Section 198 of the Companies Act, 2013 has great deal of importance for corporations as it provides for computation of profit and has dual applicability;
1. CSR under section 135 of Companies Act,2013.
2. Managerial Remuneration under Section 197 of Companies Act, 2013.
However, it can occasionally be difficult to determine the precise amount of profits earned. For this reason, the following table can be very helpful in helping the board and other professionals comprehend Section 198.
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CALCULATION OF CSR EXPENDITURE |
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| Net Profit as per Financial Statement | 2022-23 | 2021-22 | 2020-21 | ||
| Particulars | Amount | Amount | Amount | ||
| Net Profit as per Profit & Loss account (PAT) | – | – | – | ||
| Credit not to be provided for: | |||||
| a) | Profits, by way of Premium on Shares or Debentures of the company, which are issued or sold by the Company | – | – | – | |
| b) | Profits on Sales of Forfeited Shares | – | – | – | |
| c) | Profits from the Sale of the Undertaking or part thereof (of Capital Nature) | – | – | – | |
| d) | Profits from the Sale of any Immovable Property/Fixed Assets (of Capital Nature) | – | – | – | |
| e) | Any change in carrying amount of an asset or of a liability recognised in equity reserves on measurement of the asset or the liability at fair value. | – | – | – | |
| f) | Unrealised gains, Notional gains or Revaluation of assets | – | – | – | |
| Non-permissible deductions: | |||||
| a) | Income tax paid under Income Tax Act, 1961 | – | – | – | |
| b) | Compensation/Damages made Voluntarily | – | – | – | |
| c) | Loss of Capital Nature including Loss on Sale of the Undertaking or part thereof | – | – | – | |
| d) | Any change in carrying amount of an asset or of a liability recognised in equity reserves on measurement of the asset or the liability at fair value. | – | – | – | |
| Total Net Profit u/s 198 for calulation of CSR | xx | xx | xx | ||
| Add: Managerial Remuneration (Only when calculating for Section 197) |
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| Particulars | Amount | ||||
| Net Profit for the Financial year 2022-23 | – | ||||
| Net Profit for the Financial year 2021-22 | – | ||||
| Net Profit for the Financial year 2020-21 | – | ||||
| Total Net Profit of preceding three financial year (A+B+C) | – | ||||
| Average Net Profit [(A+B+C)/3] | – | ||||
| 2% of Average Net Profit ie. CSR Corpus (to be spent during respective financial year 2023-24) | – | ||||
Understanding the table;
1. Items in ‘Credit not to be provided for’ shall be deducted from PAT.
2. Items in ‘Non-permissible deductions’ shall be added back to PAT.
3. Managerial remuneration shall be included only when profit is calculated for Section 197 purposes, not when computing for Section 135 purposes.
NOTE: This table is just intended to provide a simple and quick computation of profit and since PAT serves as the beginning point, things in heads such as “Credit to be provided for” and “Permissible Deductions” are not included in this table.
Conclusion: The computation of profits under Section 198 of the Companies Act, 2013 is pivotal for companies, especially in the context of CSR obligations and managerial remuneration. This comprehensive guide and accompanying table offer clarity on the deductions and additions required for accurate profit determination, ensuring adherence to regulatory requirements and facilitating informed decision-making by corporate entities.
If you would like a working Excel model of this please leave a comment along with your email.
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Manish Shah
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