Section 198 of Companies Act 2013: Calculation of Profits

(1) In computing the net profits of a company in any financial year for the purpose of section 197:

(a) credit shall be given for the sums specified in sub-section (2), and credit shall not be given for those specified in sub-section (3); and

(b) the sums specified in sub-section (4) shall be deducted, and those specified in sub-section (5) shall not be deducted.

Sub-section (2): Amounts for which credit is given

Credit is given for bounties and subsidies received from any Government or from a public authority constituted or authorised in this behalf by any Government, unless the Central Government otherwise directs.

Sub-section (3): Amounts for which credit is not given

(a) Profits by way of premium on shares or debentures 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 sale by the company of forfeited shares.

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

(d) Profits from sale of immovable property or fixed assets of a capital nature comprised in an undertaking, unless the business of the company consists wholly or partly of buying and selling such property or assets. Where a fixed asset is sold above its written-down value, credit is given for so much of the excess as does not exceed the difference between the original cost and written-down value.

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

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

Sub-section (4): Amounts to be deducted

(a) Usual working charges.

(b) Directors' remuneration.

(c) Bonus or commission paid or payable to staff, engineers, technicians or other persons employed or engaged by the company, whether whole-time or part-time.

(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.

(f) Interest on debentures issued by the company.

(g) Interest on mortgages and on loans and advances secured by a charge on fixed or floating assets.

(h) Interest on unsecured loans and advances.

(i) Repair expenses for immovable or movable property, provided the repairs are not capital in nature.

(j) Outgoings, including contributions made under section 181.

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

(l) Excess of expenditure over income arising in computing net profits under this section in an earlier year, to the extent not already deducted in a subsequent year preceding the year for which net profits are being ascertained.

(m) Compensation or damages payable by virtue of a legal liability, including liability arising from breach of contract.

(n) Insurance paid against the risk of meeting a liability referred to in clause (m).

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

Sub-section (5): Amounts not to be deducted

(a) Income-tax and super-tax payable under the Income-tax Act, 1961, or another tax on the income of the company that does not fall within clauses (d) and (e) of sub-section (4).

(b) Compensation, damages or payments made voluntarily rather than under a legal liability of the kind referred to in clause (m) of sub-section (4).

(c) Loss of a capital nature, including loss on sale of an undertaking or part thereof, subject to the statutory treatment of excess written-down value over sale proceeds or scrap value for an asset sold, discarded, demolished or destroyed.

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