SCHEDULE VI

FORM OF BALANCE SHEET AND REQUIREMENTS AS TO

PROFIT AND LOSS ACCOUNT

Information required to be furnished in terms of clause(e) to notes appended to form of balance sheet prescribed in the Schedule

In cases where the capital account of each partner is maintained at a constant figure, or in other words, where the capital of the partner is fixed, this should be shown under "Investment". Similarly, in other cases where the capital is not fixed or not specified by the partnership deed, if any, and all transactions between the partner and the firm are merged in a single account in the books of partnership firm, the total of such account should be shown under the "Investments" and not under the "Current Assets, Loans and Advances". In other words, the net amount standing to the credit of the partner (i.e., aggregate of capital, profits, deposits, if any, etc., as reduced by share of loss, if any, and drawings of the partners) should be shown under the head "Investments" and not under the head "Current Assets, Loans and Advances".

As regards the disclosure of total capital of the partnership firm, the same may be preferably shown as on the date of the balance sheet of the company. Where, however, the capital of the firm fluctuates from day-to-day, and the accounts of the firm and the company are closed on different dates, the same may be exhibited in the balance sheet of the company as per the last authenticated balance sheet of the firm.

One of the requirements, is to disclose the share of each partner in the balance sheet of the company. This point is not free from doubt as it can mean either the share of each partner in the capital of the firm or share of each partner in the profit of the firm. It is, however, felt that the preferred interpretation is to disclose the share of each partner in the profit of the firm rather than the share in the capital since, ordinarily the expression "share of each partner" is understood in this sense. Moreover, disclosure is already required of the total capital of the firm as well as of the company's investment in the capital. Nothing further will, therefore, be gained by disclosing the share in the capital. Disclosure relating to the share of each partner in the profits of the firm would enable the company's shareholders to ascertain the extent of the company's involvement in the firm.

* CIRCULAR LETTER NO.28/1/71-CL-V, DATED 13.10.1976

Provision for gratuity not shown in balance sheet and extent of company's liability on account of gratuity also not disclosed - Whether amounts to not disclosing a true and fair view of the state of affairs.

It has been observed that some companies which do not make any provision for "gratuity liability" in their accounts, do not even add suitable note to the balance sheet disclosing the extent of the company's liability on this count. Some companies make a bald statement by way of a note to accounts, saying that the gratuity liability has not been ascertained or the "gratuity liability" is being accounted for on "cash basis". The plea of the companies that "gratuity liability" has not been ascertained nor could not be ascertained does not meet with the requirements in this regard of Schedule VI to the Act. It is essential that the gratuity liability is ascertained in accordance with the normally accepted methods, as recommended by the Institute of Chartered Accountants of India in paras 4.1 to 4.1-3 (para 2.2 of the Revised Statement) of "Statement on Treatment of Retirement Gratuity in Account" (Annex) issued by it, and if a suitable provision is not made in the accounts, or there is an under-provision, the amount of gratuity liability so estimated or left un provided, as the case may be, should be indicated by way of a note to the accounts.

In case the company does not provide for the "gratuity liability" or does not state the quantum of "gratuity liability" by way of a note, the balance sheet and profit and loss account cannot be regarded as disclosing a true and fair view of the state of affairs. It is hence the duty of the auditors to qualify their reports to this effect and specifically state that the requirements of Schedule VI have not been complied with properly. This has also been made clear in paras 8,7 and 8.3 (paras 9, 12 and 9.13 of the new edition) of the "statement of Auditing Practices" issued by the Institute of Chartered Accountants of India.

* CIRCULAR NO. 13/77[8/31/211/77-CL-V], DATED 21.11.1977.

ANNEX 1

STATEMENT ON THE TREATMENT OF RETIREMENT GRATUITY IN ACCOUNTS

1. INTRODUCTION

1.1. The Council of the Institute of Chartered Accountants of India issues the following note for the guidance of its members on the accounting and other problems arising from payments of retirement gratuity to employees. It is hoped that this note will be useful to members both in industry and in practice in determining the best practice to be followed in regard to the accounting treatment of retirement gratuity.

