Use the company-law allowance, not an automatic tax substitute
Companies Act section 198(4)(k) deducts depreciation to the extent specified in section 123. Section 123(2) refers to depreciation in accordance with Schedule II. Establish that applicable amount before adjusting the selected starting profit. A tax-depreciation schedule or an unexplained management add-back is not a substitute. This guide addresses the computation bridge; it does not prescribe asset lives, rates or a complete managerial-remuneration limit.
Read the applicable text: Government-hosted Companies Act: sections 198(4)(k) and 123(2).
Prove the statutory depreciation population
Obtain the fixed-asset register, acquisition and disposal records, relevant use/readiness facts, useful-life and residual-value conclusions, component workings and the applicable statutory/accounting analysis. Identify which amounts are the established section 123 depreciation and which are impairment, disposal loss or another adjustment. Do not classify every asset-related charge as depreciation merely because it sits in the same ledger account.
Label the starting profit
A subtotal after book depreciation needs a different bridge from one before it. Show book charge already deducted, depreciation permitted for the section 198 purpose and the resulting difference. Where the book charge equals the statutory amount, another deduction duplicates it. Where they differ, explain the actual reasons rather than selecting whichever amount produces a preferred remuneration base.
Preserve separate tax and company-law schedules
The tax block, statutory financial-statement asset register and section 198 computation have different purposes. Do not copy tax rates, additional depreciation or tax disallowances automatically into this calculation. Reconcile differences explicitly. Likewise, the section 198 bridge cannot be used as permission to leave an incorrect book depreciation charge uncorrected: accounting errors and statutory adjustments need their own appropriate treatment.
Control asset populations and duplicate entries
Match depreciation records to the accounting period and legal entity. Do not import the same charge from both a fixed-asset summary and a general-ledger expense file. Review partial-period assets and disposals under their actual applicable rules rather than prorating every figure by an invented universal convention. The illustrations assume the section 123 amount has already been independently established.
Complete the wider profit calculation
Retain a single bridge showing the base, book charge reversal where appropriate, statutory deduction and isolated subtotal. Then complete the remaining section 198 credits, expenses and exclusions. A correct depreciation bridge is not final section 198 profit, an approved director-pay amount, or proof of tax deductibility.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Book and statutory amounts match
Assume starting profit ₹90 lakh is after book depreciation ₹10 lakh, equal to the independently established statutory amount. The isolated subtotal remains ₹90 lakh. Deducting ₹10 lakh again would produce an unsupported ₹80 lakh.
Illustrative example 2: Statutory amount exceeds book charge
Assume starting profit ₹90 lakh is after book depreciation ₹10 lakh, while the established section 123 amount is ₹12 lakh. Reverse ₹10 lakh and deduct ₹12 lakh to reach ₹88 lakh, a net additional ₹2 lakh reduction.
Illustrative example 3: Book charge exceeds statutory amount
Assume starting profit ₹85 lakh is after book depreciation ₹15 lakh, while the established statutory allowance is ₹12 lakh. Reverse ₹15 lakh and deduct ₹12 lakh to reach ₹88 lakh, a net ₹3 lakh increase.
Illustrative example 4: Starting before depreciation
Assume a clearly labelled ₹100 lakh subtotal before depreciation and an established statutory amount ₹12 lakh. Deduct ₹12 lakh once to reach ₹88 lakh. Do not also deduct the ₹10 lakh book charge from the second example.
Illustrative example 5: Tax amount is different
Assume the company-law amount is ₹12 lakh, book charge is also ₹12 lakh and tax depreciation is independently ₹20 lakh. The tax-versus-company-law difference is ₹8 lakh. Do not reduce the section 198 subtotal by that extra ₹8 lakh merely because the tax computation permits it.
Illustrative example 6: Combined asset-register bridge
Assume two supported statutory depreciation populations of ₹7 lakh and ₹5 lakh, total ₹12 lakh, while starting profit ₹89 lakh includes a combined ₹11 lakh book charge. Reverse ₹11 lakh and deduct ₹12 lakh to reach ₹88 lakh. Reconcile both source populations without importing the summary total a second time.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Define computation and period | Entity, year and section 198 purpose. |
| 2 | Label the starting profit | Before or after book depreciation. |
| 3 | Recover the book charge | General ledger and fixed-asset reconciliation. |
| 4 | Establish section 123 depreciation | Applicable Schedule II and supporting analysis. |
| 5 | Separate other asset charges | Impairment and disposals assessed independently. |
| 6 | Review asset population | Additions, disposals, timing and entity scope. |
| 7 | Calculate the bridge | Book charge versus established statutory deduction. |
| 8 | Keep tax calculations separate | No unsupported tax-rate or block substitution. |
| 9 | Prevent duplicate imports | Summary and ledger charges matched by identifier. |
| 10 | Close the wider computation | Other section 198 adjustments and unresolved accounting issues. |
Sixteen practitioner FAQs
1. What does section 198(4)(k) refer to?
Depreciation to the extent specified in section 123.
2. What framework does section 123(2) identify?
Depreciation in accordance with Schedule II.
3. Does this article prescribe useful lives or rates?
No. Establish the relevant amount under the actual applicable framework.
4. Can tax depreciation be copied automatically?
No. It serves a different computation purpose.
5. Is a book charge always the statutory amount?
Verify it rather than assuming equality.
6. What if the starting profit already includes the correct amount?
Retain one deduction; do not subtract it again.
7. What if the statutory allowance is higher?
Reconcile the book reversal and statutory deduction on supported facts.
8. What if the book charge is higher?
Explain the difference and required adjustment, and address any accounting issue separately.
9. Can a before-depreciation subtotal use the same add-back as an after-depreciation start?
No. Label and reconcile the starting point.
10. Does a tax-versus-book difference automatically change section 198 profit?
No. Establish the company-law allowance independently.
11. Are all asset-related losses depreciation?
No. Identify impairment, disposal and other charges separately.
12. Can a computation bridge excuse incorrect financial statements?
No. Accounting correction questions remain separate.
13. Can every partial-period amount use an assumed uniform proration?
No. Apply the relevant facts and rules.
14. Can register and ledger totals both be deducted?
Not where they represent the same charge; eliminate duplication.
15. Is the depreciation subtotal the final remuneration profit?
No. Complete the wider section 198 computation.
16. What should a reviewer be able to trace?
Starting profit, book expense, independently established statutory amount and one reconciled adjustment.
Official sources
Government-hosted Companies Act: sections 198(4)(k) and 123(2)