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Conditions to obtain Deduction of Remuneration Paid to Partners in case of Firm [Section 40(b)]

The following specific conditions, as prescribed by section 40(b), should be satisfied:

1.    Remuneration should be paid only to a working partner

Any payment of salary, bonus, commission or remuneration to any partner who is not a working partner is not allowable as deduction.

As per the aforesaid definition, a “working partner” means:

  1. an individual who is a partner of a firm; and

  2. such an individual is actively engaged in conducting the affairs of the business/profession of the firm.

The following persons would qualify as being working partners:

  1. partner carrying out all or most of the above functions;

  2. a partner who attends to framing of business policies even though he does not participate in their implementation and other routine jobs;

  3. a partner who attends to business decision-making even though he is not attending to business administration and routine jobs;

  4. a partner who is effecting business transactions even though he is not attending to administration and routine jobs;

  5. a partner who attends to general administration of the firm whether or not he participates in decision making;

  6. a partner who attends to routine job whether or not he participates in decision-making.

The most important and noteworthy observation is that there is no requirement of “full time” attendance to any/all the above tasks. A mere consideration of the total time devoted to the business is not a relevant criterion.

Conditions for Claiming Deduction of Remuneration  in case of Firm (Section 184)

2. Remuneration Must Be Authorised By Partnership Deed

To claim deduction of remuneration paid to a partner, it should not only be authorised by the partnership deed, but should also be in accordance with the terms of the partnership deed.
Quantum of remuneration or the manner of computation of quantum of remuneration should be stated in the partnership deed and should not be left undetermined, undecided or to be determined or decided on a future date.

3. It Should Not Pertain To The Period Prior To Partnership Deed –

The remuneration to the working partners as per the partnership deed, should be payable after the date of deed. In other words, if such payment is made from a date prior to the date of partnership deed, it would not be allowed as deduction, unless the earlier deed provides for such payment.

Example :
A and B enter into a partnership agreement on April 1, 2017. Each of them will be entitled for salary at the rate of Rs. 10,000 per month apart from profit. The agreement of partnership is amended on July 1, 2017 to increase the salary to Rs. 30,000 per month with effect from May 1, 2017.

In this case, salary will be deductible as follows subject to the satisfaction of other conditions:

  X (Rs.) Y (Rs.)

From April 1, 2017 to June 30, 2017

10,000 per month 10,000 per month
From July 1, 2017 onwords 30,000 per month 30,000 per month

 

4. Remuneration Should Not Exceed The Permissible Limit –

Where any salary, bonus, commission or other remuneration is paid to any working partner, in relation to any period falling after the date of the partnership deed, it may be allowed as deduction in the hands of for both professional firm and non-professional firm. Further, these limits will be applicable whether the firm is a limited liability partnership firm or otherwise.

However, the maximum amount of such payment to all the partners during the previous year should not exceed the limits given below:

Book Profit Amount deductible in respect of Remuneration to Partners under Section 40(b) w.e.f. 2010-11
If Book Profit is Negative Rs. 1,50,000

In case Book Profit is Positive :

 
  • On first Rs. 3 lakh of Book Profit
Rs. 1,50,000 or 90% of Book Profit, which ever is More
  • On the balance of Book Profit
60% of Book Profit

BOOK PROFIT - HOW TO COMPUTE -

It would be determined as under: 

Step 1 - Find out the net profit of the firm as per the Profit and Loss Account. 

Step 2 - Make adjustments as provided by sections 28 to 44D. 

Step 3 - Add remuneration to partners, if debited to the Profit and Loss Account.

The resulting amount is “Book Profit”.

 
 
 

More Topics...on Assessment of 'Firm'

What is Firm & 'Partnership Firm'
Conditions for Claiming Deduction in respect of Remuneration and Interest to Partner in case of Firm (Section 184)
Conditions to obtain Deduction of Interest Paid to Partners in case of Firm [Section 40(b)]
Conditions to obtain Deduction of Remuneration Paid to Partners in case of Firm [Section 40(b)]
How to find out Income and Tax Liability of a Firm
Alternate Minimum Tax (AMT) on all Persons other than Companies [Section 115JC to 115JF]
 
 
 
 
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