Assessment of Partnership Firms

Meaning of Partnership, Firm and Partner

Table of Contents

Partnership firm defined as, “Relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all” Individually these persons are known as Partners and collectively they are known as ‘Firm’.

Broadly partnership firms can be divided into two categories:

Limited liability partnership: In this case, the liability of partners is limited to the extent of capital contributed by them to the firm.

Unlimited liability partnership: In this case, the liability of the partners is unlimited.

Who can be a Partner?

Individual: Individuals who are major and of sound mind can be the partners of a firm. A minor can also be admitted only to the benefits of the partnership but there must be at least two adults to form a legal partnership.

Hindu undivided family: A HUF cannot be a partner in a partnership firm

Firm: A firm cannot enter into a partnership with any other firm or an individual. However, the partner of a firm can become a partner of another firm, or all the partners of two firms can join together and form a bigger partnership.

Company: Under the Companies Act, a company is a separate entity and possesses a legal personality, hence, two or more companies can become partners in a firm.

Trust: A trust can be a partner of a firm.

Scheme of Taxation of Firms

  1. The partnership firm is taxed as separate entity, with no distinction as registered and unregistered firms. A partnership firm is or required to submit a copy of the partnership deed in the first year of assessment and later on only if there is a change in the terms/constitution of partnership.
  2. Partners share in the income of a Firm is not chargeable to tax in the hands of partners.
  3. Any payment of salary, bonus, commission or remuneration, by whatever name called, to any partner will be allowed as deduction in the hands of the firm subject to following conditions:
  4. The salary is paid to a working partner. [Sec. 40(b)(i)]
  5. Where a firm pays interest to any partner, the firm can claim deduction of such interest at a maximum rate of 12% p.a. according to the partnership deed. It cannot be claimed with retrospective effect. Interest paid in excess of the above will be disallowed in the hands of the firm.

Computation of Income of a Partner from the Firm

In computing firm’s income from business or profession, any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm from such firm to the extent of the amount inadmissible u/s 40(b), shall be included under the head business or profession. Remuneration includes

salary, bonus, commission etc. The provisions of section 40(b) provide that the following expenses shall not be allowed:

Items disallowed:

i) Salary, bonus, commission or other remuneration paid or payable to any partner of the firm, who is not a working partner, is disallowed

ii) Payment of remuneration, which is neither authorized nor in accordance with the terms of the partnership deed, to any partner being working partner is disallowed

iii) Payment of interest, which is neither authorized nor in accordance with the terms of the

partnership deed, to any partner is disallowed.

iv) Payment of remuneration authorized by and in accordance with the terms of the partnership deed relating to any period falling prior to the date of partnership deed for which such for neither authorized by nor in accordance with any earlier partnership deed to any working partner is disallowed. In other words, payment of remuneration authorized by and in accordance with the terms of earlier partnership deed to any working partner for any subsequent period is allowed as deduction. Thus, it should be payable after the date of partnership deed

v) Payment of interest in the above circumstances to any partner is disallowed. However, any payment of interest authorized by or in accordance with the terms of the earlier partnership deed to any partner for any subsequent period is allowed as deduction. Thus, it should be payable after

vi) Payment of interest authorized by and in accordance with the partnership deed relating to any the date of partnership deed period falling after the date of the partnership deed to any partner exceeding 12% p.a.is disallowed.

Computation of Taxable Income from Business/Profession of a Firm

  1. Computation of Book Profit.
  2. Computation of Admissible Remuneration to Partners
  3. Computation of Taxable Income from Business/Profession.

Computation of Book Profit

It means the net profit as per profit and loss account for the relevant previous year computed with sections 30 to 44D. The provisions of Section 40 (b) have to be complied while determining the book profit of the firm.

Particulars
Net Profit as per Profit and Loss Account XXX
Add:  
1.Inadmissible items or non Business expenses debited to Profit and Loss A/cXXX 
2. Business Income not credited to Profit and Loss A/cXXX 
3. Overvaluation of opening stock and undervaluation of closing stockXXX 
4. Remuneration to partners debited to Profit and Loss A/cXXX 
5. Disallowance of interest on capital in excess of 12% p.a.XXXXXX
  XXX
Less:  
6. Admissible expenses or Business expenses not debited to Profit and Loss A/cXXX 
7. Undervaluation of Opening Stock and Overvaluation of Closing StockXXX 
8, Income from all other Heads credited to Profit and Loss A/cXXXXXX
Book Profit XXX
1. Inadmissible Expenses/Non-Business Expenses

Inadmissible expenses are those expenses, which are not allowed under the Act. If such expenses are debited to Profit & Loss account by the assessee, they should be added back to the net profit.

