Firm Tax.docx

CA Kunal S Chandika

MCOM

OM SAI RAM

COMPUTATION OF INCOME OF PARTNERSHIP FIRMS (SECTION 40b) SCHEME OF TAXATION OF FIRMS The salient feature of the scheme are as under  The firm is taxed as a separate entity  The share of the partner in the income of the firm is not chargeable to tax in the hands of partners  Any salary, bonus, commission or remuneration (by whatever name called) paid / payable to partners is allowed as a deduction to the firm. However the deduction is subject to certain restrictions in the hands of the firm. The amount which is allowed as deduction to the firm is taxable in the hands of the partners  Where a firms pays interest to any partner, the firm can claim deduction of such interest from its total income .however the maximum rate at which interest can be allowed to a partner is 12% p.a. the amount of interest, allowed in the hands of the firm, is taxable in the hands of partners.  The income of the firm is taxed at a flat rate i.e. 30% for the A.Y. 2018-19

WHEN REMUNERATION/INTEREST IS DEDUCTIBLE Payment of remuneration and interest is deductible if the following conditions are satisfied  Conditions of section 184  Conditions of section 40(b)

WHAT ARE THE CONDITIONS A FIRM SHOULD FULFILL UNDER SECTION 184 The five conditions which a firm has to satisfy under section 184 are as under Condition 1 A firm must be evidenced by a partnership deed Condition 2 Individual share of partners must be specified in partnership deed Condition 3 Certified copy of the partnership deed should be submitted Condition 4 Revised partnership deed should be submitted whenever there is change in the constitution of firm / profit sharing ratio Condition 5 There should not be any failure as in mentioned in section 144

WHAT ARE THE CONDITIONS FOR CLAIMING DEDUCTION OF REMUNERATION OF PARTNERS UNDER SECTION 40(b) Deduction of salary to partners depends upon conditions of section 184 and section 40(b) Condition of section 40(b) The following four conditions, of section 40(b0 are to be satisfied Condition 1 Remuneration should be paid only to a working partner Condition 2 Remuneration must be authorized by the partnership deed Condition 3 Remuneration should not pertain to period prior to partnership deed Condition 4 Remuneration should not exceed the prescribed limit Condition 1:- working partner means an individual who Is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner Remuneration should not exceed the permissible limit

DIRECT TAXES II

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CA Kunal S Chandika MCOM OM SAI RAM If the above conditions are satisfied , remuneration to partners is allowable as deduction in the hands of the firms. However the maximum amount of such payment to all the partners during the previous year should not exceed the limits given below  On negative book profit or in case of loss Rs 150000  On the next Rs 300000 of the book profit Rs 150000 or at the rate of 90% of the book profit whichever is more  On the balance of the book profit At the rate of 60%

HOW TO COMPUTE BOOK PROFIT It would be determined as under Step1: Find out the net profit of the firm as per Profit and Loss A/c Step 2: Make adjustments as provided by section 28 to 44 DB Step3: Add remuneration to partners if debited to the profit and loss A/c The resulting amount is book profit It may be noted that under step two only adjustment as specified under sections 28 to 44db are made and consequently a) Income chargeable to tax under the heads “income of house property”, “capital gains”, and “income from other sources” is not part of “book profit” b) Brought forward business losses are not to be deducted from “book profit” (but the unabsorbed depreciation brought forward can be adjusted) c) Permissible deductions from gross total income under section 80C to 80U shall be ignored for computing “book profit” d) Interest paid to a partner by a firm is not deductible unless the following conditions are fulfilled Condition 1 Payment of interest should be authorized by the partnership deed Condition 2 Payment of interest should pertain to the period after the partnership deed Condition 3 Rate of interest should not exceed 12% simple interest p.a. Explanation 1: if a person is a partner in his representative capacity in the firm and if he receives interest in his individual capacity from the firm such interest should not be disallowed Explanation 2: if a person who is a partner in his individual capacity receives interest for and on behalf of someone else from the firm in which he is a partner such interest should not be disallowed Note: it should be remember that the deductible amount of interest and salary shall be the amount payable as per partnership deed or amount calculated u/s 40(b), whichever is less. Further rent paid to a partner by the firm in respect of assets belonging to the partner and used by the firm is not covered by Section 40(b) and therefore deductible INTEREST CHARGED BY FIRM ON DRAWINGS Where a firm pays as well as receives interest from the same partner, interest received by the firm will be chargeable to tax. INTEREST BEFORE BECOMING PARTNER OF FIRM The above provisions are not applicable in respect of interest paid to a person before becoming partner CARRY FORWARD AND SET OFF OF LOSS IN THE CASE OF CHANGE IN THE CONSITITUTION OF FIRM IS NOT ENTITLED IN CASE OF RETIREMENT OR DEATH OF PARTNER

