MCom I Semester Corporate Accounting Managerial Remuneration Study Material Notes

MCom I Semester Corporate Accounting Managerial Remuneration Study Material Notes: Remuneration of Directors Remuneration to Manager Overall Managerial Remuneraitons Ascertaining Profit Managerial Remuneraitons Calculation Net Profit Managerial Remuneration Commission Payable After Charging Commission Discussion Questions Long Answer Questions Short Answer Questions Numericals Questions

CTET Paper level 2 Previous Year Social Science Model Paper in Hindi

Managerial Remuneration

Remuneration paid to the members of the managerial team of a company (i.e. managing director me director and manager) is known as managerial remuneration. Payment of remuneration to managerial personnel of a public company or a private company which is a subsidiary public company is subject to rigorous legal restrictions which are as under : Remuneration to Directors

Remuneration to directors is determined either by the Articles of the company or by a resolution the Articles so require, by a special resolution passed by the company in its general meeting subject provisions of Sections 198 and 309 of the Companies Act, 1956. Sections 309 and 310 of Companies contain provisions for remuneration payable to directors including any managing director or whole-time director of a public company or a private company which is subsidiary of a public company which are as follows:

 (A) Remuneration to Whole Time Director or Managing Director : A whole-time director or managing director may be paid remuneration either by way of a monthly payment or by way of commission at a specified percentage of the net profits of the company or partly by one way and partly by the other. But Section 309 (3) provides that except with the approval of the Central Government, such remuneration shall not exceed :

(i) if there is only one whole time or managing director, 5% of the net profits for one such director and (ii) if there are more than one such director, 10% of the net profits for all of them put together.

It is to be noted that a whole-time or managing director receiving any commission from the company can not receive any commission or other remuneration from its any subsidiary. (B) Remuneration to Part-time Directors : Part-time directors may receive (1) monthly, quarterly or annual payment with the approval of the Central Government or (2) if a part-time director does not receive remuneration by way of a monthly payment, the company may by special resolution, authorize the payment of commission to such director or directors in the following manner:

(i) Not exceeding 1% of the net profits of the company where the company has a managing director or whole-time director or a manager, and

(ii) Not exceeding 3% of the net profits of the company where the company has no manager, managing or whole-time director.

The above rates can, however, be increased by the company in general meeting with the approval of the Central Government. The special resolution passed by the company as aforesaid will remain valid for a period of 5 years.

(C) Director’s Fees : In addition to the above remuneration, a part-time director may be paid fee for attending each meeting of the Board of Directors or a committee thereof which must not exceed Rs. 2.000 for each meeting unless approval of the Central Government has been taken therefor. (D) If any director draws or receives remuneration in excess of the maximum amount, he shall refund such sums to the company. The company has no power to waive the recovery of any such refundable sum unless approved by the Central Government. remuneration to a director will include any remuneration paid to him for services rendered by him the services rendered are of a professional nature and (b) in the opinion of

The Central Government, the director possesses the requisite qualifications for the practice of the profession.

Managerial Remuneration Study Material

Remuneration to Manager

Section 387 of the Companies Act governs the remuneration to manager. This section provides that a manager may receive remuneration by way of a monthly payment or by way of a specie percentage of the Het profits of the company or partly by one way and partly by the other. But the total remuneration cannot exceed 3 percent of the net profits except with the approval of the Central Government.

It is important to note that a company may have one or more than one managing directors at a time but it can not have more than one manager at a time. Further, a company can not have managing director(s) and manager simultaneously. Overall Managerial Remuneration (A) Maximum Limit: Section 198 (1) of Companies Act, 1956 puts a maximum limit of 11% of the net profits on the total managerial remuneration payable by the company to its directors including any managing or whole-time director or manager. But this does not include any fees payable to directors under Section 309 (2) for attending the Board or its committee meetings. (B) Minimum Limit : Section 198 (4) provides that if in any financial year, a company has no profit or if its profits are inadequate, it may pay to its directors including any managing director or whole-time director or manager without approval of the Central Government as minimum by way of salary, dearness allowance, perquisites and any other allowances in accordance with the provision of Section II of Part II of Schedule XIII. This is based on the effective capital of the concerned company. The scale of monthly remuneration as revised vide notification GSR No. 215 E dated 2-03-2000 is as follows: Where the effective capital of the company is