  1. Family planning expenses
  2. Fines and penalties
  3. Fringe benefit tax.
  4. Interest on capital.
  5. Legal expenses.
  6.  Legal expenses to acquire a title or to cure a defect in the assessee’s title of assets.
  7. Loss from discontinued business.
  8. Gifts and presents (non-publicity).
  9. GST, custom duty, local taxes of the premises used for business not paid on or before the due date
  10. Any business expense paid in cash exceeding ₹ 10,000, 100% of such payment shall be. disallowed. (The monetary limit of ₹ 10,000 has been raised to ₹ 35,000 in the case of payment made for plying, hiring or leasing goods carriages.)
  11. Salary or interest on loan payable outside India without TDS.
  12. Speculation losses.
  13. Bad debts still recoverable
  14. Betterment charges paid to corporation under Town Planning Act.
  15. Employer’s contribution to the provident fund not paid on or before the due date of filing returns
  16. Expenses relating to other heads of income like municipal taxes of house property let out.
  17. Excess depreciation.
  18. Expenses incurred to earn tax-free incomes like cultivation expenses
  19. Excessive and unreasonable payments made to the relatives.
  20. Direct tax like income tax, advance income tax, wealth tax, interest on loan taken for theDirect payment of taxes like income tax income etc. tax,
  21. Difference in trial balance
  22. Capital losses like loss on sale machinery, loss on sale of car etc.
  23. Charities and donations.
  24. Capital expenses like purchase of machinery, extension of building, Cost of permanent sign board fixed on office premises.
  25. Contribution to staff welfare fund.
  26. Unapproved or unrecognized fund contribution.
  27. Patents/copyrights/Technical know-how purchased: Assessee can claim depreciation U/S 32 @ 25% for Patents / copy rights / Technical know-how purchased during the previous year.
  28. Personal expenses or losses like Life / medical insurance premium paid on own life or any member of assessee’s family, Amount invested in NSS, NSC, PPF, Proprietor’s salary, Proprietor bonus, Drawings, theft from residence, rent paid for self, casual help, house hold expenses, expenses for arranging personal party etc.
  29. Preliminary expenses: Preliminary expenses (i.e., expenses relating to the preparation of feasibility report, project report, conducting market survey or any other survey relating to assessee’s business) or 5% of cost of the project, which ever less, is deductible in equal instalments over the period of five years commencing from the previous year in which such expenses were incurred.
  30. Provisions and reserves like Reserve for future losses, Provision for bad and doubtful debts etc.
2. Business Income

If business incomes are not credited to P/L account, such income be added to net profit, to get income taxable under the head income from business.

  1. Rent received from employees.
  2. Interest from debtors for delayed payments.
  3. Profit on sale of import license
  4. Sales/Commission/sundry receipts/Discount received
  5. Speculation incomes.
  6. Cash assistance received by the assessee against exports under any scheme of government of India or export incentives
  7. Custom/excise duties recovered but earlier allowed as deduction.
  8. Amount of liability foregone by the creditor.
  9. Bad debts recovered but allowed earlier.
3. Over valuation of Opening and Under valuation of Closing Stock

Example-1

Over valuation of Opening Stock: Opening Stock amounted to ₹1,20,000. Is overvalued by 10% (1,20,000 x 110/100 n 1,32,000) (1,32,000-1,20,000 = 12,000) should be added back to net profit.

Example-2

Undervaluation of closing Stock: Closing Stock amounted to ₹ 3,25,000 is undervalued by 10% (3,25,000 x 90/100= 2,92,500) (3,25,000-2,92,500 = 32,500) added back to net profit.

4. Computation of Admissible Remuneration to Partners (Statutory limit U/s40b)

Payment of remuneration authorized by and in accordance with the partnership deed relating to any period falling after the date of partnership deed to any working partner exceeding the specified limit is disallowed. The specified limit is as follows:

On the first 3,00,000 of book profit                            – 1,50,000 or 90% of book profits,

whichever is more

On the balance of book profit                                                 -60%

5.Interest on Capital

Payment of interest authorized by and in accordance with the partnership deed relating to any period falling after the date of the partnership deed to any partner exceeding 12% p.a. is disallowed.

6. Admissible/ Business Expenses

Admissible expenses are those expenses, which are allowed under the Act. If such expenses are not debited to P/L account by the assessee, they should be deducted from the net profit.

