Case: The profit before tax of Devika Pharma Ltd as per its statement of profit and loss is ₹1,50,00,000. This is after charging managerial remuneration of ₹12,00,000 and includes a profit of ₹2,00,000 on sale of a plot of freehold land held as a fixed asset; the land had never been depreciated, so the whole profit is the excess of the sale price over its original cost. The company does not deal in land. Applying section 198, the overall maximum managerial remuneration (11% of net profit) is:

Correct answer: D) ₹17,60,000

Explanation

Net profit under section 198 is computed before managerial remuneration, so it is added back: 1,50,00,000 + 12,00,000 = 1,62,00,000. Under section 198(3), profit on sale of a fixed asset is credited only to the extent of the difference between original cost and written-down value; the excess of sale price over original cost is a capital profit and is not credited. Here the land's written-down value equals its original cost, so the entire 2,00,000 is excluded: 1,62,00,000 - 2,00,000 = 1,60,00,000. Maximum remuneration = 11% x 1,60,00,000 = ₹17,60,000.