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Alternative Basis for providing Depreciation under Section 205(2)(c) of the Companies Act, 1956. - Companies Law - 12/2003Extract General Circular No. 12/2003 F.No. 5/31/2002-CL.V --------------------------- F.No.45/12/2000-CL.III Government of India Ministry of Finance and Company Affairs Department of Company Affairs ********** Shastri Bhavan, New Delhi. Dated, the 21st of February, 2003 To All Regional Directors, All Registrar of Companies Subjects: Alternative Basis for providing Depreciation under Section 205(2)(c) of the Companies Act, 1956. ***************** Sir, The request made by some Companies, particularly companies engaged in production of steel to prescribe an appropriate method, to make provision for depreciation based on unit of production rather than straight line or written down value method has been engaging the attention of the Department for quite some time. 2. Upon consultations with the institutes of ICAI ICWAI, a view emerged that providing depreciation on Unit of Production Method will not be in tune with the basic concept of depreciation as efflux of time necessarily involves loss of value of an asset. Besides, this method may not be suitable as it cannot be said that in the year in which no production takes place, no depreciation would be charged. Adopting unit of production method for charging depreciation may result in extending the life of the asset beyond the "specified period" underlying the rates of depreciation notified under Schedule-XIV to the Companies Act. 3. The "Unit of Production" method of charging depreciation also seeks to compute depreciation on estimated production basis. This may tend to a manipulation of profits based on a particular set of assumptions and technical opinion. 4. In view of the above facts, this Department hereby clarifies that companies may depreciate the assets on "Straight Line Method" or "Written Down Value" but may not follow "Unit of Production Method". The receipt of this Circular may kindly be acknowledged. Yours faithfully, (E. Selvaraj) Joint Director (T)
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