Section 198 of CA 2013 : Section 198: Calculation Of Profits

Explanation using Example

Imagine a company, ABC Ltd., is calculating the remuneration payable to its directors at the end of a financial year. To comply with Section 198 of the Companies Act, 2013, ABC Ltd. must calculate its net profits correctly.

During the year, ABC Ltd. received a government subsidy for setting up a new plant. According to Section 198(2), this subsidy will be credited to the net profits. However, ABC Ltd. also made a profit by selling some of its office furniture, which is a capital asset. As per Section 198(3)(c), this profit won't be credited to the net profits since it's of a capital nature.

Additionally, ABC Ltd. had to pay interest on the loans it took to finance its operations. This interest, as stated in Section 198(4)(g), will be deducted from the net profits. However, the income tax paid by the company cannot be deducted as per Section 198(5)(a).

By following Section 198, ABC Ltd. ensures that the remuneration paid to its directors is in accordance with the profits legally available for distribution.