Quiz for the week (09 Dec 2024):
PP & Co is a firm engaged in executing civil construction contracts to
Government Departments. During the financial year 2023-24 it has gross receipt
of Rs.505 lakhs and has interest on bank deposits of Rs.13 lakhs (total deposits
Rs 150 lakhs) representing EMD. It credited the said interest on bank deposits
to the profit and loss account and its resultant net profit was Rs.43 lakhs
before deducting working partner salary. Ignore interest on capital.
How much is the maximum amount eligible for payment by way of working partner
salary for the assessment year 2024-25?
Best Answer :
Section
40(b) says that in the case of any firm assessable as such, payment of salary,
bonus, commission or remuneration by whatever name called to any partner who is
a working partner is eligible for deduction subject to the condition that such
payment is authorised by the deed of partnership and it is subject to the
limits specified therein.
There
is a cap in the case of payment of interest on capital to partners which cannot
exceed 12% simple interest per annum. With regard to payment of working partner
salary clause (v) of section 40(b) would prevail.
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 does
not exceed the following is eligible for deduction.
The
monetary limit for allowance of working partner remuneration with reference to
book-profit is as under:
|
(a)
|
on
the first Rs.3,00,000 of the book-profit or in the case of loss
|
|
Rs.1,50,000
or at the rate of 90 percent of the book-profit, whichever is more;
|
|
(b)
|
on
the balance of the book-profit
|
|
at
the rate of 60 percent.
|
Working
partner salary beyond the limit specified above is not eligible for deduction.
'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.
As per
Explanation 3 to section 40(b), the term '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 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.
In Md.Serajuddin
& Bros v. CIT 2012 TaxPub(DT) 2885 (Cal-HC) it was held that interest
on fixed deposit held by a firm for its business purposes would form part of
business income. Accordingly, it would be included in book-profit for the
purpose of section 40(b) of the Act.
In the
given query, deposits were held by the firm and these deposits were offered as
EMD for the purpose of obtaining contracts. Upon completion and fulfilment of
the contract, the lien on these deposits were withdrawn and returned to the
firm. Accordingly, the interest on these deposits would form part of
book-profit. Reference can be made to similar decision in the case of CIT v.
JJ Industries 2013 TaxPub(DT) 1883 (Guj-HC).
Based
on the above, the book-profit of the firm for the purpose of allowance of
working partner remuneration would be Rs.43 lakhs which includes interest on
bank deposits of Rs.13 lakhs. The quantum of deduction under section 40(b)
would be as under:
|
Net
profit as per Profit and loss account including interest on bank deposits
|
43,00,000
|
|
Working
partner salary deductible
|
|
|
On
first Rs.3,00,000 @ 90%
|
2,70,000
|
|
|
On
the balance Rs.40,00,000 @ 60%
|
24,00,000
|
|
|
Total
working partner salary allowable
|
|
26,70,000
|
Readers
may note that the Finance (No.2) Act, 2024 has increased the threshold to Rs.6
lakhs instead of Rs.3 lakhs in section 40(b). |