Monthly remuneration

payable shall not exceed

(i) less than rupees 1 crore                                                                            Rs. 75,000

(ii) rupees 1 crore or more but less than rupees 5 crores                Rs. 1,00,000

(iii) rupees 5 crores or more but less than rupees 25 crores           Rs. 1,25,000

(iv) rupees 25 crores or more but less than rupees 100 crores      Rs. 1,50,000

(v) rupees 100 crores or more                                                                      Rs. 2,00,000

Minimum remuneration in excess of the above limits may be paid by a company with the approval of Central Government.

Effective Capital : For the purposes of managerial remuneration, effective capital means the aggregate of paid-up share capital, share premium account, reserves and surplus excluding revaluation reserve, long-term loans and deposits payable after one year as reduced by the aggregate of any investments, accumulated losses and preliminary expenses not written off.

Perquisites which are not included in managerial remuneration

In addition to the above remuneration, a managerial person may be given the following perquisites which shall not be included in the computation of the ceiling on remuneration :

(1) contribution to provident fund, superannuation fund or annuity fund to the extent these either singly or put together are not taxable under the Income Tax Act, 1961.

(2) gratuity payable at a rate not exceeding half a month’s salary for each completed year of service.

(3) encashment of leave at the end of the tenure.

(4) children’s education allowance upto a maximum of two children which is limited to a maximum of Rs. 5.000 per month per child or actual expenses incurred, whichever is less.

(5) return holiday passage once in a year by economy class or once in two years by first class to children the members of the family from the place of their study or stay abroad to India. ave travel concession in accordance with the company rules.

(6) leave travel concession in accordance with d the company rules .

Perquisites or benefits which are to be included in the managerial reminder

(1) any expenditure incurred by the company in providing any rent free benefit or amenity in respect of accommodation free of charge; many in providing any rent free accommodation or any other

(2) any expenditure incurred in providing any other benefit or amenity free of charge of a

(3) any expenditure incurred by the company in respect of any obligation or service benefit or amenity free of charge or at a concessional rate; expenditure by the company, would have been paid by them; and any in respect of any obligation or service which, but for such

(4) any expenditure incurred by the company in effecting any insurance on the life of or in person, annuity or gratuity for the managerial staff or his spouse or child.

Section 200 prohibits the payment by the company to any of its officer or employee remand of tax or varying with the tax payable by him.

Managerial Remuneration Study Material

Ascertaining Profit for Managerial Remuneration

Sections 349 and 350 of the Companies Act contain the provisions for ascertaining net profits of company for the purpose of calculating the managerial remuneration. These sections require the follow me points to be considered in computing net profits of a company for the purpose of calculating the manage remuneration :

(1) Credit shall be given for : Bounties and subsidies received from any Government or any public authority constituted or authorized in this behalf, by any Government unless the Central Government otherwise directs.

(2) Credit shall not be given for the following sums:

(a) profits by way of premium on shares or debentures of the company;

(b) profits on sale 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 any part thereof;

(d) profits from the sale of any immovable property or fixed assets of a capital nature, unless the

business of company consists of buying and selling any such property or assets. . Provided that where the sale price of the fixed asset sold exceeds its written down value (calculated according to Section 350), credit shall be given so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written down value. For example, a fixed asset purchased for Rs. 50,000, written down to Rs. 40,000, is sold for Rs. 55,000. In this case, out of the total profit Rs. 55,000 – Rs. 40,000, i.e. Rs. 15,000, Rs. 10,000 (the difference of original cost and written down value) will be included and the rest Rs. 5,000 (the excess of sale price over original cost) should be excluded in computing the net profit.

