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Allowance of expense of interest and remuneration to Partnership firm
Section 40(b) of Income Tax Act 1961 specify conditions on the deduction 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 following conditions must be satisfied before claiming any deduction in respect of salary/remuneration or interest payable to partner by a partnership firm.
Interest to Partners
As per Section 40(b) of Income Tax Act 1961 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 % 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) of Income Tax Act 1961 .
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) of Income Tax Act 1961 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) of Income Tax Act 1961.
Remuneration/Salary, etc to Partners
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.
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.
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.
As per section 40(b) of Income Tax Act 1961 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.
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.
Deduction of remuneration allowed subject to below calculation:
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 % of the book-profit, whichever is more;
(b) on the balance of the book-profit at the rate of 60%
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.
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