1.2. The expression "retirement gratuity" refers to amounts payable to the employees of a business enterprise on their voluntarily or in other circumstances terminating their services with the employer, in accordance with the provisions of the applicable law, a legally enforceable arrangement or by virtue of a course of conduct. The word "gratuity" meaning a payment made voluntarily is somewhat in appropriate for inclusion in the expression "retirement gratuity". Historically, however, gratuity on retirement was, in fact, paid voluntarily, but over a period of time, while the term has remained unchanged it has acquired a contractual or obligatory character. Indeed the Payment of Gratuity Act, 1972 uses the term "gratuity" while imposing a statutory obligation to pay it.

1.3. Since this note is concerned with the treatment of retirement gratuity in accounts, no attempt has been made to discuss the detailed legal provisions of the Payment of Gratuity Act, 1972. Nevertheless in Appendix 'A' will be found an abstract of the relevant provisions of the said Act, with reference to important matters like eligibility rates, disqualification and the basis of computation.

2. FINANCIAL ARRANGEMENTS TO MEET GRATUITY LIABILITY

2.1. Three different approaches appear to have been adopted in India to meet the financial obligations for payment of retirement gratuity. These are:

(1) Cash basis - Payments actually made on account of gratuity are debited to the revenue account in the year in which the gratuity becomes due and payable and no provision is made in respect of accruing liability for retirement gratuity during the service life of an employee.

(2) Accrual basis - Provision is made in the books of the enterprise for the accruing liability for gratuity by debit to the revenue account in each year, the aggregate provisions made being reflected in the balance sheet.

(3) Gratuity fund: A separate gratuity fund administered by trustees is constituted by a trust deed, and contributions are handed over each year to the trustees and charged to the revenue account. the rules relating to the recognition of a gratuity fund for income-tax purposes are given in Part C of the Fourth Schedule to the Income-tax Act, 1961. Often the trustees do not administer the fund themselves but arrive at an arrangement with the Life Insurance Corporation of India through a Group Gratuity Insurance Policy to administer the fund.

2.2. The need to provide for accruing gratuity liability is based on sound accounting considerations and exists regardless of whether in the computation of taxable profit, it is or is not allowed as a deduction. At the same time it is appreciated that when deciding whether or not to make provision for accruing gratuity liability, management may find that special circumstances exist which provide a valid justification for not making a provision . The Council is of the opinion that in all such cases, when provision for accruing gratuity is not made, or if made is inadequate, the matter should be referred to by way of a note in the accounts indicating the total accrued liability, appropriately calculated or the shortfall in the provision, as the case may be.

2.3. When an enterprise decides for the first time to make provision for gratuity in its accounts or to set up a gratuity fund, it is faced with the problem of making provision for and/or providing funds to cover by the accrued gratuity liability in respect of the entire past service put in by the employees. Appropriate arrangements can, however, be devised to spread the provision of funding in respect of a part or the whole of such initial liability over a period of years.

2.4. Whether or not a separate gratuity fund should be created by an enterprise is entirely within the discretion of the management. The principal consideration in arriving at the decision on the subject is one of finance. Where funds which are required to be set aside for the gratuity liability are employed in the business and not separately invested, they may earn an income higher than the yield which would be realised when the funds are invested in approved securities as required for a separate gratuity fund. On the other hand income from the investments of the funds is not subject to taxation, whereas income earned by investment of fund in own business is subject to taxation. A valid comparison must, therefore, be between the gross rate of interest that a gratuity fund can earn and the net rate of return that investment in own business can give. It is possible that on such a comparison, it may be found that the finance needed to provide for gratuity through the creation of a separate gratuity fund may, in certain circumstances, be lower than the finance needed when the funds are employed in the business.

