Section 198 of the Companies Act, 2013
Section 198 of the Companies Act, 2013 deals with the calculation of profits for the purpose of managerial remuneration under Chapter XIII (Appointment and Remuneration of Managerial Personnel).
📜 Section 198 – Calculation of Profits
✅ Purpose:
To determine “net profits” of a company in a financial year for the purpose of computing limits on managerial remuneration under Sections 197, 200, etc.
🔧 Key Provisions:
Profit Calculation:
Net profits shall be calculated as per this section, not as per the Profit and Loss Account.
Certain incomes are excluded and certain expenses are disallowed in computing this profit.
🚫 Exclusions (Incomes not to be credited):
The following must NOT be credited in computing net profits:
Profits from the sale of any capital asset (e.g. undertaking, immovable property, fixed assets),
Profits from revaluation of assets,
Unrealized gains, notional gains or revaluation of assets or liabilities,
Share premium account or capital redemption reserve,
Surplus from amalgamation or capital profits,
Profits from forfeited shares.
✅ Deductions (Expenses that can be deducted):
Allowed deductions include:
Working charges,
Bonus or commission paid to staff,
Tax on excess or abnormal profits (not income tax),
Interest on debentures, loans, etc.,
Repairs (not capital in nature),
Depreciation (as per Schedule II),
Director’s fees.
❌ Disallowed Deductions:
You cannot deduct:
Income tax and super-tax,
Compensation paid voluntarily,
Losses of capital nature,
Change in carrying amount of an asset or liability due to fair value adjustments.
🧮 Why it Matters:
The net profits calculated under Section 198 are used to determine:
The limit of 11% of net profits on total managerial remuneration (Section 197).
The remuneration payable to individual directors, managing directors, etc.
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