  1. Advertisements expenses. (Advertisement given in magazines or souvenir of a political party is inadmissible).
  2. Audit fees.
  3. Bank commission.
  4. Bad debts.
  5. Bank cash transaction tax.
  6. Contribution towards rural development program and conservation of natural resources.
  7. Cost of khacha well, bore well (but Cost of pucca well is inadmissible).
  8. Commodity transaction tax.
  9. Demurrage paid to railways.
  10. Discount and allowances as per IT Act.
  11. Depreciation allowable.
  12. Establishment expenses
  13. Expenditure on guest house or holiday home facility.
  14. Electricity bill/land revenue/repairs/Fire insurance premium/rent of the premises, which is used for business
  15. Entertainment expenses.
  16. Expenditure on campaign against nationalization.
  17. Expenditure on scientific research.
  18. Revenue expenditure on research carried on by the assessee is fully deductible, if such research relates to the assessee’s business.
  19. Capital expenditure on research carried on by the assessee is fully deductible, if such research relates to the assessee’s business. Deduction is available even if the asset is not put into use for research by the assessee during the previous year.
  20. Contribution to an approved university, college or other institutions for the purpose of research in social science or statistical research is deductible at the rate of 100% of actual contribution.
  21. Contribution to national laboratory is deductible at the rate of 100% of actual contribution.
  22. Contribution to approved research association, approved a university/college/other Institutions is deductible at the 100 percent of actual contribution.
  23. Expenditure on approved in-house research and development facilities of a company is qualified for deduction at the rate of 100 percent of the expenditure.
  24. Festival expenses.
  25. General expenses.
  26. Gifts and presents not made in personal capacity.
  27. Income tax expenses. (IT proceeding expenses, expenses on filing IT returns)
  28. Loss of stock due to theft by an employee.
  29. Legal expenses for filing income tax appeal.
  30. Legal expenses to defend an existing title to a capital assets
  31. Municipal taxes of quarters let out to employees and other expenses incurred according to the provisions of law.
  32. Postage and telegrams.
  33. Printing and stationary.
  34. Professional tax paid
  35. Railway freight and octroi expenses
  36. Services charges.
  37. Subscription to a trade or professional association.
  38. Salaries/wages/perquisites/allowances to employees.
  39. Staff welfare expenses.
  40. Security transaction tax.
  41. Tournament expenses.
  42. Telephone installation charges under OYT scheme.
  43. Traveling expenses related to business.
  44. Training expenses.
  45. Welfare expenses.
7. Under Valuation of Opening and Over Valuation of Closing Stock

Example-1

Valuation of Opening Stock: Opening Stock amounted to ₹ 1,20,000 is under Valued by 10% (1,20,000 x 90/100= 1,08,000) (1,20,000 – 1,08,000= 12,000) should be deducted from net profit.

Example-2

Over Valuation of Closing Stock: Over Valuation of Closing Stock amounted to ₹ 3,25,000 is overvalued by 10% (3,25,000 x 110/100 =3,57,500) (3,57,500 -3,25,000 = 32,500) to should be deducted from net profit.

8. Other Heads of Income
  1. Income from Salary
  2. Income from House Property
  3. Income from Capital Gains
  4. Income from Other sources

Computation of Taxable Income from Business

 
Book Profit of the FirmXXX
Less: Remuneration paid to working partnersXXX
[Least of Actual remuneration or Statutory limit u/s40(b)] 
Profits & Gains of Business or Profession of the FirmXXX
Add: Income from all other headsXXX
Gross Total IncomeXXX
Less: General Deductions U/S 80G to 80JJAXXX
Total Income of the firmXXX

Note: The Firm’s loss is treated in the following manner:

  • Speculation Losses can be set off against the Speculation Gain if any, otherwise it can be carried forward for four years written off.
  • Non-speculation losses against can be set off against any other income, otherwise it can be carried forward for eight years written off.
  • Short term capital losses can be set off against short term capital gain or long term capital gain and can be carried forward in eight years and retain off.
  • Long term capital Losses can be set off only against Long term capital gain if any and can be carried forward in eight years and retain off.
  • Unabsorbed depreciation can be set-off against business income of the firm.

Deductions from GTI

From the Gross Total Income deductions permissible under following sections are applicable Section 80C to Section 8OU shall be deducted and the balance shall be the total income of the firm. Only the to a firm for deduction- Section 80G, 80GGA, 80GGC, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, 80-IE and 80JJA. The share of profit of a partner in the firm is exempt under section 10(2A). Hence it will not be included in his income

Computation of tax Liability of the Firm

Income of firm is taxable @ 30%.