(3) The following sums shall have to be deducted:

(i) all the usual working charges;

(ii) directors’ fee;

(iii) 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;

(iv) any tax notified by the Central Government as being in the nature of a tax on excess or abnormal profits;

(v) any tax on business profits imposed for special reasons or in special circumstances and notified by the Central Government in this behalf;

(vi) interest on debentures issued by the company;

(vii)interest on mortgages and on secured loans and advances:

(viii)interest on unsecured loans and advances;

(ix) expenses on repairs, provided the repairs are not of a capital nature:

(x) outgoings, inclusive of contribution to charitable funds made under clause (e) of sub-section (1) of

(XI) depreciation to the extent specified in Section 350. This section allows the following deductions:

(1) normal depreciation including extra and multiple shift allowances (but excluding any special or initial depreciation or development rebate reserve or investment allowance reserve calculated on written down value at the rates specified in the Schedule XIV. (11) excess of written down value over the sale proceeds or scrap value of the assets, if it is sold. discarded, demolished or destroyed before the depreciation on such asset has been provided in full. This is termed as ‘terminal depreciation.’ It is calculated as follows:

Terminal Depreciation = Written Down Value -(Sale Proceeds + Scrap Value)

(xii) trading losses arising in any year after the commencement of the Act, in so far as such losses have not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

(xiii) any compensation or damages to be paid by virtue of any legal liability, including a liability arising from a breach of contract;

(xiv) any sum paid by way of insurance against the risk of meeting any liability such as referred to in (xiii); and

(xv) debts considered bad and written off or adjusted during the year of account.

(4) The following sums shall not be deducted:

(i) income-tax and super tax payable under Income-tax Act or any other tax on the incomes of the company not falling under (iv) and (v) above;

(ii) any compensation, damages or payments made voluntarily;

(iii) loss of a capital nature including loss on sale of the undertaking, and

(iv) remuneration payable to the directors, managing director or manager.

It is to be noted that the above provisions do not apply to a private company unless it is subsidiary of a public company.

Illustration 1. Following is the Profit and Loss Account of X Ltd. You are required to calculate the maximum remuneration permissible to part-time directors. The company does not employ manager or managing director or whole-time director. Also calculate overall maximum managerial remuneration under Section 198.

Managerial Remuneration Study Material

Thus, the Manager gets Rs. 18,919 MC Manager gets Rs. 18,919 and three whole time directors get Rs. 22.703. The total commission payable to the managerial staff is Rs. 18,919 + Rs. 22,703 = Rs. 41,622 maximum of 11% of the profits, i.e., 11/100 of Rs. 4,20,000 or Rs. 46,200.

Commission payable on profits available

A Company for dividend may enter into an agreement with its any managerial staff to pay commission on profits dividend. The phrase “profits available for dividend’ means profits remaining after taxation appropriations which are compulsory, e.g. transfer to sinking fund created for redemption of debentures under the Debenture Trust Deed. Thus, the commission to managerial staff can be calculated when tax liability of the company is computed which in turn is computed on profits after charging chat remuneration. Thus, commission to managerial staff and amount of tax would be inter-related. such a case, remuneration to managerial staff and tax liability would be calculated with the help of Simultaneous equations. This is explained hereafter in illustration 3.

Illustration 5. From the following Profit and Loss Account of CENSICO Ltd. for the year ended 31st December 2000, calculate the Managing Director’s remuneration who is entitled to a commission of 4% on profits available for dividend purposes, assuming rate of income-tax 50% on ordinary profits and 20% on capital profits. Also calculate the amount of income-tax payable.

Discussion Questions

Long Answer Questions

1 Describe the provisions of Companies Act, 1956 as amended up-to-date relating to the ascertainment of remuneration of the members of managerial staff.

2. What is the meaning of managerial remuneration ? Describe the provisions relating to maximum and minimum remuneration.

3. How is net profit calculated for ascertaining managerial remuneration?

4. What provisions have been made in the Companies Act in connection with depreciation and remuneration of whole time directors ? Describe.

5. What is the meaning of managerial remuneration ? How is profit calculated for managerial remuneration ? Describe in detail.

Managerial Remuneration Study Material