BY

PARJAT SAURAV
5
TH
Yr, B.B.A. LL.B.
Symbiosis Law School
parijatsaurav@gmail.com
PAR1NLR3lP llRM
P Section 4 of the ndian Partnership Act, 1932
defines partnership as "relationship between
persons who have agreed to share the profits of a
business carried on by all or any of them acting for
all.
P Persons who have entered into partnership with
one another are called individually "partners and
collectively a "firm.
3alient leatures of the soheme of taxation
of firms:
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 deduction to the firm.
However the deduction is subject to certain
restrictions in the hand of the firm.

3alient leatures of the soheme of taxation

of firms (oontd.):
here a firm 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 as deduction in
the hands of the firm, is taxable in the hands of
partner.
onditions to be fulfilled:
Payment of remuneration and interest is
deductible if the following conditions are satisfied:
onditions under section 184
onditions under Section 40(b)
onditions u/s 184:
A firm must be evidenced by an instrument.
ndividual share of partners must be specified in
partnership deed.
ertified opy of Partnership deed must be
submitted along with the return of the income.
onditions u/s 184 (oontd.):
ertified opy of revised partnership deed must
be submitted along with the return of income
whenever there is change in the constitution of
firm or any change in profit sharing ratio of some
or all partners.
There should not be any failure as is mentioned in
section 144.
ho will oertifv?
The copy of the instrument of partnership shall be
certified in writing by all the partners (not being
minors) or,
here the return is made after the dissolution of
the firm, by all persons (not being minors) who
were partners in the firm immediately before its
dissolution and by the legal representative of any
such partner who is deceased.
lailures u/s 144 to be avoided
failure to make the return and failure to make a
return or a revised return as required u/s 139, or
failure to comply with all the terms of a notice
issued by assessing officer u/s 142(1) or failure to
comply with a direction issued u/s 142(2A), or
having made a return, failure to comply with all the
terms of a notice issued by the assessing office [S.
143(2)].
onditions u/s 40(b) for exemption of
remuneration paid:
Remuneration should be paid only to a working
partner. A '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 [Explanation to S. 40(b)].
Remuneration must be authorised by the
partnership instrument and the remuneration shall
be in accordance with the terms of partnership
instrument.
onditions u/s 40(b) for exemption of
remuneration paid (oontd.):
Remuneration should not pertain to period prior to
partnership deed for which remuneration was not
authorised by the partnership instrument.
Remuneration should not exceed permissible
limit.
Permissible limits of deduotions:
f the above mentioned conditions are satisfied,
remuneration to partner is allowable as deduction
in the hands of the firm. However, the maximum
amount of such payment to all the partners during
the P.Y. should not exceed the limits given below:
Book Profit Maximum amount deductibIe in
respect of remuneration to
partners u/s 40(b)
f book profit is
negative
Rs. 1,50,000
n case book profit is
positive
4 n first Rs. 3 lakh of
book profit
4 n the balance of Book
Profit
Rs. 1,50,000 or 90% of book profit,
whichever is more.
60% of the book profit.
ook Profit:
"Book-Profit means the net profit, as shown in the
profit and loss account for the relevant previous year,
computed in the manner laid down in hapter V-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.
Method of omputation of ook Profit:
1) Find out the net profit as per Profit and Loss
Account.
2) Make adjustments as provided by Ss. 28 to 44DB
of the ncome Tax Act, 1961.
3) Add remuneration paid to partners, if debited to
Profit and Loss Account.
4) The resulting amount is Book Profit.
omplianoes u/s 40(b) for exemption for
interest paid:
Payment of interest should be authorised by the
partnership instrument.
Payment of interest should pertain to the period after
the partnership instrument.
Rate of interest should not exceed 12% per annum.
f, however, interest payable exceeds simple interest
of 12% p.a., the excess amount is not deductible.
nterest charged by firm on drawings will be
chargeable to tax.
here reoipient of interest aots in a
representative oapaoitv:
Explanation 1 to S. 40(b) provides that where an
individual is a partner in a firm on behalf of or for
the benefit of any other person, interest paid by
the firm to such individual(otherwise than as
partner in a representative capacity), is not taken
into account, for the purpose of S. 40(b).
Explanation 2 provides that where an individual is
a partner in a firm in his individual capacity,
interest paid by the firm to such individual will not
be taken into account for the purpose of S. 40(b), if
such interest is received by him on behalf or for
the benefit of any other person.
eduotions under hapter lv :
S. 30 Rents, taxes, rates, repairs and insurance
for buildings used for the purpose of business or
profession.
S. 31 Repairs and insurance of machinery, plant
or furniture used for the purpose of business or
profession.
S. 32, Expl 1 Any capital expenditure for the
improvement/construction/work/renovation/extensi
on of the building, in which the lease or other right
of occupancy exists.
eduotions under hapter lv (oontd.):
S. 32AB nvestment in deposit account.
However, if assessee is a partnership firm, the
deduction is not allowed in the computation of
income of any partner.
S. 35 Expenditure on scientific research.
S. 35D Amortization of expenditure on
commencement or expansion of business or
profession and other preliminary expenses.
eduotions under hapter lv (oontd.):
S. 36 ther deductions such as insurance
premiums, bonus or commission, interest on
capital borrowed etc.
S. 37 ther expenditure laid out or expended
wholly and exclusively for the purposes of the
business or profession.
Rate of lnoome tax:
n the taxable income --- 30% of the whole
taxable income ("ncome Tax)
Education ess --- 2% of the income tax payable
("E..)
Secondary and Higher Education ess --- 1% of
the income tax payable ("S.H.E..)
Total tax payable = ncome
tax + E.. + S.H.E..
3ervioe 1ax:
S. 65(105) of the Finance Act, 1994 enumerates
the list of "taxable service.
Service to a client, by a manpower recruitment or
supply agency in relation to the recruitment or
supply of manpower, temporarily or otherwise, in
any manner is taxable service [S. 65(105)(k)].
valuation of taxable servioe:
The consideration for a taxable service shall be the
gross amount charged by service provider for the
services provided or to be provided.
f the gross amount is inclusive of service tax payable
i.e. service tax is not separately charged in invoice, the
value of taxable service shall be calculated in a manner
that with addition of service tax payable, the total is
equal to the gross amount charged [i.e. gross amount
is 'value of taxable service' plus service tax payable]
Alternately service provider may charge service tax
separately in the invoice.
Reeistration:
Registration is mandatory if value of taxable
services exceeds Rs 9 lac in a financial year.
Hence registration is not necessary for a service
provider as long as value of taxable services does
not exceed Rs. 9 lac.
Lxemption and servioe tax liabilitv:
Exemption from paying service tax is applicable if
value of taxable services does not exceed Rs. 10
lac.
The value of taxable services above Rs. 10 lac is
taxable at the rate of 10.3% (10% service tax + 2%
E.. of service tax + 1% S.H.E.. of service tax).
THANK YU