CALCULATION OF PROFITS FOR MANAGERIAL REMUNERATION

SECTION: 198- CALCULATION OF PROFIT

According to Section 198 of the Act, net profits for any financial year for the purpose of managerial remuneration payable under section 197 shall be calculated as follows:

(I) Credit shall be given for the sums specified in Section 198(2)

Add: Bounties and subsidies received from any Government, or any public authority constituted or authorized in this behalf, by any Government, unless and except in so far as the Central Government otherwise directs.

(II) Credit shall not be given for those sums specified in Section 198(3)

Less: (if credited to the P & L A/c for arriving at profit before tax)

(a) Profits, by way of premium on shares or debentures of the company, which are issued or sold by the company unless the company is an investment company as referred to in clause (a) of the Explanation to section 186;

(b) Profits on sales by the company of forfeited shares;

(c) Profits of a capital nature including profits from the sale of the undertaking or any of the undertakings of the company or of any part thereof.

(d) Profits from the sale of any immovable property or fixed assets of a capital nature comprised in the undertaking or any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of buying and selling any such property or assets:

Provided that where the amount for which any fixed asset is sold exceeds the written-down value thereof, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written-down value;

(e) Any change in carrying amount of an asset or of a liability recognized in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.

(f) Any amount representing unrealized gains, notional gains or revaluation of assets.

(III) In making the computation aforesaid, the following sums specified under Section 198(4) shall be deducted:

(a) All the usual working charges;

(b) Directors' remuneration;

(c) Bonus or commission paid or payable to any member of the company's staff, or to any engineer, technician or person employed or engaged by the company, whether on a whole-time or on a part-time basis;

(d) Any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits;

(e) Any tax on business profits imposed for special reasons or in special circumstances and notified by the Central Government in this behalf;

(f) Interest on debentures issued by the company;

(g) Interest on mortgages executed by the company and on loans and advances secured by a charge on its fixed or floating assets;

(h) Interest on unsecured loans and advances;

(i) Expenses on repairs, whether to immovable or to movable property, provided the repairs are not of a capital nature;

(j) Outgoings inclusive of contributions made under section 181 (Company to contribute to bona fide and charitable funds);

(k) Depreciation to the extent specified in section 123;

(l) The excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

(m) Any compensation or damages to be paid in virtue of any legal liability including a liability arising from a breach of contract;

(n) Any sum paid by way of insurance against the risk of meeting any liability such as is referred to in clause (m);

(o) Debts considered bad and written off or adjusted during the year of account.

(IV) In making the computation aforesaid, the following sums specified under Section 198(5) shall not be deducted:

(a) Income-tax and super-tax payable by the company under the Income-tax Act, 1961, or any other tax on the income of the company not falling under clauses (d) and (e) of sub-section (4);

(b) Any compensation, damages or payments made voluntarily, that is to say, otherwise than in virtue of a liability such as is referred to in clause (m) of sub-section (4);

(c) Loss of a capital nature including loss on sale of the undertaking or any of the undertakings of the company or of any part thereof not including any excess of the written-down value of any asset which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value;

(d) Any change in carrying amount of an asset or of a liability recognised in equity reserves including surplus in profit and loss account on measurement of the asset or the liability at fair value.