The following are special rates of taxable income of firm given below:

1. Short term capital gain (u/s111A) 15%

2. Long term capital gain (u/s 112) 20% (without indexation in some cases @ 10%)

3. W innings from lottery, races, etc. 30%.

4. Long term capital gain u/s112A : 10%

5.Altemative Minimum Tax – Tax payable by firm can not be less than 18.5% (+ SC +SEC) of adjusted total income asper Sec. 115JC

Surcharge is applicable if taxable income exceeds₹ 1 crore (12% of income tax).

Health and education cess (4% of tax Surcharge)

Illustration – 1

State whether the following are admissible or inadmissible expenses under the provisions of Income Tax Act:

  1. Sales tax paid during the year ₹15,000
    1. Interest on capital ₹5,000
    1. Donation to political party ₹10,000
    1. Loss due to theft ₹ 20,000
    1. Life insurance premium ₹ 3,000
    1. Outstanding sales tax of previous years paid during the year ₹ 30,000

Illustration – 2

State weather the following are admissible or inadmissible expenses under the provisions of Income Tax Act:

  1. Interest paid on loan taken for daughter’s marriage ₹ 10,000
  2. Penalty paid to custom authorities for importing prohibited goods from Australia ₹1,80,000.
  3. Loss of ₹1,20,000 snatched away from the cashiers positions while going to Bank to deposit the amount.
  4. Brokerage paid for raising a loan of ₹ 10,00,000
  5. Commission of ₹ 50,000 paid to secure a business order.
  6. Compensation of ₹ 2,00,000 paid to an employee for premature termination of his service.

Illustration – 3

State weather the following are admissible or inadmissible expenses under the provisions of Income Tax Act:

  1. Sales tax paid during the year ₹ 25,000
  2. Interest on capital ₹15,000
  3. Donation to political party ₹20,000
  4. Loss due to theft ₹30,000
  5. Life insurance premium ₹ 6,000
  6. Income tax paid ₹80,000
  7. Outstanding sales tax of previous years paid during the year ₹ 60,000

Illustration – 4

weather the following are admissible or inadmissible expenses under the provisions Of Income State Tax Act:

  1. Interest paid on loan taken for daughter’s marriage ₹20,000.
  2. Penalty paid to custom authority for importing prohibited goods from Australia ₹2,80,000.
  3. Loss amount. of ₹ 2,20,000 snatched away from the cashiers positions while going to Bank to deposit the amount.
  4. Brokerage paid for raising a loan of ₹20,00,000.
  5. Commission of ₹10, ,000 paid to secure a business order.
  6. Compensation of ₹3,00, 000 paid to an employee for premature termination of his service.

Illustration – 5

State whether the following payments are admissible or not while calculating the business income under the provisions of Income Tax Act.

  1. Loss of stock due to theft by an employee
  2. Service charged
  3. Charities paid
  4. Provisions for doubtful debt
  5. Legal expenses to defend on existing title to a capital asset.
  6. Loss on sale of capital asset.

Illustration – 6

State whether the following are admissible or inadmissible expenses under the provisions of Income Tax Act.

  1. Discount allowed
  2. Annual listing fees paid towards stock exchange by a company.
  3. LIC premium on director and his family member’s life.
  4. Payment of licence for obtaining franchise.
  5. Depreciation of ₹ 40,000 is debited to P/L Ac of Sri Ganesha Temple which was constructed inside the factory premises for the benefit of employees of the company.
  6. Interest on loan taken to pay income tax.

Illustration – 7

Accounting to Income Tax Act advise an assessee about admissibility or otherwise of the following while computing income from business

  1. Commission of ₹ 40,000 paid to procure orders for the business.
  2. Loss due to embezzlement by an employee.
  3. Cash expenditure of ₹ 34,000.
  4. Interest on loan taken to pay income tax.
  5. Discount allowed for prompt payment of dues
  6. Penalty for importing prohibited goods.

Illustration – 8

State weather the following are admissible or inadmissible expenses under the provisions of Income Tax Act:

  1. Gift taxpaid
  2. LIC premium on Director and his family member’s life.
  3. Payment of licence fees for obtaining franchise
  4. Professional Tax paid
  5. Annual listing fees paid towards stock-exchange by a company.
  6. Expenditure paid.
  7. Pension paid to employees

Illustration – 9

State whether the following are admissible or inadmissible expenses under the provisions of Income Tax Act.

