Disposal of Profits

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Final Accounts: Managerial Remuneration and Disposal of Profit

Managerial Remuneration

Managerial remuneration encompasses all payments and benefits given to the management of a company. This includes:

  • Salaries
  • Commission
  • Retirement Benefits (RFA)
  • Life Insurance Policies
  • Membership Fees for Clubs
  • Cost of Car Facilities
  • Other Allowances or Benefits

Management refers to individuals responsible for planning, directing, and controlling the company's activities. This typically includes Directors, Managing Directors (MDs), Managers, or individuals with similar designations.

Calculation of Managerial Remuneration

Managerial remuneration can be based on either the company's net profit or effective capital, depending on the financial performance of the company.

Based on Net Profit

  • Single Whole-Time Director/MD/Manager:
    • Maximum: 5% of Net Profit
  • Multiple Whole-Time Directors/MDs/Managers:
    • Maximum: 10% of Net Profit
  • Single Part-Time Director/MD/Manager:
    • Maximum: 3% of Net Profit
  • Combination of Single Whole-Time and Single Part-Time Director/MD/Manager:
    • Maximum: 6% of Net Profit
  • Combination of Multiple Whole-Time and Single Part-Time Director/MD/Manager:
    • Maximum: 11% of Net Profit

In the Absence of Profit or Shortage of Profit (Based on Effective Capital)

  • Effective Capital Less than ₹1 Crore:
    • Maximum: ₹75,000 per month
  • Effective Capital ₹1 Crore or More but Less than ₹5 Crore:
    • Maximum: ₹1,00,000 per month
  • Effective Capital ₹5 Crore or More but Less than ₹25 Crore:
    • Maximum: ₹1,25,000 per month
  • Effective Capital ₹25 Crore or More but Less than ₹50 Crore:
    • Maximum: ₹1,50,000 per month
  • Effective Capital ₹50 Crore or More but Less than ₹100 Crore:
    • Maximum: ₹1,75,000 per month
  • Effective Capital ₹100 Crore or More:
    • Maximum: ₹2,00,000 per month

Calculation of Net Profit (Section 349)

To determine the managerial remuneration, net profit must be calculated as follows:

  • Net Profit as per Financial Books:
    • Starting point for calculations.
  • Adjustments:
    • Provisions (All): Add back provisions made for various contingencies.
    • Appropriations (All): Add back appropriations like reserves.
    • Actual Depreciation: Include actual depreciation charges.
    • Depreciation as per Company Act: Adjust to match statutory depreciation.
    • Voluntary Compensation: Add back voluntary compensation paid.
    • Voluntary Donation: Add back voluntary donations made.
    • Profit on Sale of Investments: Deduct profit on sale of investments.
    • Loss on Sale of Investments: Add back loss on sale of investments.
    • Interest/Dividend/Rental/Investment Income: Adjust based on income from investments.
    • Profit on Sale of Fixed Assets: Adjust for any profit on the sale of fixed assets.
    • Capital Expenditure (Research & Development): Include capital expenditure related to R&D.
  • Final Adjustments:
    • Management Salary: Include in calculations.
    • Management Commission: Include in calculations.
  • Net Profit as per Section 349:
    • The adjusted profit figure used for calculating managerial remuneration.

Note: Director fees are not included in managerial remuneration calculations but should be accounted for separately when determining net profit as per Section 349.

Summary: The process of calculating managerial remuneration involves assessing both net profit and effective capital. By understanding the limits based on profit and capital, and accurately computing net profit through various adjustments, companies ensure compliance with regulations while fairly compensating their management.