Firm and partners: business income, partners' remuneration and interest within section 40(b), and tax of each (as set, 1961 Act, AY 2020-21)

Readings

1. Status. The firm has met the formalities, so it is assessed as a firm (section 184) and its partners' share of profit is exempt in their hands (section 10(2A)). The partnership deed is read as authorising the salary and the interest and as dated before the period they relate to, since section 40(b)(iv)-(v) cover only payments for periods after the date of the deed; both partners are read as working partners.
2. The donation. The question says the ₹80,000 is included in the expenses debited; no line is so named, but it has been charged before the net profit, so it is added back. Being a gift, it is not a business expense; the firm may claim section 80G instead.
3. Sales tax provision. Section 43B tests payment against the due date under section 139(1), not against the day the return is actually filed. The question gives 31st July 2020 as the date of filing, and that is also this firm's due date: its sales of ₹50,00,000 and other receipts of ₹1,60,000 are below the ₹1 crore audit limit of section 44AB(a), and no other audit is indicated, so it is an assessee under clause (c) of Explanation 2 to section 139(1) (31st July of the assessment year). A tax paid by that date is deductible for 2019-20, with evidence of the payment furnished along with the return (proviso to section 43B); a tax paid later is deductible only in the year of payment. A payment of 11th November 2020 could not in any case be evidenced with a return filed on 31st July 2020. Only if the due date were 11th November 2020 or later, and the return with that evidence were furnished on or after the day of payment, would the ₹13,000 be allowed too: the firm's business income would be ₹7,33,200, its total income ₹8,36,540 and its tax liability ₹2,46,440.
4. The long-term capital gain is taken as taxable at 20% under section 112; the question does not say what asset was sold.

Business income of the firm

• Interest on capital: at 18% the capitals are ₹2,00,000 (X) and ₹1,40,000 (Y). Interest is deductible only up to 12% simple interest (section 40(b)(iv)): ₹24,000 and ₹16,800. The excess, ₹12,000 + ₹8,400 = ₹20,400, is added back.
• Sales tax provision of ₹25,000: ₹12,000 paid on 10th July 2020, before 31st July 2020, is allowed, the evidence of payment being read as sent with the return; ₹13,000 paid on 11th November 2020 is added back, to be allowed in 2020-21.
• Refund of sales tax ₹50,000: a refund is income under section 41(1) only where the tax was allowed as a deduction earlier. It was not, so it is not income.
• Other receipts from business ₹1,60,000 stay in the profit: they are business income.
• Sales tax of ₹1,00,000 debited as paid is deductible.

Partners' remuneration within section 40(b)

Remuneration to working partners is allowed up to the limit on book profit (section 40(b)(v)):

Salary paid, ₹2,60,000 + ₹1,40,000 = ₹4,00,000, is within the limit, so all of it is allowed.

Total income of the firm

Section 80G: a gift to a notified public charitable trust is deductible at 50% of the gift, the gift counting only up to 10% of the adjusted gross total income (section 80G(1)(ii); section 80G(4)). Adjusted gross total income excludes the long-term capital gains: ₹8,86,200 − ₹1,40,000 = ₹7,46,200; 10% is ₹74,620. The gift of ₹80,000 counts up to ₹74,620, and 50% of that is ₹37,310. The gift is taken as paid otherwise than in cash.

Tax liability of the firm

(Finance Act, 2020, First Schedule, Part I, Paragraph C; Finance Act, 2020, section 2(11))

No surcharge: the total income is below ₹1 crore.

Partners' income and tax

Salary and interest from the firm are business income of the partner, adjusted to the extent any of it was not allowed to the firm under section 40(b) (section 28(v) and its proviso); the share of profit is exempt (section 10(2A)). Dividends from an Indian company, being dividends referred to in section 115-O, are exempt (section 10(34)); the proviso to that clause, for dividends chargeable under section 115BBDA, does not touch them, since that section applies only where dividends in aggregate exceed ₹10,00,000 (section 115BBDA(1); X ₹40,000, Y ₹50,000). Savings bank interest is deductible up to ₹10,000 (section 80TTA): the account is the partner's own savings account with a bank, a co-operative bank or a post office (section 80TTA(1)), not one held by or for a firm, association of persons or body of individuals (section 80TTA(2)).

Both are taken as resident in India, which the rebate requires (section 87A); if X were not, there would be no rebate and his liability would be ₹1,800 + 4% cess = ₹1,872, ₹1,870 rounded off. Both are below 60 years, so item (I) of Paragraph A applies (Finance Act, 2020, First Schedule, Part I, Paragraph A): X's tax is 5% of ₹36,000 = ₹1,800, wholly met by the rebate of up to ₹12,500 under section 87A; Y's income is within ₹2,50,000.