Declaration ‑ Whether, for purposes of determining depreciation to be provided under the section read with section 350, it is immaterial as to whether depreciation in respect of any assets is actually admissible under the Income‑tax Act and rules made thereunder. - Companies Law - Letter No. 10(1)/CL‑VI/61,

Circular: Letter No. 10(1)/CL ‑ VI/61, dated 21 ‑ 5 ‑ 1962. Subject:- Declaration ‑ Whether, for purposes of determining depreciation to be provided under the section read with section 350, it is immaterial as to whether depreciation in respect of any assets is actually admissible under the Income ‑ tax Act and rules made thereunder. A case has been brought to the notice of this Department in which a company declared and paid dividends in respect of its financial year ended 31‑3‑1961, without providing for depreciation on its immovable properties (which were stated to be its substantial source of income) as required by section 205 on the grounds (a) that its immovable properties were held as capital investments (though shown in the balance sheet under the head Fixed assets ) and were not used for the purpose of any business carried on by the company, and (b) that for purposes of calculating the total income of the company, no allowance by way of depreciation on the said properties was admissible under the Income‑tax Act and the Rules made thereunder. The matter has been very carefully examined by the Central Government and they have been advised that the contention of the company, in the case mentioned above, is not tenable in law. 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 purposes of determining the amount of depreciation to be provided under section 205 read with section 350, it is immaterial as to whether depreciation in respect of any asset is actually admissible under the Income‑tax Act and the Rules made there under. The only provision of the Income‑tax Act that is relevant for the above purpose, is the provision specifying the rates of percentage as contained in the Income‑tax Rules for the purpose of determining depreciation on various assets as referred to therein. Provisions of the 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 . In support of this view, attention is also invited to the provisions of section 205(2)(d) which apply to cases where no rate of depreciation is allowed by the Income‑tax Act. If a company has calculated its distributable 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, the officers of the company would become liable to the penalty as provided in section 211(7).