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Direct Tax - Assessment of Firms

The document discusses the taxation of partnership firms and taxable income of partners. It covers the tax rates and deductions applicable to the income of firms, as well as the conditions for deducting remuneration and interest paid to partners. It also discusses the tax liability of the firm and the tax treatment of income received by partners from the firm like share of profit, remuneration, and interest.

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57 views4 pages

Direct Tax - Assessment of Firms

The document discusses the taxation of partnership firms and taxable income of partners. It covers the tax rates and deductions applicable to the income of firms, as well as the conditions for deducting remuneration and interest paid to partners. It also discusses the tax liability of the firm and the tax treatment of income received by partners from the firm like share of profit, remuneration, and interest.

Uploaded by

Awesome Angel
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We take content rights seriously. If you suspect this is your content, claim it here.
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ASSESSMENT OF PARTNERSHIP FIRMS & TAXABLE INCOME OF PARTNERS

SCHEME OF TAXATION OF FIRMS

1. Income of Firm is taxable at a flat rate of 30 per cent. Surcharge at the rate of 12 per cent of income tax
is applicable if income of a firm is more than Rs. 1 crore. Besides, health and education cess is also
applicable. This is applicable in case of LLP also
2. A firm including a LLP is subject to an alternate minimum tax
3. If a firm pays interest to any partner, the firm can claim deduction of such interest from its total income.
The maximum rate at which interest can be allowed to a partner is 12 per cent per annum. If the amount
of interest is allowed as deduction in the hands of the firm, it will be taxable in the hands of partner.
4. Any salary, bonus, commission or remuneration paid or payable to partners is allowed as deduction to
the firm subject to certain restrictions. The amount which is allowed as deduction to the firm is taxable
in the hands of the partners.
5. If a firm claims deduction in respect of remuneration or interest to partners, it will have to satisfy the
conditions u/s 184 and Sec.40(b)

CONDITIONS UNDER SECTION 184

 A firm should be evidenced by a partnership deed


 Individual share of partners must be specified in the partnership deed
 Certified copy of the partnership deed should be submitted along with the return of income for the first
year
 Revised partnership deed should be submitted whenever there is change in the constitution of firm or
profit sharing ratio

CONDITIONS UNDER SECTION 40(b)

 Remuneration should be paid only to working partner


 Remuneration must be paid according to the terms of the partnership deed
 Remuneration should not exceed the permissible limit given below:
i) On the first Rs.3,00,000 of book profit or in the case of loss Rs.1,50,000 or 90% of book
profit (whichever is more)
ii) On the balance of book profit 60% of book profit
 COMPUTATION OF BOOK PROFIT
a) Calculate net profit of the firm as per Profit and Loss Account
b) Consider the adjustments as provided by Sec.28 to Sec.44DB
c) Add remuneration to partners if debited to the Profit and Loss account
After considering point (a), (b) & (c), the resultant figure is the Book Profit
Points to be noted
 Permissible deductions from Gross Total Income u/s 80C to 80U shall be ignored for
computing Book Profit
 Brought forward business losses are not to be deducted from “Book Profit” (however the
deduction of brought forward unabsorbed depreciation is permissible)
 Income chargeable to tax under other heads of income is not a part of book profit

TAX LIABILITY OF FIRM

STCG u/s 111A ------------------------ @ 15%

LTCG u/s 112 -------------------------- @ 10% or 20%

LTCG u/s 112A ------------------------ @ 10%

Winnings from Lottery, races etc. -- @ 30%

Income (not being income which is subject to special tax rate) ----- @30%

Add: Surcharge @ 12% (if total income exceeds Rs.1 crores)

Add: Health & Education Cess @ 4%

[PROVISIONS OF AMT IS APPLICABLE] --- Refer to class discussion

TAXABLE INCOME OF PARTNERS

Share of Profit ---- Not chargeable to tax in the hands of partners

Remuneration or Interest --- Taxable in the hands of the partners (to the extent these are allowed as
deductions in the hands of the firm) provided conditions u/s 184 and Sec. 40(b) are satisfied

Points to be noted

 Remuneration is taxable as Business Income in the hands of the partners


 Any expenditure incurred in order to earn salary or interest income can be claimed as a deduction u/s 30
to 37 from such income
 If salary or interest is disallowed in the hands of firm, then the same is not taxable in the hands of the
partners

PROBLEMS (References from VK Singhania & Monica Singhania 69th Edition Book)

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