Determination of depreciation under section 205(2)(b) of he Companies Act, 1956, consequent upon changes in the Income-tax rates introduced by Finance Act, 1983 - Income Tax - 001/1985

Determination of depreciation under section 205(2)(b) of he Companies Act, 1956, consequent upon changes in the Income-tax rates introduced by Finance Act, 1983 Circular No.001 Dated 10/1/1985 To All the Chambers of Commerce. Dear Sirs, Subject : Determination of depreciation under section 205(2)(b) of he Companies Act, 1956, consequent upon changes in the Income-tax rates introduced by Finance Act, 1983. I am directed to say that during the year 1983, the rates of depreciation under the Income-tax Act have been changed on some of the assets. As the depreciation provision in the annual accounts of the companies under section 205/350 of the Companies Act, 1956, is related to the rates of depreciation as provided in the Income-tax Act, any change in the rates under the Income-tax Act affect the provision of depreciation in the annual accounts of the companies. As a result, this Department has received several queries/representations from companies enquiring as to what procedure they should adopt for charging depreciation on straight line method on the assets purchased earlier to the change in the rates of depreciation as provided in the Income-tax Act. 2. This issue has been examined in this Department and it has been decided that under sub-section (5) of section 205, "specified period" for providing depreciation on straight line method under clause (b) of sub-section (2) of section 205 has to be recalculated on the basis of the revised rates under the Income-tax Act. The companies which adopt the straight line method of depreciation should provide for the depreciation in their annual accounts of the following basis: (a) No. of years for which asset has already been depreciated, before the change in depreciation rate - Say, "A" years (b) Specified period calculated at revised rates by which 95% of the original cost of asset would have depreciated on written down value method at revised rates - Say, "B" years (c) Written down value of the asset in the books at the beginning of the year in which rates have been changed under the Income-tax Act - Say, Rs. "X" (d) 5% of the original cost - Say, Rs. "Y" (e) Fixed instalments of depreciation to be provided each year after the rate has been changed shall be calculated as per the formula - X-Y/ B-A If "A" is greater than "B", then the amount (X-Y) may be provided for as depreciation in the year in which rates are changed. 3. You are requested to bring the above views of the Department to the notice of your member companies for their information and guidance. Yours faithfully, (Sd.) Sooraj Kapoor, Joint Director. No. 15/50/84-CL.VI.