DIRECT TAXES II

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CA Kunal S Chandika

MCOM

OM SAI RAM

TAX LIABILITY OF FIRM ON THE INCOME COMPUTED, TAX IS PAYABLE FOR THE ASSESSMENT YEAR 2018-19 IS CALCULATED AT FOLLOWS 1) FIND OUT INCOME TAX Tax Rate Short term capital gain under section 111A 15% Long term capital gain (section 112) 20% Winnings from lottery, races etc 30% Income (not being income which is subject to special tax rate) 30% 2) ADD EDUCATION CESS @ 2% OF TAX 3) ADD SECONDARY AND HIGHER EDUCATION CESS @ 1% OF TAX 4) Tax Liability = 1+2+3

CLASS WORK SHEET 1) Profit and Loss account of X & Co. (a firm of X,Y and Z which satisfies all condition of section 184 and 40(b) for the year ending March 31,2018 is as follows: Particulars Rs. Particulars Rs. Cost of Goods Sold 790000 Sales 2600000 Remuneration to Partners Rent of house Property 50000 X 600000 (Half Portion) Y 900000 Interest on debentures 60000 Z 55000 (Non-trade investments) Fringe Benefit Tax 8000 Interest to partners @ 13.5% X 40000 Y 10000 Z 60000 Municipal tax of house property 5000 (entire property) Other expenses 210000 Net Profit 32000 2710000 2710000 Other Information: a) Out of other expenses Rs 48500 is not deductible under section 36,37(1) and 43B b) ON January 15,2018 the firm pays an outstanding sales tax liability of Rs2922 of the Previous Year 2009-10, As this amount pertains to the previous year 2009-10 it has not been debited to the aforesaid profit and loss account c) Z is not an working Partner d) The firm owns a house the ground floor is used for the business purposes the first floor given on rent, Municipal tax is Paid on May 10,2018 Find out the net income of the firm (and tax treatment of the payment to partners in their hand) for the assessment year 2018-19 2) A) Profit and Loss account of X and Co (a firm of X,Y and Z which satisfies all condition o Section 184 and 40 b for the year ending March 31,2018 is as follows Particulars Rs. Particulars Rs. Expenses 288000 Receipts from clients for tax 360000 DIRECT TAXES II

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CA Kunal S Chandika Depreciation Remuneration to partners Interest on capital to partners

MCOM 232000 advice 275000 Audit Fees 55000 Net Loss 850000

OM SAI RAM 272000 218000 850000

Other Information 1. Out of Expenses of Rs.88000, Rs 57250 is not deductible under section 36 and 37 2. Depreciation as per section 32 is Rs 323100 3. Interest on capital to partners not deductible under section 40 (b) is Rs 17900 Calculate the Book Loss and Remuneration of Partners 3) Profit and loss account of XY and Co (a firm) for the year ending March 31,2018 is as follows Particulars Rs. Particulars Rs. Cost of Goods Sold 280000 Sales 792000 Other Expenses 391000 Net Loss 272000 Interest on partners 125000 Remuneration to Partners 268000 1064000 1064000 Out of other expenses debited to profit and loss account Rs 63600 is not deductible under Section 30,36 and 37(1) Interest to partners is not deductible to the extent of Rs 17100 The firm satisfies all conditions of Section 184 and 40(b) Computation of remuneration deductible under Section 37(1) read with Section 40(b) 4) M/s Sunny Industries a partnership firm submits the following profit and loss account to you for computation of taxable business income for the assessment year 2018-19 Profit and loss account for the year ending 31-3-2018 Particulars Rs. Particulars Rs To Salaries 348000 By Gross Profit 640000 “ Rent 24000 “ Sundry Creditors receipts 7000 “ Printing and Stationery 4700 “ Dividend from UTI 13000 “ Telephone 2800 “ Conveyance 19500 “ Travelling 16000 “ Interest 68000 “ Depreciation 20000 “ Legal Fees 12000 “ Auditor’s fees 12000 “ PF Contribution 18000 “ Net Profit 115000 660000 660000 Additional Information: a) Salaries include paid to working partner X and Y Rs 120000 and Rs 80000 Respectively b) Rent of Rs 24000 is paid to the premises belonging to partner Y who has let out the property to Firm c) Interest paid includes Rs 60000 being interest paid to partners Y at simple interest of 20% d) Out of Pf Contribution debited to profit and loss account Rs 7000 is outstanding beyond the due date of filing the return e) The firm purchased goods by issuing the crossed cheques and bank overdraft except in the case of one bill for Rs 25000 for which the payments has been made by cash. This has been debited to trading account as the part of Purchases DIRECT TAXES II

