Section 40(b) REMUNERATION TO PARTNERS (Eg Salary, Interest on Capital; etc)
Section 40(b) REMUNERATION TO PARTNERS (Eg Salary, Interest on Capital; etc)
Deductibility of Such Remuneration - Conditions
• Remuneration paid/payable by a firm to its partners are deductible only if the conditions mentioned under Section 184 & Section 40(b) are complied with.
• One of the conditions require that there should exist a legal document which confirms the existence of a partnership firm (such as partnership deed). Such legal document should give the firm the power to pay remuneration to its partners.
• A copy of such legal document is also required to be filed at the time of submission of income tax return for the first time.
Quantum of Deduction: •
|
Type Of
Remuneration |
Payment
To |
Maximum
Permissible Deduction |
|
Interest
on capital |
Any
partner |
Rate of
interest shall be
lower of the
two: ---- |
|
|
(working partner as well
as sleeping partner) |
Rate
specified in partnership deed; or --12%
p.a. (Calculation of
interest on simple
interest basis) |
|
Salary, bonus, commission or any other remuneration |
Only working partner (such remuneration is not allowed to be paid to a sleeping partner) |
|
Calculation of Book Profits
Following adjustments should be made to the net profit u/h PGPB to arrive at book profits:
• Only income u/h PGPB is to be taken after including all incomes and deducting all eligible expenses (ie, income after giving effect to the provisions of Sections 30 to 38)
• Interest on capital is allowed to be deducted only to the extent it is permitted u/s 40(b). Amount in excess of the permissible figure shall be added back.
• Salary, bonus, commission, etc to partners are not to be deducted.
• Current year depreciation as well as unabsorbed depreciation of previous years are allowed to be deducted (because such expenditure is covered under Sections 30 to 38)
• Brought forward business asses and Chapter VI-A deductions are not allowed to be deducted (because such expenditure is not covered under Sections 30 to 38)
Points to be Noted
• Interest on loan is not covered within the scope of Section 40(b). However, it is allowed to be deducted if provided for in the partnership deed. The rate of interest would also be specified in the partnership deed.
• Share of profit received by a partner from a partnership firm is hands of the partners u/s 10(2A).
• Interest on capital and salary, bonus, etc are considered to be the income of the partners u/h PGBP to the extent they are allowed to be deducted u/s 40(b).
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#REMUNERATIONTOPARTNERS
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