3.5 Query: Set off of previous years’ losses for managerial remuneration.
1. A public limited company has its Managing Director duly appointed by the shareholders of the company. In addition to salaries and perquisites payable to him, commission of 1% on profits of the company for the year is also payable which is a term of the appointment. The appointment of Managing Director was made sometime in March, 1989. In the Accounting Year ended 31st March, 1989, there were profits and such as commission @1%, amounting to Rs.1209/- was paid. For the Accounting Year ended 31st March, 1990, there were losses of Rs. 17,01,676/- for the year (after transfer from Investment Allowance Utilised Reserve there was a net deficit of Rs. 13,98,527/-, after considering credit of Rs.71,746/- in profit and loss account of the previous year, there was a net deficit of Rs. 13,26,781/-) and as such no commission was paid to him. This deficit was set off by transfer from General Reserve. Losses were not carried forward in the profit and loss account. Being loss for the year, there was a deduction of 10% in salaries also (Rs. 1,80,000 - Rs. 18,000 = Rs. 1,62,000 only was paid) and no commission was paid.
2. For the Accounting Year ended 31st March, 1991, there are profits of Rs. 63,91,065/- as per the profit and loss account and as per the provisions of section 349 of the Companies Act, the profits are Rs.27,02,807/-. The commission payable is Rs. 27,028/-.
3. The provisions of section 349(4)(l) of the Companies Act, as enumerated by the querist, are as under: -
“The excess of expenditure over income which had arisen in computing the net profit 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.”
4. In case the losses of the previous year are to be set off, the commission is not payable for the year 31st March, 1991. In case the losses of the previous year are not to be set off the same are payable. According to the querist, the Calcutta High Court, in J.K. Industry Pvt. Ltd Vs. Ganga Mfg. Co. Ltd., has held that such losses are not to be set of against profits of subsequent year (1968, 2 Comp. L. J. 36). However, the querist asserts that the same is an old law whereas in the Companies Act by Ramaiya, at page no. 992, it is stated that it is not a good law and requires reconsideration.
5. The querist has sought the opinion of the Expert Advisory Committee regarding the following issues:
(a) Whether losses of the Accounting Year ended 31st March, 1990, are to be deducted in computing the commission payable to the Managing Director for the accounting year ended 31st March, 1991.
(b) In case the losses are to be off against profits of subsequent year, whether the losses as per books of account are to be set off or losses as computed under section 349 are to be deducted.
Opinion February 11, 1992
1. The Committee notes that section 349(4)(l) of the Companies Act, 1956, inter alia, provides as below:
“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.” (Emphasis supplied by the Committee).
2. The Committee is of view that it is clear that excess of expenditure over income as computed under section 349 is to be set–off against the profits computed under the same section. Adjustment of book losses against General Reserve is, therefore, not relevant for the purposes of computation of net profits under section 349. Thus, in the present case since the excess of expenditure over income as computed under section 349 was not deducted in any preceding year for computing profits under this section, the said excess of expenditure over income should be so deducted in the current year.
3. On the basis of the above, the opinion of the Committee, with regard to the issues raised in para 5 of the query, is as below:
(a) The excess of expenditure over income of the Accounting year ended 31st March, 1990 as computed under section 349 of the Companies Act, 1956, should be set off against the profits computed under the said section for the Accounting Year ended 31st March, 1991.
(b) The amount to be set off would be the excess of expenditure over income as computed under section 349 irrespective of the loss computed as per the books of account. ___________________________________ |