Partnership Firms - Income Tax Notes Part - 08
Scheme of taxation of partnership firms
1. Any salary, bonus, commission or remuneration (by whatever name called), paid/ payable to partners is allowed as deduction to the firm subject to some restrictions in the hands of firm. The amount which is allowed as deduction to the firm is taxable in the hands of partners.
2. The firm can claim deduction in respect of interest paid to the partners subject to a maximum of 12% p.a. This amount of interest, allowed as deduction in the hands of the firm, is taxable in the hands of partners.
3. The income of the firm is taxed at a flat rate of 30% plus surcharge @ 12% (if taxable income is more than Rs. 1 crore) plus cess @ 4%.
When remuneration/ interest is deductible
Payment of remuneration and interest is deductible if the following conditions are satisfied –
1. Conditions of section 184; and
2. Conditions of section 40(b)
In other words, it can be said that if conditions of section 184 and 40(b) are not satisfied, then nothing is deductible in the hands of firm on account of payment of salary and interest to partners.
Optional to claim deduction on account of interest on capital and remuneration to partners – Even if conditions of section 184 and 40(b) are satisfied, the assessee-firm may or may not claim the deduction in respect of payment of remuneration and interest to partners. In other words, the Assessing Officer cannot enforce deduction of remuneration and interest to partners, if the firm does not want to claim this deduction.
Conditions of section 184
The five conditions which a firm has to satisfy under section 184 are as under:
1. A firm must be evidenced by an “instrument” (i.e., partnership deed).
2. Individual share of partners in profits of the partnership firm must be specified in such instrument or partnership deed.
3. Certified copy of the instrument should be submitted. It should be certified in writing by all the partners (other than minors).
4. Revised instrument should be submitted whenever there is change in the constitution of firm/ profit-sharing ratio. It is to be noted that even if there is a change in remuneration/ payment of interest to partners but there is no change in profit-sharing ratio, a copy of revised instrument should be submitted.
5. There should not be any failure as is mentioned in section 144 [Best Judgement Assessment].
Conditions for claiming deduction of remuneration of partners under section 40(b)
1. Remuneration should be paid/ payable only to a working partner. For this purpose, a “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.
2. Remuneration must be authorised by partnership deed and it should also be in accordance with the terms of partnership deed.
3. Remuneration should not pertain to the period prior to partnership deed.
4. Remuneration should not exceed the permissible limit:
If the above three conditions are satisfied, remuneration to partners is allowable as deduction in the hands of the firm. However, the maximum amount of such payment to all the partners during the previous year should not exceed the limits given below – a. If book profit is negative:
Rs. 1,50,000
b. If book profit is positive:
- On first Rs. 3,00,000 of book profit, Rs. 1,50,000 or 90% of book profit, whichever is more
- On remaining balance of book profit, 60% of book profit
Computation of book profits
“Book profit” means net profit of the firm as per profit and loss account after every adjustment as per sections 28 to 44DB but before deducting remuneration to partners.
Notes –
1. Income chargeable under the heads “House property”, “Capital gains” and “Income from other sources” is not part of “book profit”.
2. Brought forward business losses are not to be deducted from “book profit”. However, brought forward unabsorbed depreciation can be deducted from “book profit”.
3. Deductions under section 80C to 80U shall be ignored for computing “book profit”.
Conditions for claiming deduction of interest to partners under section 40(b)
1. Payment of interest must be authorised by the partnership deed and it should also be in accordance with the terms of partnership deed.
2. Interest should not pertain to the period prior to partnership deed.
3. Rate of interest should not exceed simple interest @ 12% p.a.
Notes –
a. If interest payable exceeds simple interest @ 12% p.a., then the excess amount is not deductible.
b. Where an individual is a partner in a firm on behalf of (or for the benefit of) any other person, interest paid by the firm to such individual (otherwise than as partner in a representative capacity) is not taken into account, for the purposes of section 40(b). For example, X is a partner in a firm on behalf of his HUF. He has given a loan of Rs. 1,00,000 in his personal capacity @ 14% to the firm. The HUF has also given a loan (or capital contribution) of Rs. 4,00,000 @ 14%.
