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TMI BlogRequirement regarding declaration of dividend out of profits arrived at only after providing depreciation Certain queries answeredX X X X Extracts X X X X X X X X Extracts X X X X ..... y company managements in complying with this section have been made known to the chambers of commerce, professional bodies, etc. However, it would appear that some company managements continue to experience difficulties in this regard and the Department's views in regard to the queries raised by them are set out below for information : Query 1: Whether it would be necessary to provide depreciation after the commencement of the Companies (Amendment) Act, 1960 in respect of the entire amount of the "original cost" as mentioned in sub‑sections (2)(b) and (2)(c) of the above section ? Answer : Any depreciation already provided for in the books, that is the profit and loss account of the financial years prior to the commencement of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income‑tax Act under which income arising from these assets becomes assessable to income‑tax. Query 3 : Whether any company which had adopted the widely used "straight line method" of providing depreciation in the past is required to change it in view of the provisions of the amended section 205, provided of course that 95 per cent of the original cost of the asset is written off by way of depreciation before the expiry of the specified period ? Answer : Section 205(2)(b) seeks to authorise the use of "straight line method" of depreciation and no company following this method is obliged to change this, provided the provisions of that section are complied with. The reference in this section to "original cost" is only for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) and section 350 and it would be immaterial whether such allowances are claimed by the company for the purpose of its tax assessment. Query 7 : If any asset has already been reduced to 5 per cent or below its original cost, whether any further depreciation would require to be provided in accordance with section 205 before declaring dividend, provided the asset is still in commission. If the written down value is lightly over 5 per cent of the original cost, whether depreciation can be provided under section 205 only to the extent it will bring it down to 5 per cent of its original cost ? Answer : If the straight line method is adopted in accordance with section 205(2)(b), depreciation has to be provided till such time the written down v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before declaration of dividend would make it difficult for new undertakings to declare dividends even after a number of years after commencing production, as the new company will necessarily take a long time to clear the backlog of arrears of depreciation before it could declare dividend. Answer : From the cases examined in this Department, it would appear that these misgivings have arisen mainly due to the fact that the alternative method of providing for depreciation according to the straight line method under section 205(2)(b) has not been appreciated properly in many cases. The advantage of the straight‑line method is that it evens out the so‑called burden of depreciation on a company and thereby enables it to bear it more ..... X X X X Extracts X X X X X X X X Extracts X X X X
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