3. NEED FOR USE OF ACTUARIAL TECHNIQUES

3.1. When it is desired to evolve a financial arrangement to cover accruing gratuity liability through the second or the third method referred under para 2.1 above, the first step must clearly be to obtain an estimate of the liability accruing from year to year. As on a particular date, neither the amount of accrued gratuity in respect of past service, nor the date of its payment are known with certainty. Since gratuity is payable at exit from service, the date of payment would depend on the cause of exit, that is, on whether the employee continues in service till normal retirement or dies or withdraws from service earlier. The amount of accrued gratuity depends on the salary at exit from service and, at times, also on the cause of exit. For computing financial provisions, it also becomes necessary to make assumptions regarding investment returns likely to be earned in future. Accordingly, determination of the cost of accruing gratuity benefits can only made on the basis of assumptions regarding the future course of a variety of events. As a consequence, it is not possible to ascertain with certainty, either the present value of accruing gratuity liability or the financial provisions required to meet such liability as it emerges. Techniques of making estimates of this nature are developed in actuarial science and the problems of estimating the liability in respect of accruing gratuity benefits and devising appropriate financial arrangements to meet such liability fall within the province of the actuary. As the actuarial estimates are based on forecasts regarding future course of events, it becomes necessary for the actuary to keep the changing experience in respect of such events under constant review and to re-examine the working of financial arrangements in the light of such review. Thus arises the need for periodical actuarial valuations.

3.2. Provisions for gratuity liability are sometimes based on estimates of gratuity liability made on the assumption that each employee would withdraw from service on the estimation date and gratuity based on his past service and current salary would be immediately payable to every eligible employee. Of course, this assumption is far removed from reality, since all employees are unlikely to withdraw immediately. This could happen only where the employer discontinues his business, whereas normally all accounts are prepared on the assumption of continuity of business. Provisions made on the basis of such estimates cannot be considered as determined on a scientific basis and they are likely to distort appreciably the picture presented by the accounts. Since over-provision is as undesirable as under-provision, it is recommended that the provision for gratuity as well as the note relating to under-provision, over-provision or non-provision, as the case may be, should be based, as far as possible, on a computation determined by the use of actuarial principles. Where for any reason, an actuarial computation has not been obtained, and the provision is made or the disclosure of under-provision, over-provision or non-provision is based on any other method of computation, the accounts should clearly disclose this fact and should indicate broadly the basis of calculation.

3.3. It is, however, recognised that there, may be circumstances under which an actuarial valuation is not called for. For example, in the case of a small company or where the number of employees is negligible, the cost and trouble involved in obtaining in actuarial valuation may not be justified. Consequently, an enterprise with very few employees may calculate the provision for gratuity or the amount to be disclosed as not provided, over-provided or under-provided, by reference to an ad hoc calculation based on the assumption that all employees are entitled to gratuity at the end of the accounting year, rather than by way of an actuarial computation. Nevertheless, in such a case, the accounts should disclose that the provision or the disclosure is based on a method of calculation other than an actuarial computation.

3.4. Whether an actuarial investigation and valuation of liabilities should be carried out each year or whether it would be adequate to carryout such investigations and valuation of liabilities at less frequent intervals say once in three years; is a matter which could best be left to be decided in consultation with the actuary. Some of the factors which will determine the interval between the two actuarial investigations are:

(a) the purpose of the investigation, i.e., whether to determine the rate of contributions to the Gratuity Fund, and to determine periodically the adequacy of the fund, or to make provisions in the annual accounts for accruing gratuity liability or to state in note to the balance sheet the amount of total accrued gratuity liability not provided for in the accounts;

(b) the method of costing valuation to be adopted by the actuary;

(c) the employee strength, its age/service profile, rate of employee turnover and frequency of changes in dearness allowance amounts. (If the accruing liability from year to year is unlikely to fluctuate widely, it maybe possible to carry out the actuarial investigations at less frequent intervals);

(d) changes in gratuity benefit rules;

(e) provisions in the gratuity trust fund, rules regarding frequency of actuarial valuation.

In the opinion of the Council, an actuarial valuation should be carried out at least once every three years except in situations where the consulting actuary advises valuation at more frequent intervals or advises a special investigation during a normal three-year inter-valuation period.

