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Prepared By - :

ANKIT VYASKINJAL VYASBINAL MEHTA

JAGRUTI JAIN

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Introduction - :y Section 40(b) of the Income Tax Act, 1961, as it stood at

the relevant time, prohibited deduction of interest,

salary, bonus, commission or remuneration paid by the firm to the partner.y Section 40 of the Income Tax Act, 1961 opens with the

nonobstante clause and directs that outgoings such as

interest, salary, bonus, commission or remunerationspecifically enumerated in cl. (b) shall not be deductedin computing the income chargeable under the head"profits and gains of business or profession".

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Pa rtner s Remuner a tion - : As per Income Tax Act ,full amount of

salary is not allowed as expenses in profit & lossaccount but salary is restricted to % of profit beforesalary to the partner. There are some conditions also which are to be complied to claim deduction of salary as expense in P & L account of partnership firm.

Deduction for any amount paid by way of salary, bonus, commission or remuneration by afirm to the partners is allowable in the computation of income of the firm. Deductible amount shall be theamount as per the partnership deed or amount

calculated under Sec.40(b), whichever is less.

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C onditions a re defined in section40(b) of the income t ax a ct - :

1. Salary should be paid to working partner.2. Salary must be written/authorised by the

Partnership deed3. Salary should be related to the period after the

partnership deed date.4. Salary must be with in limit of % of Book profit.

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The bo a rd h av e gi v en some cl a rifica tion reg a rding

dis a llow a nce of remuner a tion p a id to the workingp a rtners a s pro v ided under section 40(b) of income t axa ct. These a re :

(i) The partners have agreed that the remuneration to a working partner will be the amount of remunerationallowable under the provisions of section 40(b)(v) of theIncome-tax Act; and

(ii) The amount of remuneration to working partner willbe as may be mutually agreed upon between partners atthe end of the year.

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P rescribed limits for deduction in

p a rtnership a s per I. T.Sec40(b) :PROFESSIONAL FIRMS OTHER FIRMS REMUNERATION

AS A % OF BOOKPROFITS BOOKPROFITS

O n the first Rs 100000 of the book profit or incase of a loss

O n the first Rs 75000 of thebook profit or in case of aloss

Rs 50000 or 90% whicheveris more

On the next Rs 100000 of the book profit

On the next Rs 75000 of the book profit 60%

O n the balance of the bookprofit

O n the balance the bookprofit

40%

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E xa mple :suppose

y Profit as per P & L = 220850y Depreciation =111474.00y

Net profit after depreciation =109376y salary of partner given =108000

y Now salary allowed as per section 40(b) is given belowBook profit=109376

y Here, Book profit means net profit as per the profitand loss account for the previous year.

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y If firm i s cove red unde r 44AA( p rof ess ion p res crib ed):

Book profit=109376

1. O n first 100000=90% of 100000=90000

2. O n balance 9376 @ 60%=5626

3. Total allowed=90000+5626=95626

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y if firm i s not cove red unde r ab ove: any othe r firm

Book profit=109376

1. O n first 75000=90% of 75000 among 109376=67500

2. O n (109376-75000=34376) @ 60%=20986

3. Total allowed :67500+20986=88486

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B usiness P rofit:It is clear that every business operate in order to

earn profit. In most cases the main goal of a business is makingprofit. A business may have other goals but if they do not makeprofit in the business then they will have to end the business.

W h a t is bus iness p rofi t? W h a t is bus iness p rofi t?The easiest way to explain profit is the income a

company earned in a certain period of time. There are two typesof profit namely gross profit and net profit. Gross profit is notthe actual profit of a business and it is found by deducting thecost of goods sold from net sales. Thus, net profit is consideredas the actual profit retained by a business and it is actually thedifference between the revenue earned by the company and the

expenses incurred.

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Th anks For Coope ra t ionTh anks For Coope ra t ion