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
Quantum of Deduction: •
interest shall be
lower of the
(working partner as well
as sleeping partner)
specified in partnership deed; or
interest on simple
Salary, bonus, commission or any other remuneration
Only working partner (such remuneration is not allowed to be paid to a sleeping partner)
Example: -If book
profits are Rs 10,00,000,
maximum salary, etc
can be. Rs
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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