3.5. Where an actuarial valuation is made every year, the accruing liability (to be provided in the accounts or to be referred to in the balance sheet) for the year will be directly determined. Where, however, an actuarial investigation and valuation of liabilities is carried out at less frequent intervals, day once in every three years, the actuary will provide the estimates of accruing liability for the following two years, at the time of each triennial valuation. It should be clearly understood that after the immediately following triennial valuation the accruing gratuity liability determined for the third year will necessarily contain an adjustment for the over-/under-provisions made in the preceding two years.

3.6. The accounts of each respective year should clearly disclose whether the gratuity provision reflected in the accounts is based on an actuarial valuation made at the end of the accounting year or an actuarial valuation made at an earlier date. In the latter case, the method by which the annual accrual has been determined should also be briefly described.

3.7. The observations in the foregoing paragraphs relating to a provision for gratuity in the accounts also apply in a case where no provision or inadequate provision is made but the estimated amount of the gratuity liability is disclosed. In other words, the method to be adopted for determining either the amount of the disclosure or the amount of the provision is roughly identical.

3.8. Where an enterprise has established a gratuity fund, similar observations would also apply in determining the annual contributions to the fund subject, however, to the overriding requirement that such contributions must be in accordance with the rules of the fund, the provisions of the trust deed, and the requirements of the Income-tax Rules relating to approved gratuity funds.

4. GRATUITY LIABILITY UNCOVERED BY PROVISIONS

4.1. As indicated in para 2,3 above, on the first occasion when provision for gratuity liability is made, it may be decided that the provisions to cover a part or the whole of the initial liability in respect of past service should be spread over a number of years. During such period the total accumulated provision would not suffice to cover the entire accrued liability in respect of past service. Even after provisions are started, owing to special circumstances, it may be found that increase in the liability during a particular year is too large to be observed by the provisions normally expected in respect of that year. Such sudden large increases in liability may arise as a result of improvements of benefits under a gratuity scheme, sizeable increases in the level of salaries as a result of revision of scales of basic salary or dearness allowance as well as from the need for a change in actuarial assumptions. When such an event occurs, it maybe permissible to spread the provisions to cover a part of such increase over a period of years provided that the amount charged in the profit and loss account of the year is not less than the amount properly chargeable to that year and the amount for which the provision is deferred does not exceed the increase in the liability pertaining to the past services of the employees. The tax implications of such a procedure both regarding the allowance in the year in which the provision is deferred and in subsequent years will have to be carefully considered. During the period over which the total provisions are spread, the accumulated provision may fall short of the total accrued gratuity liability upto that date. Hence, whenever and for whatever reason the provisions made fall short of the accrued gratuity liability for past service, the quantum of such under-provision should be disclosed in a note to the balance sheet.

4.2. Where a gratuity fund is constituted and the fund is not sufficient to cover the full accrued liability, the difference between the accrued liability, in respect of past service and the accumulated fund should be either provided for in the accounts of the enterprise or should be suitably disclosed by way of a note to the balance sheet. Even where the trustees of the gratuity fund have made arrangements with the Life Insurance Corporation of India through a group gratuity policy, it would be necessary to examine whether any of the past service accrued liabilities have remained uncovered and if so provide for or to refer to the same in a note to the balance sheet.

5. PROVISIONS AND TAX IMPLICATIONS

5.1. The amount of total accrued past service liability or of accruing liability for the year or the rate of contribution to the Gratuity Trust Fund will be determined by the actuary on a gross basis, i.e., without taking into account whether such provisions/contributions will be allowed as deductible items under the Income-tax Act. However, where the amount provided for gratuity in the balance sheet is held to be not allowable as a deduction in computing the employer's taxable income, the allowance under the Income-tax Act would be made when the liability finally emerges, that is, when under the terms governing the payment of gratuity, it actually becomes due to the employee. The net cash cost of gratuity payment to the enterprise is not, therefore, the gross amount of the gratuity but the amount of the gratuity less the benefit derived from its deductibility for the tax purposes. In calculating the accruing liability for gratuity, credit may therefore be taken for the ultimate expected saving in tax. Thus if the rate of tax applicable to the employer is 60 per cent, provision may be made at the rate of 40 per cent of such part of the gross liability appropriately calculated. If the gratuity is provided for or disclosed on a "net-of-tax" basis, disclosure should be made both of the gross amount of gratuity liability and the net amount thereof after tax.

