# Computation of Net Worth and Net Profit

## Net Worth (Section 2(57))

Net Worth = Aggregate of:

Paid-up Share Capital (PUSC)
Reserves created out of profits (R&S)
Securities Premium Account (SPA)
Debit balance of P&L A/c (P&L A/c Dr.)

LESS:

Accumulated Losses
Deferred Expenditure
Miscellaneous Expenditure written off

> Important Exclusions (Ignore): Reserves created out of revaluation of assets and write-back of depreciation are NOT to be included in Net Worth.

## Net Profit for CSR (Section 198 read with Rule 2)

Net Profit = Profit BEFORE TAX

However, the following shall be EXCLUDED while computing Net Profit:

1. Profit arising from overseas branches of the company (whether operated as a separate company or otherwise).

2. Dividend received from other companies in India which are already covered under and complying with the CSR provisions.

## Why These Exclusions?

Overseas Branch Profits: Excluded to avoid extra-territorial application; CSR is meant for Indian social welfare.
Dividend from CSR-complying Companies: Excluded to prevent double counting of profits on which CSR has already been spent by the paying company.

Worked example

### Example 1

Example: Compute Net Profit for CSR purpose for MNO Ltd.:

Profit Before Tax: Rs. 10 crore
Includes profit from US branch: Rs. 2 crore
Includes dividend from XYZ Ltd. (a CSR-complying co.): Rs. 50 lakh
Includes dividend from ABC Ltd. (not subject to CSR): Rs. 30 lakh

Answer: Net Profit for CSR = 10 cr - 2 cr (overseas) - 0.50 cr (CSR-complying dividend) = Rs. 7.5 crore. Dividend from ABC Ltd. is NOT excluded as ABC is not covered under CSR.

⚠️ Common exam mistakes

Using Profit AFTER tax instead of Profit Before Tax for CSR computation.
Including revaluation reserves and write-back of depreciation in Net Worth.
Excluding ALL dividends - only dividends from CSR-complying Indian companies are excluded.
Forgetting to exclude profits from overseas branches.
Confusing Section 198 net profit (for managerial remuneration) with Net Profit for CSR - they are similar but not identical.

Bare-Act text Rule 2(1)(h) · Companies (CSR Policy) Rules, 2014 · click to expand

Rule 2(1)(h) of Companies (CSR Policy) Rules, 2014: 'Net Profit' means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following: (i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and (ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.

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Computation of Net Worth and Net Profit for CSR

Worked example

⚠️ Common exam mistakes