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- 1. Provision related to Interest & Remuneration to Partners U/s. 40(b) of the Income Tax Act, 1961
- 2. Partner to be paid Interest & Remuneration must be a working partner
- 3. Remuneration or interest to Partners must be authorized by the Partnership Deed
- 4. Quantification of remuneration to Partners in Partnership Deed is must
- 5. No Interest & Remuneration to Partner to be allowed which relates to any period falling prior to the date of such partnership deed
- 6. Remuneration to Partners exceeding the limit prescribed u/s 40(b) to be disallowed
- 7. Any interest to any partner exceeding 12% disallowed
Section 40(b) of Income Tax Act places some restrictions and conditions on the deductions of expenses available to an assessee assessable as a partnership firm in relation to the remuneration and interest payable to the partners of such firm. The deductions regarding salary to partners and any payment of interest to partners cannot exceed the monetary limits specified u/s 40(b) and are available subject to the fulfillment of conditions mentioned therein.
The following conditions must be satisfied before claiming any deduction in respect of salary/remuneration or interest payable to partner by a partnership firm.
2. Partner to be paid Interest & Remuneration must be a working partner
The partners of a partnership firm whose accounts are to be credited with the salary, remuneration, commission, bonus or by whatever name called, by the firm, must be working partners and not the silent partners. Working partner in general terms means the partner who is actively engaged in the business of the partnership firm and is not a partner for merely enjoying the profits/benefits of the partnership business. If a partner is not a working partner then remuneration to such partner will not be eligible for deduction as per section 40(b) of Income Tax Act 1961. Explanation 4 to section 40(b) provides meaning of working partner as an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.
As per section 40(b) only that salary, remuneration, bonus, commission etc payable to working partners or any payment of interest payable to any partner will be allowed as deduction only if it is authorized by the partnership deed. If the partnership deed does not contain such provisions then the deductions may be disallowed if the same is claimed by the partnership firm.
4. Quantification of remuneration to Partners in Partnership Deed is must
CBDT in its circular no. 739 dt 25/03/1996 have clarified that no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.
Thus quantification of remuneration is required to be there in the partnership deed for it to be considered as authorized by the partnership deed and to avoid any disallowance u/s 40(b). It is seen that in many cases the partnership deed contains clauses like the following
“The partners have agreed that the remuneration to a working partner will be the amount of remuneration allowable under the provisions of section 40(b)(v) of the Income-tax Act and the amount of remuneration to working partner will be as may be mutually agreed upon between partners at the end of the year.”
If such a clause is contained in the partnership deed then remuneration to partners may be disallowed as per section 40(b) in view of the above circular.
However In Commissioner of Income Tax Versus M/s. Anil Hardware Store [2010] 323 ITR 368 (HP) where remuneration clause in partnership deed was in line with section 40(b) and It was contended on behalf of the revenue that in respect of the profits upto Rs.75,000/-, even in the partnership deed, the word “upto Rs.50,000/- or 90% of the book profits” have been used which shows that the partnership deed does not exactly determine the remuneration of the partners. But it was held that “The CBDT circular referred to above lays down two conditions. Either the amount of remuneration payable should be specified or the manner of quantifying the remuneration should be specified. In the present case, the manner of fixing the remuneration of the partners has been specified.” Hence deduction was allowed.
5. No Interest & Remuneration to Partner to be allowed which relates to any period falling prior to the date of such partnership deed
As per section 40(b)(iii) the remuneration will be allowed as deduction only for that period onwards where from the partnership deed authorizes such remuneration. Thus if a Partnership deed is executed on 01-04-2009 which doesn’t authorizes payment of remuneration to the partners and subsequently the deed is amended by a subordinate partnership deed to provide for such authorization on 01-04-2010 then remuneration to partners will not be allowed for period between 01-04-2009 to 01-04-2010 since during that period it is not authorized by the deed.
6. Remuneration to Partners exceeding the limit prescribed u/s 40(b) to be disallowed
As per section 40(b)(v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder will be disallowed:
(a) on the first Rs.3,00,000 of the book-profit or in case of a loss Rs.1,50,000 or at the rate of 90 per cent. of the book-profit, whichever is more;
(b) on the balance of the book-profit at the rate of 60 per cent.
Explanation 3 to section 40(b) defines “book-profit” as to mean the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.
7. Any interest to any partner exceeding 12% disallowed
As per Section 40(b)(iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of 12[twelve] per cent simple interest per annum shall be disallowed. Thus payment of any simple interest to any partner is allowed only to the extent of 12% per annum as deduction as per section 40(b). Even if the partnership deed authorizes any payment of higher rate of interest than 12% to any partner, the excess of interest will not be deducted.
It is here to be noted that where remuneration/salary etc is allowable only to the working partners as per section 40(b)(iii) but payment of interest not exceeding 12% per annum is allowable to any partner whether working or not, since the word any partner is used in 40(b)(iv).