5.2. In making the above calculations, a question arises as to whether the liability under the Companies (Profits) Surtax Act, 1964, should also be taken into account in determining the likely reduction in the amount of tax to be deducted from the gross amount of gratuity. Two approaches are possible. On the one hand, as surtax now forms a more or less permanent feature of the tax assessment in the country, it may appear reasonable to take surtax into account in calculating the net-of-tax liability. On the other hand, as the calculation of surtax depends on a number of factors and there can be no easy way of ascertaining whether there would be a liability for surtax in the future year in which gratuity is paid, or the precise magnitude of the profits chargeable to surtax (the incidence and rate of surtax depending on the amount of the capital base), it can be argued that surtax should not be taken into account when calculating the net-of-tax rate. In the event of an enterprise adopting the first approach, namely, taking into account surtax, it is suggested that some estimate may be made of the likely surtax liability based on the average ratio which surtax bears to the total profit of the company over the past few years, for example, if it is found that surtax liability during the three immediately preceding years was equal to 9 per cent, 10 per cent and 11 per cent of the profits of the company, the average of 10per cent may be adopted as a reasonable basis for calculating the surtax liability. While both the views are possible, on balance, it would appear more desirable to calculate accruing liability for gratuity on a net-of-tax basis without taking into consideration the surtax liability.

5.3. The net-of-tax method of calculating accruing liability of gratuity is, however, not appropriate unless there is a reasonable assurance that the enterprise will earn taxable profits in future to enable it to claim a deduction from such taxable profits when the liability for gratuity is discharged. This assurance would not normally be available where an enterprise has a large carry forward of unabsorbed depreciation, development rebate, investment allowance or tax losses and/or has been incurring losses and there does not appear to be a reasonable possibility of its earning sufficient profits in the immediate future to wipe off such carried forward deductions.

5.4. Where the net-of-tax method, a problem is created by changes in the rates of taxation applicable to the employer. Several possible methods could be used such as, a standard rate of tax which is not varied from year to year, or a recomputation of total liability net-of-tax each year and providing for the difference between the amount calculated as at the beginning and at the end of the accounting period respectively. It is recommended that since the gross liability for gratuity is recalculated at the end of each year in the light of the facts as known at that time, it would be logical that the net-of-tax amount should also be recalculated on the basis of tax rates in force as at the date on which the recalculation is made.

5.5. Where adequate provision for gratuity is made gross, that is, without considering the tax benefit, the actual payment is debited to the provision for gratuity. Where, however, a provision is made net-of-tax, certain accounting problems may arise. the most satisfactory method would be to debit the gross amount of the gratuity to the provision account. At the same time, the provision for tax for the accounting year in which the payment is made should be made without taking into account the relief in respect of the gratuity payment. The additional liability so provided for should then be transferred from the provision for taxation account to the provision for gratuity account. In the Council's opinion, if adjustments are made in accordance with the above method, there is no necessity for showing the movements in the provision accounts.

Information required to be disclosed in accordance with Part II

Clarification 1

INFORMATION IN TERMS OF PARA 33(ii)

According to Note 2 given under para 3 of part II of Schedule VI and for the purposes of para 3(ii) (a),(b) and (d), the items for which the company is holding separate industrial licence, shall be treated as separate class of goods, while in case of trading companies the imported items are required to be classified in accordance with the classification adopted by the Chief Controller of Imports and Exports in grating the import licences. It may, therefore, be assumed on the same analogy that in case of manufacturing companies the turnover is to be similarly classified by reference to each class of goods for which the company holds an industrial licence. Similarly, in case of trading companies, the turnover should be classified in accordance with the classification adopted by the Chief Controller of Imports and Exports. There may, however, be cases where the company may not be holding any industrial licence or the goods cannot be classified according to the classification adopted by the Chief controller of Imports and Exports, in such cases the classification adopted by the rules framed under the Monopolies and Restrictive Trade Practices Act may be adopted. If this is also not practicable or feasible, then the goods, may be grouped under suitable broad headings. As regards the quantitative analysis, the same should be given according to the classification as pointed out above and not in general manner.

