Question 3 (b)
Interest and remuneration to partners allowable under section 40(b) (as set, 1961 Act, AY 2019-20)
4 marks
- Time to write
- About 8 minutes
From an older CBCS paper
Question
Question 3 (b) · 4 marksXY & Co., a partnership firm, has paid its partners interest @15%p.a. amounting to ₹ 90,000, along with remuneration of ₹ 4,80,000, during the previous year 2018-19. The firm's book profits have been computed at ₹ 5,00,000. Calculate the interest and the remuneration allowable u/s 40b. (4)
Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2019-20 (previous year 2018-19), with the dates as printed.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- CalculateHead by head: each income under its head, exempt items marked exempt, then the deductions and the tax.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Conditions for the deduction ½ mark 2 min
- 2 Interest allowable at 12% 1½ marks 2 min
- 3 Remuneration limit on book-profit 2 marks 3 min
Short on time? Step 3 carries 2 of the 4 marks: guard its minutes.
Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
- The interest and the remuneration are authorised by, and paid in accordance with, the partnership deed, for periods after its date, and the remuneration is paid to working partners (partners actively engaged in running the firm's business, Explanation 4 to section 40(b)). A payment for a period before the deed's date would be allowed only so far as an earlier deed authorised it, and an earlier deed cannot reach back before its own date (section 40(b)(iii)). The interest is taken as paid to each partner in his own right, not in a representative capacity or for another person (Explanations 1 and 2 to section 40(b)). The result if they are not authorised is given at the end.
- The book-profit of ₹5,00,000 is the firm's net profit computed under the business provisions, with the partners' remuneration added back, so far as it was deducted in computing that net profit (Explanation 3 to section 40(b)), as the question states.
Interest to a partner is allowed only up to 12% simple interest a year (section 40(b)(iv)). The firm paid ₹90,000 at 15%, so the capital on which it was paid is ₹90,000 × 100/15 = ₹6,00,000, and interest at 12% on it is ₹72,000.
| Particulars | ₹ |
|---|---|
| Interest paid at 15% | 90,000 |
| Allowable at 12% (₹90,000 × 12/15) | 72,000 |
| Disallowed | 18,000 |
Remuneration to working partners is allowed up to a ceiling worked out on the book-profit (section 40(b)(v)): on the first ₹3,00,000 of book-profit, ₹1,50,000 or 90% of the book-profit, whichever is more; on the balance, 60%.
| Particulars | ₹ |
|---|---|
| On the first ₹3,00,000: 90% (₹2,70,000), being more than ₹1,50,000 | 2,70,000 |
| On the balance ₹2,00,000 at 60% | 1,20,000 |
| Maximum allowable remuneration | 3,90,000 |
| Remuneration paid | 4,80,000 |
| Disallowed | 90,000 |
| Payment | Paid (₹) | Allowable (₹) | Disallowed (₹) |
|---|---|---|---|
| Interest | 90,000 | 72,000 | 18,000 |
| Remuneration | 4,80,000 | 3,90,000 | 90,000 |
The firm may deduct ₹72,000 of interest and ₹3,90,000 of remuneration in computing its business income; the ₹1,08,000 disallowed is added back. In the partners' hands, only the amounts allowed to the firm are taxed as their business income (section 28(v)).
If the deed does not authorise the payments
If the deed did not provide for the interest or the remuneration, nothing would be allowed under section 40(b)(ii): the whole ₹5,70,000 would be disallowed. Remuneration to a partner who is not a working partner is disallowed under section 40(b)(i), but that clause does not reach interest, which stays allowable to any partner within the deed and the 12% limit.
Where the 4 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Conditions for the deduction | 0.5 |
| 2 | Interest allowable at 12% | 1.5 |
| 3 | Remuneration limit on book-profit | 2 |
| Total | 4 |
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