198. 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.

(2) In making the computation aforesaid, credit shall be given for the bounties and

subsidies received from any Government, or any public authority constituted or authorised

in this behalf, by any Government, unless and except in so far as the Central Government

otherwise directs.

(3) In making the computation aforesaid, credit shall not be given for the following

sums, namely:—

(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 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 writtendown

value;

(e) 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.

(4) In making the computation aforesaid, the following sums shall be deducted, namely:—

(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;

(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.

(5) In making the computation aforesaid, the following sums shall not be deducted,

namely:—

(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.