TMI BlogCalculation of depreciation for computation of net profits for the purposes of managerial remuneration Department’s memorandum on interpretation of the sectionX X X X Extracts X X X X X X X X Extracts X X X X ..... methods of calculations broadly indicated below : In calculating the amount of depreciation to be deducted under section 350, as recently amended, in respect of the first financial year, which ends on or after the commencement of the Companies (Amendment) Act, 1960, i.e., December 28,1960, the written down value should be worked out by deducting the normal depreciation allowed for income‑tax purposes and which was deductible in accordance with the provisions of section 350 as they stood before the recent amendment of this section, in respect of financial years ending on or before December 27, 1960, from the written down value of the fixed assets [before provision of depreciation] as shown by the books of account on the date of the commencement of the Companies Act, 1956, i.e., April 1, 1956, or immediately thereafter. [In determining the notional written down value for the limited purposes of section 350, extra and multiple shift allowances need not be taken into consideration in respect of financial years which ended on or before December 27,1960]. After the notional written down value has been determined as indicated above, depreciation should be calculated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company managements continue to experience difficulty in giving effect to the provisions of the section. The queries raised by them in this connection and the departmental views in regard to such problems are set out below : 1. Since section 350 provides that depreciation shall be calculated with reference to the written down value of the assets shown by the books of the company, whether it would be advisable to adopt the basis of notional written down value contemplated in the departmental memorandum? A close perusal of the wording of section 350 will make it clear that written down value as shown by the books has to be taken into account for purposes of section 350 in respect of the first financial year expiring at or immediately after the commencement of the Companies Act, 1956 and that in respect of the first subsequent financial year, the written down value for the purpose of section 350 will have to be calculated separately by applying the income‑tax rates of depreciation on the written down value mentioned above. The depreciation for the next financial year should be calculated by applying the income‑tax rates to the said written down value re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher than what is contemplated under section 350 ( i.e., income‑tax rates of depreciation), there would be an under provision of depreciation for the purposes of section 350, as would be seen from Illustration 1 given below : ILLUSTRATION 1 Provided in the P L Account at the rate of25% (straight line method) Book written down value Provided at the rate of 20% u/s 350 on the basis of book written down value Rs. Rs. Rs. Cost : First year 2,500 1,000 2,500 2,000 Second year 2,500 7,500 1,500 2,500 Third year 2,500 5,000 2,500 1,000 Fourth year 2,500 2,500 2,500 500 Fifth year Nil Nil Nil Nil Nil Nil Total depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Additional charge in seventh 2,800 Year 2,800 Total amount charged 8,800 14,050 It will be seen that the departmental memorandum seeks to achieve a logical compliance with the provision of section 350, at the same time without causing much difficulty or inconvenience to company managements and professional accountants in the matter of calculation of depreciation. As it is necessary that the procedure followed under section 350 should not only conform closely to the spirit of the provisions therein, but in accordance with good company practice, it would be advisable to adopt the notional written down value basis suggested in the departmental memorandum. 2. The reasons for not deducting extra and multiple shift allowance in respect of financial years ending on or before December 27, 1960, in calculating the notional written down value in accordance with the departmental memorandum are not clear. Under the provisions of section 350, before its recent amendment, only normal depreciation, allowable under the Indian Income‑tax Act, 1922 and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set remains idle, by the efflux of time, it would be necessary to deduct depreciation in respect of idle assets in accordance with section 349(4)( k ) read with section 350. 5. It is not clear whether depreciation of a particular year is to be calculated after taking into consideration the additions to the asset and the sale or disposal of the asset during that year. In accordance with accepted accounting procedure the additions to the assets and the sale or disposal of assets during the year have to be taken into consideration before calculating depreciation in accordance with section 350 , in respect of that financial year, but the depreciation to be adjusted in any particular year on the additions and disposals made in that year would only be on a pro rata basis with reference to the actual date of such additions/disposals. 6. Since plant and machinery which for income‑tax purposes is divided into 10 or 12 sub‑headings, each of which carries a different rate of depreciation, whether it would be in order to apply the average rates calculated with reference to the total depreciation allowed in respect of that type of fixed assets in relation to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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