  1. A cash payment of ₹ 18,500 paid to a supplier of raw materials on a day on which the banks were closed on account of in-definite strike.
  2. Depreciation of ₹ 50,000 is debited to P&L A/c on Sri Ram Temple which is constructed inside the factory premises for the benefits of employees of the company.
  3. Contribution made by company to Staff Welfare Fund.
  4. Donation to NCF ₹ 25,000
  5. Bonus of₹ 75,000 was paid to the employee after the due date of filing return of income
  6. Service tax paid.
  7. Provision for income tax.
  8. Sales tax of₹ 10,000 was paid before fling the return of income.

Illustration – 10

The book profit of a firm is ₹50,500 and the remuneration of partner is ₹80,000. Compute the admissible amount of remuneration to the partners.

Illustration – 11

Calculate allowable remuneration to the working partners.Net profit as per P&L A/c₹ 1,35,000 after debiting the following items:

Salary to partners                    ₹1,25,000

Commission to partners          ₹1,00,000

Bonus to partners.                   ₹25,000

Illustration – 12

P, Q and R are the partners in a firm sharing profits and losses equally. For the year ended 31-3-2023, thefirmsnetprofitis₹5,00,000afterdebiting the following:

(i) Salary to Q ₹50,000

(ii) Commission to P ₹20,000

(iii) Bonus to R ₹10,000

(iv) Donation net to profit NDF ₹30,000

The above net profit 5,00,000 also includes ₹ 20,000 interest on Govt. securities and ₹ 10,000 dividend from Indian Company:

Compute the remuneration payable to partners and firm’s business income for the previous year 2023-24.

Illustration – 13

X, Y and Z are partners in a firm sharing profits and loss in the ratio 1 : 2 : 3. Profits of the firm for the year ended on 31-3-2023 was ₹ 1,31,800 after considering the following items to P and L Account.

  1. Salary to partners:

X:₹1,30,000 and Y:₹1,20,000

  1. Interest on capital at 20%

X: ₹3,500, Y:₹14,000, Z:₹10,500

  1. Commission to partners:

X:₹5,000, Y:₹12,500, Z:₹17,500

Compute the allowable remuneration of the partners.

Illustration – 14

Ram, Shyam and Sajib are partners of a firm with equal shares. The profit and loss account for the year ended 31st March 2023. Shows a net profit of ₹ 1,00,000 after debiting the following as per the deed:

  1. Salary to Ram ₹ 20,000 and to Shyam₹15,000.
  2. Bonus to Kishore₹ 15,000.
  3. Interest on capital to Ram ₹ 2,000 (in excess of specified limit).
  4. ₹ 20,000 paid for the rent of the business premises.
  5. commission of ₹ 5,000 was given to Sajib.

Compute Book Profit and the Total Income of the Firm assuming all the Partners are working partners.

Illustration – 15

Sri Ram and Raghuram are working partners in a professional firm which satisfies all conditions of Sections 184 and 40(b) of Income Tax Act. They share profits and losses in the ratio of 4: 1. 5,85,000

Other Information:

Profit and Loss A/c of the firm for the year ending 31.3.2023

ParticularsParticulars
To General expenses68,500By Gross Profit5,85,000
To Interest on capitals of partners75,000 
To Donation to NDF25,000 
To Salary, Bonus and other remuneration to partners2,85,000 
To Depreciation30,000 
To Net profit1,02,000 
 5,85,000 5,85,000
  1. General expenses to the extent of ₹18,500 Is not deductible.
  2. Interest on capital to partners is in excess of₹ 15,000
  3. Depreciation allowable as per IT rules works out to ₹32,500

Compute the permissible amount of remuneration to partners.

Illustration- 16

The Profit & & Loss Account of a chartered account firm for the year ending 31st March 2023 is as follows:

Profit & Loss A/c for the year ended 31st March 2023

ParticularsParticulars
To Office Expenses75,000By Audit Fees65,000
To Depreciation35,000By Consultation Fee62,000
To Interest on capital of Partners8,000By Net Loss58,000
To Remuneration to Partners67,000 
 1,85,000 1,85,000

Additional Information:

  1. Out of expenses of₹ 80,000, ₹ 16,000is not deductible U/s 37(1) and 43 (b).
  2. Depreciation allowable Under Section 32 is ₹37,000.
  3. Interest to the extent of ₹800 is not deductible U/S 40 (b).

Compute book profits of the firm.

