Table of Contents
1. What is section 40(b) of the Income-tax Act, 1961?
Section 40(b) contains provisions relating to the amount of deduction available to the partnership firm out the expenditure relating to payment of Interest and remuneration to partners.
2. What is the scope of Remuneration as per this section?
Payments made to partners by way of salary, bonus, commission, royalty shall be considered as remuneration for the purpose of this section.
3. Is the share of profit received by a partner from the partnership firm covered under the scope of section 40(b)?
No, the share of profit received by a partner from a firm is exempt in the hands of the partner as per section 10(2A). Therefore, the same will not be included for the purpose of calculating the allowable expenditure under this section.
4. Implications of section 40(b) on Interest paid to partners on Capital/Loan/Current Account?
- If the Interest payment is not authorised by the partnership deed
- No Deduction (100% disallowed).
- If the interest payment is authorised by the partnership deed
- Max deduction upto 12% per annum is allowed as deduction.
5. Is deduction allowed for interest paid before the date of partnership deed but subsequently authorised by the deed?
No, retrospective deduction is not allowed.
6. Implications of section 40(b) on remuneration paid to partners?
- If the remuneration is not authorised by the partnership deed
- No deduction (100% disallowed)
- If the remuneration is authorised by the partnership deed
- If the remuneration is paid to Non-Working partners
- No deduction (100% disallowed)
- If the remuneration is paid to working partners
- Amount allowed as deduction is the total amount paid to working partners (or) the maximum amount as defined in this section (whichever is lower) (Refer FAQ 7)
- If the remuneration is paid to Non-Working partners
7. What is the maximum amount defined in this section for availing deduction in respect of remuneration paid to working partners?
- Maximum limit is calculated in 4 steps
- Step 1: Calculate book profit for the financial year
- Step 2: On first 3,00,000 of book profit (or) in case of loss –
- 1,50,000 (or) 90% of book profit (whichever is higher)
- Step 3: on the balance book profit
- 60% of the balance book profit
- Step4: Maximum amount = Step 2 + Step 3
8. Calculation of book profit
| S. No | Particulars | Amount |
|---|---|---|
| 1 | Income computed as per the normal provisions of the Income Tax Act (after considering all disallowances and allowances, if any) | XXX |
| 2 | Add: Remuneration paid to partners (if debited to Profit and loss account) | XXX |
| 3 | Less: Unabsorbed Depreciation, if any | (XXX) |
| 4 | Book Profit (1+2-3) | XXX |
9. Who are considered as working partners for the purpose of this section?
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.
10. Does section 40(b) apply to LLP’s?
Yes, the provisions of section 40(b) applies to Limited Liability Partnerships also.
11. Non applicability of the provisions of section 40(b)
- Interest received by an Individual partner in a representative capacity
- Interest received by an individual partner on behalf, or for the benefit, of any other person
12. Will section 40A (2) of the Income Tax Act, 1961 relating to payments made to related parties be applicable in respect of payments made to partners?
No, Section 40A (2) need not be invoked in respect of payment of interest and remuneration to partners which is allowed under section 40(b).