As per explanation 1 to section 40(b) where an individual is a partner in a firm on behalf, or for the benefit, of any other person(i.e. Partner in a representative capacity), interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of section 40(b);
But interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause.
Explanation 2 to section 40(b) further provides that where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person.
Read Other Articles from Advocate Amit Bajaj
(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: [email protected], M +919815243335)
(Republished With Amendments)
Author Bio
Can firm who is not under audit, paid interest & Remuneration to Partners.
Hi
I have a doubt if A partner get professional fees from the firm in which he is partner in addition to remuneration/interest. Whether the same is allowed? Whether limit of 40(b) will not be applicable on the same? The firm will deduct tds u/s 194 J for such payment
Regards,
Abhishek
Hi Abhishek, did you find answer to this question?
In the context of Income is Nil, is it compulsory to charge Interest on Capital to partners, or it can avoid for income tax purpose?.
if the remuneration paid to two partners is 240000 , so how much deduction is eligible .
i have received interest and remunation from business filing of income tax due date sir from the asst year 19-20
In A.Y. 2018-19, i Show partner remuneration Rs. 3,00,000/- ( 2 partner each )
In A.Y. 2019-20, can i Show partner remuneration Less than Last Year OR Rs. 3,00,000/- ( 2 partner each )
Please Reply……
IS SELF ASSESSMENT TAX PAID BY COMPANY FOR A PARTNER IS ALSO CALCULATED UNDER INTEREST PAYMENT BY A PARTNER TO THE COMPANY.
Can a partnership firm give interest on capital to partners when there is a loss in the said Financial Year ? Please advice.
Hi,
I have paid partner salary of 26 Lakh this year and as per allowable salary it is 7 Lakh, where to book in accounts for the rest 19 Lakh and advise me where I can max utilise this.
Thanks,
Pradipta
IS IT COMPULSORY TO GIVE INTEREST ON CAPITAL PROVIDED IN PARTNERSHIP DEED??
it is for book profit.. what if there is book loss?
The contention of A.O. is not correct as the partners are allowed remuneration in any form of payment subject to limits of sec. 40(b).
The partnership firm consists of doctors and partners apart from Remuneration and interest on capital, they are receiving consultation fees based on their expertise. The AO proposed to disallow consultation fees since partners are not eligible for any payment except Remuneration and interest on capital.
Please reply whether AO is right
when firm earn profit but partners capital is negative than remuneration it will give or not???
BOOK PROFIT ………… ? BOOK PROFIT CALCULATION ASSESSMENT YEAR 2016-17
BOOK PROFIT – SALARY – PARTNER INTEREST = NET PROFIT
sir.
what is the meaning of Taxable profit for calculation of Remmuneration, means before adjustment of brought forwared loss or any adjustment of that, i also want to know what is the treatment of unabsorbed depreciation.
TAX GURU – SIR
MY WIFE IS GRADUATE AND PARTNER WITH FIRM WITH ME , MY SON & HIS B- TECH WIFE. REMUNERATION GIVEN TO EACH IS NOT EQUAL BUT ACCORDING TO DUTIES. SON GIVEN 195000 PA , SON,S WIFE B-TECH HELPING IN BUSINESS GIVEN 180000 PA , MYSELF TAKES 36000 PA , MY WIFE GIVEN 96000 PA.
WILL THE REMUNERATION OF MY WIFE AND SON’ WIFE’S WILL BE CLUBED IN HUSBANDS ( MY & MY SON ) INCOME.
From profit Int on capital is allowed at the rate of 12% per annum.Average capital of partners during the year. Then remuneration is deducted say Rs 480000/- per annum and int is 2.5 lac per annum then 13 lac minus 4.8 lac minus 2.5 lac balance is Rs 5.70 lac is taxable at the rate of 30.9% plus 3 % surcharge 176130 + 5284/- =181414/-
Your NP 693524/- Remu and int @ 12% on average capital of partners to be deducted. suppose int @ 12% comes to 1.50 lac and remuneration is 3.60 lac per annum the balance profit of 183524/- will attract tax @ 30.90% plus 3 % surcharge so total tax will be 58410/- has to be paid if no adv tax paid then will attract interest @ 12% on tax.
How to derive remuneration allow under income tax if during the year one partner retire
How to derive remuneration allow under income tax if during the year one parther retire
In ITR-5 , Firm had u/s 44AD nature of business. For the A.Y: 2014-15 firm had Presumtive income but after deduction of interest & salary paid to partners, then the firm incurred the loss. While uploading ITR -5 , the error occurred ” In no account case net profit cannot be negative”. Please give me the suggestion as per provisions of the Incometax Act.