In this case, Rs. 14,000 (being interest @ 14% on Rs. 1,00,000) paid to X in his personal capacity is deductible without applying the provisions of section 40(b). However, interest of Rs. 56,000 paid to X for the benefit of HUF will be governed by section 40(b).
c. Where a firm pays as well as receives interest from the same partner, interest received by the firm will be chargeable to tax in the hands of firm. Interest paid to the same partner will be allowed within the four-corners of section 40(b).
d. The above provisions are not applicable in respect of interest paid to a person before becoming partner.
Miscellaneous points
1. A firm can claim deductions under the following sections from its gross total income: section 80G, 80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE and 80JJA.
2. Share of profit received by a partner (including a minor admitted for the benefit of the firm) from the firm is exempt from tax under section 10(2A).
3. Remuneration and interest received from the firm by the partners is taxable under the head “Profits and gains of business or profession” in their individual hands.
4. The amount of remuneration which is allowed as deduction to the firm is taxable in the hands of partners in the ratio of remuneration of partnership deed.
5. Any expenditure incurred by the partner in order to earn salary/ interest income can be claimed as a deduction under sections 30 to 37 from such income.
TOTAL INCOME AND TAX LIABILITY OF INDIVIDUALS, LEADING COURT CASES AND RETURN OF INCOME
Introduction
The chapter discusses some leading cases of Supreme Court on the matter of taxation and concepts related to filing of returns. The chapter also discusses the problems on computation of total income and tax liability of an individual.
Leading cases of Supreme Court
Agricultural income [CIT v Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC)]
As pointed out in this judgement, ‘Agriculture in its primary sense denotes the cultivation of land in the strict sense of the term, i.e., tilling of the land, sowing seeds, planting and similar operation on the land’. Bhagwati, J. laid down the following principles to serve as a guide in the determination of the scope of the terms, “agriculture” and “agricultural purposes”. The land is said to be used for agricultural purposes where the following two types of operations are carried out on such land:
1. Basic operations:
Prior to generation, some basic operations are essential to constitute agriculture. These involve cultivation of the ground, in the sense of tilling of the land, sowing of the seeds, planting and similar operations on the land. Such basic operations demand the expenditure of human labour and skill upon the land itself and further they are directed to make the crop sprout from the land.
2. Subsequent operations:
After the crop sprouts from the land, there are subsequent operations which have to be rescued to by the agriculturalists for the efficient production of the crop such as, weeding, digging the soil around the growth, removal of undesirable growths, prevention of the crop from insects and pests and from depredation by cattle and tending, pruning, cutting, etc.
Mere performance of these subsequent operations on the products of the land (where such products have not been raised on the land by the performance of the basic operations described above) would not be enough to characterize them as agricultural operations. Where, however, the subsequent operations are performed in conjunction with and in continuation of the basic operations, the subsequent operations would also constitute part of the integrated activity of agriculture.
Some connection with land not significant:
The mere fact that an activity has some connection with or is in some way dependent on land is not significant to bring it within the scope of the term “agriculture”. For instance, breeding and rearing of livestock, dairy farming, cheese and butter-making and poultry farming would not by themselves be agricultural purposes.
In computing the annual value of a house property, expected rent cannot exceed the standard rent [Shiela Kaushish v CIT (1981) 131 ITR 435 (SC)]
Standard rent is the rent which a person can legally recover from his tenant under a Rent Control Act. The Supreme Court has observed in this case that a landlord cannot reasonably expect to receive from a hypothetical tenant anything more than the standard rent under the Rent Control Act.
Where property let out is governed by the Rent Control Acts, the standard rent fixed thereof (or even not fixed but provision thereof is applicable to the area in which the property is situated) will have to be taken for determining the bonafide annual value. In the case of the property governed by the Rent Control Act, its annual value under section 23(1)(a) [i.e., expected rent] cannot exceed the standard rent (fixed or determinable) under the Rent Control Act.