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CA Kunal S Chandika

MCOM

OM SAI RAM

5) M/s mita Traders a partnership firm furnishes the following Profit and Loss account and requires you to furnishes the taxable business income Particulars Rs. Particulars Rs, To Salary to staff 120000 By Gross Profit 590000 “ salary to “ Insurance compensation 60000 Partner A 100000 Partner B 90000 “ Interest 48000 “ Rent 72000 “ Advertisement 40000 “ Conveyance 26500 “ Printing And Stationery 13500 “ Entertainment 12000 “ Travelling 18200 “ Office Maintenance 6800 “ Miscellaneous 1000 “ Net Profit 102000 650000 650000 a) Interest represents interest paid to partners at 20% rate whereas as per partnership deed for 12% rate b) Insurance compensation has been received towards loss of stock-in-trade which was allowed as deduction in earlier year 6) Determine the total income of the firm and partners for the assessment year 2018-19 on the basis of following Rs (a) Net profit as per profit and loss account 1500000 (b) Remuneration to partners debited to profit and loss Account A (working Partner) 500000 B(Sleeping Partner) 200000 (c) Interest debited Partner C on loan of Rs 2 Lakhs i.e. 25% 50000 (d) Profit and loss sharing ratio A 40% B 30% c 30 % 7) A firm comprising of four partner A,B,C & D carrying on business I partnership sharing the profit and loss equally shows the loss of Rs 32000 in the books after deduction of the following amounts for the year Rs A Remuneration to Partner “A” who is not actively engaged in business 48000 B Remuneration to partner “B” & “C” actively engaged in business Partner “B” 60000 Partner “C” 72000 C Interest to partner “D” on loan of Rs 150000 @ 24% 36000 The deed of partnership provides for the payment of above remuneration and interest to partner. You are required to work out the taxable income of the firm as well as partners for the assessment year 2018-19 8) Tanaji, Dadoji and suryaji are the partners in TDS Enterprises. They furnishes the following information for the year ending 31/3/2018 Profit and loss account for the year ended 31/3/2018 DIRECT TAXES II

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CA Kunal S Chandika Debit To Tax deducted at source from business Receipts To Advance Tax Paid To Drawings of partners To remunerations to partner Tanaji 80000 Dadoji 160000 Suryaji 160000 To interest on capital of partner (9%) To Net Profit c/d

MCOM Rs 12000 90000 48000

Credit By Gross Profit b/d

OM SAI RAM Rs 680000

By Profit on sale of machinery

40000

400000 90000 80000 720000

720000

Additional Information Tanaji is non-working partner Dadoji looks after production and suryaji is in charge of marketing From the above information for the assessment year 2018-19 (a) Calculate Book Profit and remuneration of partner allowable u/s 40(b) of the income tax Act 1961 (b) Compute the taxable income of the firm (c) Calculate the tax payable by the firm ` 9) Given Below the profit and loss account of JP Associates for the year ended 31/3/2018 JP Associates is a partnership firm which satisfies all the conditions of Section 184 & 40(b) Profit and Loss A/c Particulars Rs. Particulars Rs. To Opening Stock 27600 By Sales 1253500 “ Purchases 24120 “ Closing Stock 30000 “ Salaries 20235 “ Rent Received 72000 “ General Expenses 55500 “ Interest on Investment 3500 “ Depreciation 23550 “ Electricity charges 16800 “ Printing and Stationery 9600 “ Municipal Tax 6000 “ Remuneration to partner J 300000 P 200000 Q 100000 600000 “ Interest to partners @ 15% J 80000 P 20000 Q 120000 220000 To Net Profit 355595 1359000 1359000 Additional Information: a) Out of the General Expenses Rs 20000 is not deductible under the income tax Act b) The Salaries include an amount of Rs 5000 being Bonus declared during the year However the bonus was unpaid till 31stoctober 2018 which is the due date of filling the return of income Therefore it is to be disallowed DIRECT TAXES II

