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Declaration of Computation of depreciation under straight line method as contemplated - Companies Law - No. 8/19(205)/64‑PR,Extract Circular: No. 8/19(205)/64 ‑ PR, dated 15 ‑ 9 ‑ 1964. Subject:- Declaration of Computation of depreciation under straight line method as contemplated Query: Section 205(2) provides for different methods of depreciation of assets. The words Specified period occurring in some of the sub‑clauses has been explained in section 205(5)(a) as that period at the expiry of which at least 95 per cent of the original cost of the asset would have been written off if depreciation were to be calculated in accordance with the provisions of section 350. Section 350 refers to reducing balance method of depreciation and the depreciation rates specified in the Income‑tax Act and the Rules made thereunder. To be precise, the final rate of depreciation for this purpose consists of normal depreciation plus extra and multiple shift allowances. Now a company, wishing to adopt the straight line method of depreciation provided for in section 205(2)(b), works out a straight line rate of depreciation by dividing 95 per cent of the original cost of the asset with the specified period . It will obviously base its calculations of such specific period on the prevailing rates of depreciation. But since the rate of depreciation and extra shift allowances keep on changing (for example, third shift allowance has been provided for only under the Finance Act, 1964) and also because the management cannot correctly predict for in advance the number of shifts its factory will run in the years ahead, the specified period will change along with change of any of the above factors, viz., (a) depreciation rates and allowances, and (b) number of shifts run. So, will it not become necessary for the company in case of such changes, (a) to revise its straight line rate of annual depreciation, and (b) to set right the net difference, consequent to such changes in the amount of previous depreciation provisions, for to abstain from such revision will defeat the purpose of the provision of specific period ? But, on the other hand feasibility of effecting such revision and the voluminous calculation involved therein is very doubtful and open to questions. Under the circumstances and existing legal provisions, can you suggest us some method of calculating straight line rate of annual depreciation which (a) is practicable, (b) always holds good and does not warrant any revision at short intervals, and (c) does not violate the provisions of the law? Answer: The provisions of section 205(2)(b) have to be read with those of section 350 thereof which, inter alia, provides that depreciation should be provided at the rate specified in the Income‑tax Act and the Rules made there under for the time being in force including therein extra and multiple shift allowances. Any depreciation provided in terms of section 205(2)(b) should, therefore, reflect any change made in the Income‑tax Act or the Rules made there under. In this view of the matter, it would appear necessary for companies, which had hitherto been providing depreciation in terms of section 205(2)(b), i.e., on the straight line method, to recalculate the specified period for the assets concerned and provide for depreciation taking into consideration the recent reintroduction of triple shift allowance.
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