5/10/13

ICAI

Expert Advisory Committee

ICAI-Expert Advisory Committee Search: Options: 1.46 Query phrase case-sensitive

Advanced Search

Provision for Depreciation under Section 205 read with Section 350 of the Companies Act 1956 and under Section 32 (1) (ii) of the Income-tax Act.
Under clause (a) of sub-section (2) of Section 205 of the Companies Act, 1956, a company has to provide depreciation to the extent specified in Section 350 of the said Act. Section 350 reads as follows: The amount of depreciation to be deducted in pursuance of clause (k) of sub-section (4) of Section 349 shall be the amount calculated with reference to written down value of the assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter and at the end of each subsequent financial year at the rate specified for the assets by the Indian Income-tax Act, 1922, and the rules made there under for the time being in force, as normal, depreciation including therein extra and multiple shift allowances but not including therein any special, initial or other depreciation or any development rebate, whether allowed by the Act or those rules or otherwise... Section 32 (1) (ii) of the Income-tax Act, 1961 (substituted in place of the Income-tax Act, 1922) provides that where the actual cost of any machinery or plant does not exceed seven hundred and fifty rupees, the actual cost thereof shall be allowed as a deduction in respect of the previous year in which such machinery or plant in first put to use by the assessee for the purpose of his business or profession. A circular has been issued by the Company Law Department on Section 205 of the Companies Act, 1956 (appearing in A Guide to the Companies Act by A. Ramaiya, Eighth Edition at page 436) which is reproduced below: As the Company managements are aware, the provisions in sub-sections (1) and (2) of Section 205 are mandatory in nature and must be strictly complied with by every company before declaring or paying any dividend. For purpose of determining the amount of depreciation to be provided under Section 205 read with Section 350 of the Act, it is immaterial as to whether depreciation in respect of any assets is actually admissible under the Indian Income-tax Act, and the Rules made thereunder. The only provision of the Income-tax Law that is relevant for the above purpose, is the provision specifying the rates of percentages
220.227.161.86/eac/eacfinal/vol1/46.htm 1/3

5/10/13

ICAI

as contained in the Indian Income-tax Rules for the purpose of determining depreciation on various assets as referred to therein. Provisions of the Indian Income-tax Act relating to the admissibility of depreciation allowance for the purpose of calculating the total income of the assessee are not relevant for the purpose of Section 205 read with Section 350 of the Companies Act, 1956. In support of this view, attention is also invited to the provisions of Section 205 (2) (d) of the Companies Act, 1956, which apply to cases where no rate of depreciation is allowed by the Income-tax Law. If a company has calculated its distribution profits without providing for depreciation in the manner required by Section 205, and if the profit and loss account of the company does not provide for depreciation accordingly, the balance sheet and profit and loss account of the company for the relevant year cannot be said to give a true and fair view of its state of affairs or of its profits or losses, as contemplated by Section 211 (1) and (2) with the result that the officers of the company would become liable to the penalty as provided in Section 211 (7) of the Act. In regard to items of Plant & Machinery which cost Rs. 750/- or less, Section 32 (i) (ii) of Income-tax act, 1961, provides that 100% depreciation is admissible in respect of these items. However, no rate has been provided for these items in Income-tax Rules. As per above circular of Company Law Board, depreciation for the purpose of Section 205 of the Companies Act has to be provided at the rates specified in Income-tax Rules and the provisions of Income-tax Act relating to the admissibility of depreciation allowance are not relevant. In view of the above, it appears that for the purpose of compliance of Section 205 of the Companies Act, 1956, a company need not write off in books of accounts, the actual cost of Plant & Machinery the value of which does not exceed Rs. 750/- and it shall be a proper compliance if the depreciation is charged in accounts in respect of these items at the rates prescribed for Machinery and Plant in Appendix I of the Income-tax rules. Further it is felt that the claiming of deduction in Income-tax u/s 32 (1) (ii) of Income-tax Act, 1961, in respect of these items will not in any way affect the above position. Kindly advice.

Opinion

June 12, 1978

The Committee is of the opinion that it would not be correct to say that the depreciation rate of 100% in respect of assets where cost does not exceed Rs. 750/-, as mentioned in Section 32 (1) (ii) of the Income-tax Act 1961 should not be considered for depreciation under Section 205 read with Section 350 of the Companies Act, 1956. In the opinion of the Committee, for purpose of compliance of Section 205 read with Section 350 of the Companies Act, 1956, a company has to write off depreciation at the rates specified for the assets by the Indian Income-tax Act, 1961, and the Rules made thereunder. The Income-tax Rules should be considered as a whole. The Circular of the Company Law Board referred to in the query if reviewed carefully mentions the same and does not imply any other meaning. __________________________

220.227.161.86/eac/eacfinal/vol1/46.htm

2/3

5/10/13

ICAI

220.227.161.86/eac/eacfinal/vol1/46.htm

3/3