Legal Necessity of Provision for Depreciation

On account of the provision under section 205 that, no dividend shall be declared except out of profits arrived at after providing for depreciation in accordance with the provisions of the Act, it has become obligatory for every company distributing dividend to make a provision for depreciation.
Sub-section (2) of Section 205 prescribes different methods that may be adopted for computing the amount of depreciation. There are summarised below:

(1) The charge on account of depreciation may be calculated in the manner required by Section 350. As per the Companies (Amendment Act), 1988, the amount of depreciation was calculated with reference to the 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 in schedule XIV. Thus, depreciation is now required to be calculated in accordance with the rates specified in the new Schedule XIV to the Act and thereby delinking in the Companies Act, 1956 from that under the Income Tax Act, 1961. However the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000 has amended section 350 and deleted the words, ” the amount calculated with reference to the written down value of the assets” by the words, “the amount of depreciation assets”. Therefore depreciation in future would be with reference to amount as per books of account and which may be on SLM basis.
(2) However, it may be noted that schedule XIV to the Companies Act, 1956 provides rates as per straight line method as well.
(3) The provision for depreciation may be made on any other basis approved by the Central Government which has the effect of writing off by way of depreciation 95% of the original cost to the company of each depreciable asset at the expiry of the specified period. It is provided further that if an asset is sold, discarded, demolished or destroyed, for any reason before depreciation if such asset has been provided in full, the excess of its written value, if any, at the end of the financial year in which it is sold, discarded, etc. over its sale proceeds of scrap value, also must be written off in that year, in which the asset is sold, discarded, demolished or destroyed.
(4) If a company possesses a depreciable asset for which no rate of depreciation has been prescribed by the Companies Act, 1956 or the Rules framed thereunder, the amount of depreciation should be computed on such basis as the Central Government may approve, either by any general order published in the Official Gazette or any special order in a particular case.

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