INFORMATION IN TERMS OF CLAUSE (f) OF SUB-PARA (x) OF PARA 3

It is not possible to apportion the expenditure incurred in respect of certain employees, if the amenities provided are shared by other employees who get less than Rs.3,000 per month. For example, the subsidy provided for a canteen, fair price shops, or educational institutions, which are used by all the employees of an organisation cannot be precisely apportioned and the amount attributable to employees drawing Rs.3,000 or above worked out. Hence, expenditure to be disclosed here will relate only to the other expenditure by way of remuneration and perquisites, whether or not taxable in the hands of the employees concerned.

INFORMATION IN TERMS OF CLAUSE (i) OF SUB-PARA (x) OF PARA 3

In terms of proviso to clause (i), any item of expenditure which exceeds one per cent of the total revenue or Rs.5,000, whichever is higher, has to be shown as a separate and distinct item against an appropriate account head in the profit and loss account. for this purpose, "total revenue" means all items on the credit side of the profit and loss account excluding closing stock and the loss, if any, for the period.

INFORMATION IN TERMS OF NEW PARA 4D

Value of imports calculated on c.i.f. basis-Clause(a) - All the imports made by the company, irrespective of whether these imports are made directly or through any other agency, should be disclosed in the profit and loss account. In case, however, certain goods have been purchased by a company from an independent entity who had made the imports on its own and not on behalf of the company concerned, need not be included in the total imports of the company.

The value of the goods imported is required to be disclosed on "c.i.f." basis. There may be cases where the goods may be imported on the basis of "f.o.b." contract so that the values directly available from its record would be those relating to f.o.b. terms. In such cases, it should not be unduly difficult to apply a standard formula in order to convert f.o.b. values to c.i.f. values of imports. It may, however, be necessary to make approximations in suitable cases and if such approximations are reasonable, no objection may ordinarily be taken.

All goods including those in transit should be included in case the title to the goods has passed on the company within the accounting year.

Expenditure in foreign currency -Clause (b) - All the items involving expenditure in foreign currency should be disclosed separately. In other words, the foreign currency expenditure should be classified between royalty, know-how, professional consultation fees, interest and other matters and as such should be disclosed under each of such items and not to be clubbed together under any one item.

It is only that part of the expenditure which is to be paid in foreign currency that has to be declared. However, a footnote should be given to this effect so that it may be clearly indicated as to whether the expenditure on royalty, etc., in foreign currency has been disclosed on the basis of the gross amount or on the basis of the net amount after deduction of tax at source, or any other such charge.

The expenditure may be shown either on cash basis or accrual basis provided that the basis actually adopted is disclosed by way of footnote in the profit and loss account and the basis so stated is-consistently followed by the company.

The item "other matters" appears to be exhaustive so as to cover all types of items involving foreign currency expenditure. At the same time it is viewed that the disclosure relates to the expenditure on intangible items rather than on import of tangible goods, that is to say, the disclosure should not be made once again with regard to the expenditure involved in foreign currency for items whose import value has already been discussed in compliance with the requirements of other paras.

Value of imported raw materials, spare parts, etc. - Clause (c) - The disclosure is only in respect of goods directly imported by the company and through channellised agencies. It may be mentioned in this connection that while the other requirement of para 4D, as already discussed in clause (a) above, applies only to the case of imports made by the company directly or through any other agency, the requirements to disclose the value of "imported materials consumed" applies to all such materials, whether they were imported directly or through any other agency or whether they were acquired through local sources, the main idea being to determine the percentage of the imported raw materials, spare parts and components consumed during the financial year in relation to the total consumption.

Earnings in foreign exchange -Clause(e) - The amount to be disclosed in respect of the earnings of foreign exchange and classified in terms of the aforesaid clause (e)of para 4D should be disclosed either on accrual basis or cash basis provided the basis adopted is stated and the basis so stated is consistently followed by the company.

