There are certain expenses which are expressly not allowed to be deducted as per Section 40A of the Income Tax Act, such as interest, royalty and fee for technical services payable outside India or to a nonresident on which tax is not deducted at source or having been so deducted is not paid as per the provisions of the IT Act. Similarly, any sum paid on account of securities transactions tax is not allowed deduction. In certain circumstances under the provisions of Section 40A undue remuneration paid by the assessee to a relative can also be disallowed by the Assessing Officer. However, reasonable remuneration so paid for the services rendered by the relative would be admissible. Any illegal expenses incurred by a professional person are not allowed as deduction.
Deduction of Salary and Interest Regarding a Professional Firm
Under the provisions of Section 40(b) any salary or other remuneration or interest paid by a professional firm to a partner in excess of certain limits laid down in that section is not allowed as deduction. Thus, in the case of a professional firm any payment of remuneration to any partner is a working partner, which is authorized 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 would be allowed as deduction in computing the taxable income of the professional firm for the financial year 2011-2012 as per the following rates as per Section 40(b) (v) of the Income Tax Act:
(a) On the first ` 3 lakh of book profit and in the case of loss —
` 1,50,000, or 90% of the book profit, whichever is more;
(b) On the balance amount of the book profit @ 60%.
Besides, interest paid by a professional firm to a partner is allowed upto a maximum extent of 12% simple interest per annum if the payment of the interest to any partner is authorized by the partnership deed.
Compulsory Maintenance of Accounts
As per Section 44AA of the Income Tax Act it is provided that every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or a technical consultancy or interior decoration or certain notified professions would be required to keep and maintain such books of accounts and other documents as would enable the Assessing Officer to compute the total income under the Income Tax Act. Other professional persons have to compulsorily keep books of account if the income from the profession exceeds ` 1.20 lakh, or the gross receipt from the profession exceeds ` 10 iakh in any one of the 3 years immediately preceding the previous year. Where the profession is newly set up in any previous year and the income from the profession is likely to exceed ` 1.20 lakh, or the gross receipts from the profession exceed ` 10 lakh in any one of the 3 years immediately preceding the previous year.
It is also required that the books of account and other documents would be kept and maintained for a period of 6 years from the end of the relevant assessment year.
Compulsory Tax Audit
As per Section 44AB, every person carrying on a profession if his gross receipts in the profession exceed ` 25 lakh in any previous year has to compulsorily get his accounts audited by an accountant, which normally means a chartered accountant, by the 30th day of September of the assessment year. He is also required to file a copy of the audit report along with the return on or before the filing of the income tax return. Nowadays no papers can be enclosed with the income-tax return, hence the tax audit report also cannot be enclosed with the Income-tax return. Just keep the tax audit report ready and submit to the assessing officer as and when demanded by him.