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
Sub: 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)