As regards the earnings in respect of the-goods to be exported to countries with which payment arrangements are in force and settlements are effected in Indian rupees, although according to the strict interpretation of clause(e), it may not be necessary to include them, this may, however, be desirable so that full particulars of the total foreign exchange earned by a company may be available. It will, therefore, be desirable in such cases to indicate the correct position of this category of earning by way of a footnote.

* CIRCULAR LETTER NO.28/11/71-CL-V, DATED 13.10.1976.

Clarification 2

INFORMATION IN TERMS OF CLAUSE (D) OF SUB-PARA 3(ii)

The companies which are carrying on trading as well as manufacturing activities should disclose the quantitative particulars for both these activities in regard to opening and closing stocks of purchase/sale and it will not be sufficient merely to show the value and quantitative break up of the raw material consumed but also on all other items of stocks. It is mandatory for the companies to disclose the quantitative analysis in respect of all the items. It is incorrect to say that para 3(ii)(d) of Part II of Schedule VI make any exception in this regard.

Clarification on amendments in Schedule XIII by the Companies (Amendment) Act, 1988

Part I:

(a) The conditions specified therein are required to be satisfied only at the time of appointment. In case the appointee, after appointment, does not satisfy any of the said conditions, it will not debar the person concerned from continuing in office for the full tenure of his appointment. For example, as per clause(c), an appointee must not have attained the age of 65 years at the time of his appointment. If, for example, the appointment is made at the age of 64 years and thereafter, the appointee crosses the age of 65 years during the tenure of his appointment, no approval of the Central Government is required under section 269 for the latter part of his appointment which may fall outside the upper age limit.

(b) In so far as clause (f) is concerned, the company has to ensure at the time of appointment of its managerial personnel that it had not suffered loss or had adequate profits during the financial year immediately preceding the financial year in which the appointment is made or in any of the three financial years in the four financial years immediately preceding the financial year in which the appointment is made.

In other words, the company must have earned adequate net profits computed in the manner laid down in sections 349, 350 and 351 either during the financial year immediately preceding the year of appointment or during any of the three financial year out of four financial years immediately preceding the preceding financial year.

Illustration

Where the appointment is made during the financial year 1990, approval of the Central Government is not necessary if the profits were adequate--

(1) during the financial year 1989, being the financial year immediately preceding the financial year in which appointment is made; or

(2) In any of the three financial years out of four financial years, namely, 1985, 1986, 1987 and 1988 (being the four financial years immediately preceding the "preceding financial year").

(c) Where the profits are found to be inadequate or where the adequacy or inadequacy of profits cannot be computed, the dispensation envisaged under clause (f) will not be available to the concerned company. As such a newly incorporated company will not be in a position to satisfy the conditions laid down in clause (f) and, therefore, will be required to seek approval of the Central Government in accordance with the relevant provisions of the Act.

(d) The ceilings specified in section 198(1) and 309(3) of the Companies Act, 1956, determine the adequacy of profits with reference to managerial remuneration paid during the relevant year(s) specified in clause (f) and not with reference to the proposed remuneration payable in the year of appointment.

In a case where no managerial remuneration had been paid during the relevant year(s), any profit earned by the company as computed in the manner laid down under sections 349, 350 and 351 of the Act would be deemed to be adequate.

(e) For the purpose of determining net profits of any financial year, the amount of depreciation required to be deducted in pursuance of clause (k) of sub-section (4) of section 349 read with section 350 shall be the amount calculated as per the written down value method at the rate specified in Schedule XIV, on the assets as shown by the books of the company at the end of the relevant financial year.

Part II:

(a) The slabs of remuneration laid down in paragraph 2 of Part II are subject to the ceilings of 11% specified in section 198(1) and of 5% and 10% specified in section 309(3) of the Act. If the remuneration of managerial personnel exceeds the aforesaid ceilings in any financial year, the company can pay managerial remuneration subject to a cut of 10% of the substantive salary laid down in Paragraph 2 of Part II read with Paragraph 2 of Part III of Schedule XIII.

(b) As indicated, vide Note (d) on "Votes" below Schedule VI, "long-term loans" for the purpose of "effective capital" would mean loans repayable after one year, whether secured or unsecured.

CIRCULAR NO.3, DATED 13.4.1989