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CA Kunal S Chandika MCOM OM SAI RAM c) The rent received is in respect of house property given on rent The municipal tax debited above relates to the house property d) Depreciation allowable as per income tax Act is Rs 53550 Ascertain the income from Business of the firm with reference to Section 40(b) for the A.Y.2018-19 10) Following is the profit and loss account of AB & Co (A partnership firm of Chartered Accountants, which satisfies all conditions of section 184 and 40 b for the year ending 31st March 2018 Particulars Rs Particulars Rs To Firm Tax(Income Tax) 25000 By Receipts from Clients for Tax To Expenses 138000 Advice 175000 To Depreciation 32000 By Audit Fees 225000 To Remuneration to Partners 150000 To Interest to Partners @ 15% 30000 To Net Profit 25000 400000 400000 Additional Information: (a) Expenses include the following (1) Capital Expenditure Rs 15000 (2) Donations to Trust Rs 10000 (3) Other Expenses not deductible u/s 30 to 36 & 37 Rs 12000 (b) However the following expenses paid were inadvertently not recorded in books of accounts (1) Telephone Charges Rs 5000 (2) Electricity Charges Rs 7000 (c) Depreciation allowable as per income Tax Act is Rs 35000 Find out the income of the firm for A.Y. 2018-19 11) M/s Vishwanath Industries a partnership firm, submits the following profit and loss accounts you for computation of taxable income for the assessment year 2018-19 Profit and loss account for the year ending 31/03/2018 Expenses To salaries To Rent To Printing & Stationery To telephone To Conveyance To Travelling To Interest To Depreciation To Legal Fees To Auditor’s Fees To PF Contribution To Net Profit

Rs 696000 48000 9200 5600 39000 32060 136000 40000 24000 24000 36000 250000 1340000

Income By Gross Profit By Income from sundry creditors By Dividend from UTI

Rs 1300000 14000 26000

1340000 Additional information: (a) Salaries include Rs 240000 paid to working partner X and Rs 160000 to Working Partner Y DIRECT TAXES II

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CA Kunal S Chandika MCOM OM SAI RAM (b) Rent of Rs 48000 is paid to the premises belonging to partner Y who has let it out to the firm (c) Interest paid includes Rs 120000 being interest paid on loan given by partner Y at the rate of 20% simple interest (d) Out of the PF Contribution debited to P & L Account Rs 14000 is outstanding beyond the due date of filling return (e) The firm purchased goods by issuing crossed cheques and bank drafts except in the case of one bill for Rs 150000 for which payment has been made in cash this has been debited to trading account as part of purchases (f) Assessee has incurred expenditure relating to exempt income and the same was charged to personal account and not debited to the P & L account

12) from the following data of M/s Risk Care & Co. engaged in business, calculate the salary and interest to partners allowable under section 40(b) of the income tax Act 1961 Dr. Profit & Loss A/c for the year ended 31-03-2018 Cr. Particulars Rs Particulars Rs To salaries By Gross Profit 16,25,300 Staff 5,50,000 By dividend from companies 25,6000 Partners By interest received on deposits Amar 2,00,000 (held as investment) 72,500 Akbar 1,40,000 Anthony 60,000 To general expenses 55,000 To depreciation on machinery 82,000 To rent 84,000 To bank interest 22,500 To insurance premium 1,55,000 To telephone, printing, postage and stationery 42,000 To interest to partner Amar 30,000 Akbar 22,500 Anthony 15,000 To net profit 2,65,400 17,23,400 17,23,400 Your are further informed that 1. Rent paid includes Partner Amar’s personal rent of Rs 14,000 2. Depreciation admissible as per the income tax Act is Rs 60,000 3. Insurance premium paid for cover of machinery is Rs 35,000, for stock is Rs 85,000 and the remaining is partners personal life insurance premium 4. General expenses include partner Akbar’s children’s school fees Rs 15,000 5. Partners are paid interest @ 15% p.a. on their capital and Anthony is not a working partner

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