Clarifications on the provisions relating to depreciation under the Companies Act, 1956, as amended by the Companies (Amendment) Act, 1988 - Income Tax - 002/1989

Clarifications on the provisions relating to depreciation under the Companies Act, 1956, as amended by the Companies (Amendment) Act, 1988 Circular No. 002 Dated 7/3/1989 This Department has been receiving queries from different quarters on the subject mentioned above, from time to time, and, accordingly, the following clarifications are issued:-- (1) Date on which the new provisions relating to depreciation become effective: The Companies (Amendment) Act, 1988, specifically provides that Schedule XIV shall be deemed to have come into force on April 2, 1987. The amended provisions of section 205 and 350 of the Act have come into force on June 15, 1988, by virtue of the notification issued by this Department. A question, arises, therefore, whether depreciation can be charged on assets on the basis of the rates provided in Schedule XIV for accounting year ending between April 2, 1987, and June 14, 1988. In view of the intention of the Legislature behind the amendments in sections 205 and 350 of the Act, the amended provisions have come into force with effective from April, 1987. (2) Recomputation of specified period: It is stated that in 1986, the Department had issued a circular stating that specified period once determined may not be recomputed. Accordingly, the Department had advised the companies that it was open for them not to recompute the specified period even when there is a change in the rates of depreciation later on (as against the position of the Department's earlier circular of 1985 on the subject). It is argued that as far as the existing assets are concerned, the companies can follow either of the two circulars. An option under the 1956 circular would thus be available to the companies as at present not recomputing the specified period where the Straight Line Method (SLM) is used. In other words, where a company decides to follow the 1986 circular, assets on which SLM depreciation was being charged can continue to be depreciated at old SLM rates. In view of this Department's Circular No. 1 of 1986 (No. 1/1/86-CL.V), dated 21st May, 1986 (See [1986] 160 ITR (St.) 66), specified period once determined may not be recomputed. The companies which follow this circular may, therefore, continue to charge depreciation at the old SLM rates in respect of the already acquired assets against which depreciation has been provided in earlier on SLM basis. (3) Can higher rates of depreciation be charged? It is stated that Schedule XIV clearly states that a company should disclose depreciation rates if they are different from the principal rates specified in the Schedule. On this basis, it is suggested that a company can charge depreciation at rates which are lower or higher than those specified in Schedule XIV. It may be clarified that the rates as contained in Schedule XIV should be viewed as the minimum rates, and, therefore, a company shall not be permitted to charge depreciation at rates lower than those specified in the Schedule in relation to assets purchased after the date of applicability of the Schedule. However, if on the basis of a bona fide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of a note forming part of annual account. (4) Can SLM rates be different than those specified under Schedule XIV? It is stated that SLM rates (corresponding to the Written Down Value (WDV) rates, as per Schedule XIV) can be different than those prescribed under Schedule XIV provided a company continues to determine the rates as provided under section 205. Thus, against SLM rates prescribed under Schedule XIV of 11.31 per cent. (triple shift rate for general plant and machinery), a company can charge depreciation at the rate of 10.56 per cent. It may be mentioned that the rate of 11.31 per cent. has been determined on the basis of eight years and six months or so of specified period whereas if 95 per cent. is divided by nine years, the corresponding SLM rate comes to 10.56 per cent. The argument is that for calculating the SLM rates, complete years have to be taken into account whereas the rates under Schedule XIV also take into account fractions of years. It is clarified that a company must necessary provide SLM depreciation on the rates prescribed under Schedule XIV and the interpretation that fraction of years cannot be taken into account is not correct.