Provision of Depreciation for Past Years

Section 205(1) prescribes that if a company has not provided for depreciation for any previous financial year it shall, before declaring, or paying dividend, provide for such depreciation :

  1. either out of the profits of that financial year, or
  2.  out of the profits of any other previous financial year or years.

The implication of this rule is that if, for example, the profits of a company for the year ending 31st March, 1991 are proposed to be distributed, and it is found that due to inadequacy of profits no provision for depreciation had been made for the year ended 31st March, 1990 it would be necessary to make provisions in respect of the depreciation, for the year ended 31st March, 1990 as well as 1991 and only the balance of the profits for the year 31st March, 1991 would be available for distribution as a dividend.

There are, however, two exceptions to this rule :
(1) The profits of financial year or years ended before 28th December, 1960 may be distributed even though in arriving at these profits no depreciation in respect of past years had been provided.
(2) A company may be permitted by the Central Government, if it is thought necessary, to pay dividend for any financial year, without first providing for depreciation for that year or for any earlier year. The Central Government would, however, exempt a company only if it finds that such a distribution is necessary in the public interest [clause(c) of the first provision to sub-Section (I) of Section 205].

Ascertainment of depreciation for computing net profits for the purpose of managerial remuneration : Under Section 198(1) of the Companies Act, 1956 depreciation calculated in the manner specified in Section 350 must be deducted for arriving at the amount of net profits, on which remuneration payable
to managerial personnel is to be calculated.

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