If the firm paid an equal amount to a partner for monthly basis under professional charges and deduct TDS u/s 194J, the said amount could be allowed in Income Tax Computation ??? the deed remind silent on remuneration & Professional Charges
BOOK PROFITS WERE Rs.400000/-
AS PER AGREEMENT WORKING PARTNER TOOK MONTHLY SALARY OF Rs.40000/-(TOTAL: Rs.480000/-)
HOW MUCH AMOUNT OF REMUNERATION WILL BE ALLOWED AS PER PARTNERSHIP ACT?
Q. The tax liability on the toal income before remuneration and interest (Rs. 60,000) of a professional firm is Rs. 10,00,000. After considering the deduction permissible u/s 40(b), the tax payable by firm excluding education as will be…….plz rply who know the ans
Partnership Firm Carrying Transportation Business , For Bank Guarantee Deposit in Bank Rs. 450000/- Received Interest Rs. 55739/- Such Interest allowable for Remuneration of Partners ? or Such Interest taxed @ 30 %
hai mayank,rent paid to partner is not remuneration or intrest,so it doesn’t fall u/s 40(b) it falls u/s 36
so,rent paid is deduct u/s 36
In ITR-5 , Firm had u/s 44AD nature of business. For the A.Y: 2014-15 firm had Presumtive income but after deduction of interest & salary paid to partners, then the firm incurred the loss. While uploading ITR -5 , the error occurred ” In no account case net profit cannot be negative”. Please give me the suggestion as per provisions of the Incometax Act.
if the loss is 10,000 rs. the the remuneration for two partners should be>?
IS LOSS ON DISPOSAL OF FIXED ASSETS ADJUST WITH PROFIT FROM P&L FOR CALCULATION OF FIXED ASSESTS?
Apologies for earlier post, had trouble in formatting. Here’s the solution
(a) On the first Rs. 3,00,000 of the book-profit or in case of a loss:
Rs.1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more
(b) On the balance of the book-profit:
at the rate of 60 per cent;
what is the treatment of Rent paid to a partner by the partnership firm…..??????
If the calculation of remuneration of partners to be allowed as deduction is
different from the partnetship firm calculation of remuneration to such firm
is deduction available ?
Sir,
my firm profit Rs693524/- how pernter remunation & how much tax
NET PROFIT OF THE FIRM IS RS. 13,00,000/= THEN WHAT ABT REMUNERATION TO GIVE PARTNER. ? PL MENTION RATION AND WORKING
Dear sir
Kindly give Tax payable & partner Remuneration
Books Profit Rs.745527/- U/s. 44AD ( Presumptive)
Remuneration is Mentioned in the deed Rs, 1,20,000/- pa Each Partner
Thanks & regards
NAGARAJ
Sir under deduction in case of a partnership firm u/s 40(b) ….
How 2 calculate remuneration as per income tax act???
Dear Sir, In a partnership firm,one of the partners, is a pvt. ltd co,represented by its director.The companies AA and MA allow the company to enter into partnerships etc.The firm wants to treat the representative director as ‘working partner’ AND GIVE HIM SALARY.but the company wants the salary to be treated as its OWN INCOME and not the directors income .Now, the company cannot be eligible for salary obviously.Can the company create an overriding charge on the salary so that it is allowed as a deduction for the firm and taxed in its[companies] hand?Whether recitals to this effect are necessary in the partnership deed?I”ll be highly obliged if i can get an immediate reply to this. Yours,Ravi S
Sir My firm profit is 250460.
partners salary is 180000.
how to calculate the tax.
please explain it.
thanks
Dear sir
Kindly give Tax payable & partner Remuneration
Books Profit Rs.745527/- U/s. 44AD ( Presumptive)
Remuneration is Mentioned in the deed Rs, 1,20,000/- pa Each Partner
Thanks & regards
mahesh
dear sir,
as per partnership deed
1)remmunation to partner wiil be payble on first book profit 90% on Rs.75000/- or Rs.50000/- which ever is higher
2) next 60 % on Rs.75000/- and 40% balance Amt
as per income tax section 40(b)
a) on the first Rs.3,00,000 of the book-profit or in case of a loss Rs.1,50,000 or at the rate of 90 per cent. of the book-profit, whichever is more;
(b) on the balance of the book-profit at the rate of 60 per cent.
which provision ableble for deduction allawable exp in partnership return
Plz solve this A firm having book loss of Rs. 126969.00 after deducting remuneration to 3 partners Rs. 252000.00 in equal ratio then how much remuneration is taxable in the hand of partner and why?
what are all the expenses should be added back to calculate bok profit?
Whether Interest on Capital Charged after Providing Remuneration to Partners?
Please provide calculation of remuneration ratio 60% 20% 20% example 6,00,000.00
and profit ratio 33.33% 33.33% and 33.33% plz pvd details remuneration and profit total exp. 1,45,000 .
thanks
9838452798