Tax liability of a law firm on cash basis, with partners' remuneration and dividends (as set, 1961 Act, AY 2017-18)

Assumptions

1. X and Y are working partners, and their remuneration is authorised by the deed for the whole year; the firm is assessed as a firm (section 184) and is resident (section 6(2)).
2. Office rent, staff salary, office expenses and the miscellaneous expenses are all incurred for the profession; the receipts for 2015-16 were received in 2016-17 (cash basis, so they are income of this year).
3. The donation to the Prime Minister's National Relief Fund was paid other than in cash (section 80G(5D)).

Depreciation (section 32(1)(ii); rates as given)

The computers were put to use on 6-10-2016 (177 days to 31 March) and the furniture on 1-1-2017 (90 days), both for less than 180 days, so they get half the rate in this year (section 32(1)(ii), second proviso).

Profits and gains of profession

Not debited: the purchase of computers and furniture (capital; depreciation is allowed instead), the expenses on the sale of land (a capital gains item), the donation (a deduction under Chapter VI-A) and the bank deposits (not an expense).

Partners' remuneration allowed (section 40(b)(v))

Paid ₹30,00,000 (₹15,00,000 each); allowed ₹15,37,200; disallowed ₹14,62,800. Book profit is the net profit computed under the provisions for business income, before deducting the partners' remuneration (section 40(b), Explanation 3).

Capital gains

The land was held for 21 months, not more than 36 months, so it is a short-term capital asset (section 2(42A)); the 24-month period for land applies only from assessment year 2018-19.

A loss under the head Capital gains cannot be set off against any other head (section 71(3)). With no other capital gain, it is carried forward for up to eight assessment years, against capital gains only (section 74(1) and (2)), if the loss is determined in pursuance of a return filed within the time allowed by section 139(3) (section 80).

Computation of total income

For assessment year 2017-18, section 115BBDA(1) applied to an individual, a Hindu undivided family or a firm resident in India (the wording before 1 April 2018, given in its footnote), so the firm's dividends above ₹10,00,000 are taxed at 10%, and the exemption of section 10(34) does not cover them (its proviso). The first ₹10,00,000 is exempt. The donation is set against the professional income, so total income is ₹6,74,800 of other income and ₹2,00,000 of dividends.

Tax liability for assessment year 2017-18

No surcharge: total income is below ₹1 crore (Finance Act, 2017, First Schedule, Part I, Paragraph C, Surcharge on income-tax).

Notes

1. The remuneration of ₹7,68,600 allowed to each partner is taxed in his hands as business income (section 28(v)); his share of the firm's profit is exempt in his hands (section 10(2A)).
2. If X and Y were not working partners, no remuneration would be allowed (section 40(b)(i)): profits ₹24,12,000 and tax liability ₹7,04,110 (same rates).