Expense on issue of bonus shares is revenue expenditure [CIT v General Insurance Corporation (2006) 156 Taxmann 96 (SC)]
In this decision, the court has said that issue of bonus shares does not result in any inflow of fresh inflow of funds or increase in the capital employed. Issuance of bonus shares by capitalization of reserves is merely a reallocation of company’s fund. The total funds available with the company will remain the same and the issue of bonus shares will not result in any change in the capital of the company. The expenditure incurred in connection with issuance of bonus shares is therefore revenue expenditure.
Preparation of return of income
Preparation of return of income through software
There are two ways of filing income tax return electronically. One way is to prepare the income tax return offline on your computer and then upload it on the website www.incometaxindiaefiling.gov.in. Another way is to directly prepare income tax return on the website www.incometaxindiaefiling.gov.in. Second way of filing income tax return requires less time in preparing and submitting the return as compared to the first way.
Preparing Income Tax Return offline and then submit (one way of filing income tax return) –
To Upload ITR (Income Tax Return), following steps are to be followed –
1. Open the above website and click the heading “Downloads” and then download the relevant form.
2. Prepare the return with the help of following information –
a. All information regarding your personal details, income, tax payments, deductions etc.
b. Enter all data and click on 'Calculate' to compute the tax and interest liability and final figure of Tax Refund or Tax payable
c. If Tax is payable – remember to pay immediately and enter the details in appropriate schedule. Repeat above step so that tax payable becomes zero
d. Generate and save the Income Tax Return data in XML format in the desired place on your Computer.
3. Login to above website with User ID, Password, Date of Birth and enter the Captcha code.
4. Go to e-File and click on "Upload Return".
5. Select the appropriate ITR, Assessment Year and XML file previously saved in Step 2 (using browse button).
6. Click on "Submit" button.
7. On successful submission, ITR-V will be generated automatically which needs to be verified. On submission of return, option of ‘e-verify’ automatically comes on the screen. Under this option, verification can be done electronically either through Aadhar number, internet banking, bank account number, etc. After this electronic verification, the process of income tax return filing will be treated as completed.
However, if you do not want to verify ITR-V electronically, download the ITR-V. ITR-V is also sent automatically to the registered email. ITR-V form should be printed, signed and submitted to Central Processing Centre (CPC) by post at the address written on ITR-V within 120 days from the date of e-Filing. The return will be processed only upon receipt of signed ITR-V. After receipt of this ITR-V at the CPC, the process of income tax return filing will be treated as completed.
Preparing and submitting Income Tax Return online (another way of filing income tax return) –
To Prepare and Submit ITR Online, following steps are to be followed –
1. Login to above website with User ID, Password, Date of Birth and enter the Captcha code.
2. Go to e-File and click on "Prepare and Submit ITR Online" (only ITR 1 and ITR 4 can be filled online).
3. Select the Income Tax Return Form ITR 1/ ITR 4 and the Assessment Year.
4. Fill in the details and click the "Submit" button.
5. On successful submission, ITR-V will be generated automatically which needs to be verified. On submission of return, option of ‘e-verify’ automatically comes on the screen. Under this option, verification can be done electronically either through Aadhar number, internet banking, bank account number, etc. After this electronic verification, the process of income tax return filing will be treated as completed.
However, if you do not want to verify ITR-V electronically, download the ITR-V. ITR-V is also sent automatically to the registered email. ITR-V form should be printed, signed and submitted to Central Processing Centre (CPC) by post at the address written on ITR-V within 120 days from the date of e-Filing. The return will be processed only upon receipt of signed ITR-V. After receipt of this ITR-V at the CPC, the process of income tax return filing will be treated as completed.
Note:
Preparing the return online and submitting the return online is available only for ITR 1 and ITR 4 whereas preparing the return offline and submitting the return online is available for all the forms.
Note: The summary of Income Tax Notes Part-08 PARTNERSHIP FIRMS summarise from the content of Book of School of Open Learning. © School of Open Learning.
Profits and Gains From Business or Profession