Illustration- 17

A and B are partners. The Profit and loss A/c for the year ended 31/03/2023 is as follows:

ParticularsParticulars
To Opening Stock80,000By Closing Stock1.70,000
To Salary to Staff60,000By Interest on Govt. Securities50,000
To Salaries By Rent from House Property50,000
A40,000 
B20,000 
To Provision for Bad debts17,500 
To Income Tax17,500 
To Net Profit35,000 
 2,70,000 2,70,000

Additional Information:

  1. Opening stock is undervalued by 20%
  2. Closing stock is undervalued by 10%
  3. Salary to staff includes salary of ₹ 20,000 of A’s son who is a B.Com Student. Who casually helps in the business and ₹ 4,000 general reserve.
  4. Interest on capital: A=₹30,000; B=₹20,000;

You are required to compute Book profit of the firm in the A.Y. 2023-24.

Illustration- 18

X, Y and Z are partners in a firm. The firm has incurred a net loss of ₹ 1,50,000. During the P.Y. 2022-23. The further information is as follows:

Interest on capital @ 20% :    X ₹8,000

Y ₹7,000

Z ₹9,000

Salary/Remuneration:             X ₹50,000

Y ₹35,000

Z ₹35,000

Bonus:                                     X ₹20,000

Y ₹15,000

Commission to Z ₹15,000

Donation to Prime minister drought relief fund ₹ 15,000

Depreciation on assets ₹ 40,000 (allowed ₹60,000)

Incometax₹15,000

Sales Tax ₹ 20,000

General Reserve ₹40,000

The profit and loss A/c include the following:

Export earning ₹ 30,000

Compute Books profit of Firm in the A. Y. 2023-24.

Illustration – 19

Profit and loss A/c of Sumit & Co. for the year ending 31.03.2023 is as follows:

Profit and Loss Account

ParticularsParticulars
To Cost of Goods Sold10,00,000By Sales15,00,000
To Remuneration to Partners1,49,000By Rent of house property60,000
To Interest to partners @ 12% p.a.40,000By Dividend1,70,000
To Municipal tax of House property25,000 
To other Expenses2,36,000 
To Net profit2,80,000 
 17,30,000 17,30,000

Other Information:

  1. Out of other expenses of₹ 18,400 is not deductible under36,37(1) and 43(b)
  2. On 15-01-2023, the firm pays on outstanding sales tax liability of 54,700 the previous year 2021-22. This amount pertains to previous year 2022-23. It has a not been debited to the aforesaid profit & Loss Account.

Calculate Book Profit from the above information for A. Y. 2023-24.

Illustration- 20

B are partners in a firm sharing profits and losses equally. The profit & loss A/c for the year ended 31.03.2023 is as under:

Profit and Loss Account

ParticularsParticulars
General Expenses5,00,000Gross profit18,00,000
Sales tax2,00,000Interest on Govt. Securities2,00,000
Salary to partners: Long term capital gain58,000
A2,20,000 
B2,20,000 
Interest on partners  
Capital @ 16% p.a.  
A2,16,000 
B1,92,000 
To Net Profit5,10,000 
 20,58,000 20,58,000

Compute Book Profit.

Illustration – 21

X, Y&Z are Partners in the firm XYZ & Co., sharing profit and loss in the ratio of 1:2:3 respectively.

The summarized profit and loss account for the year ended 31.3.2023 is given below:

Compute Book Profit of the Firm

ParticularsParticulars
Office salaries15,360Gross Profit1,20,000
Local Taxes (let out property)5,000 Rent received15,000
Salary to working partner X3,000Interest on Securities5,000
Commission to Partners: Discount received1,500
X 10,000  
Y 10,000  
Z 10,00030,000 
Collection charges of interest  
on Securities600 
Provision for bad debts1,500 
Net Profit82,040 
 1,41,500 1,41,500

Compute Book Profit of the Firm.

Illustration – 22

A, B & C are the Partners who share profits and losses in the ratio of 1:2:3. The Net profit is ₹1,60,000 after defatting the Partners following:

1. Salaries of ₹ 60,000 and ₹40,000 to A and B respectively.

2. Interest on capital calculated @ 20% of ₹27,000, ₹ 28,000 and₹21,000 to A, B and C respectively,

3. Bonus to A ₹ 36,000.

4. Commission of ₹ 30,000, ₹ 25,000 and ₹ 35,000 to A, Band C respectively.

Compute book profit of the firm in the A.Y. 2023-24.

Problems on Total Income and Tax Liability

Illustration – 23

P, Q & R are partners in a firm assessed as firm sharing profits & losses equally. The firm’s profit & loss account for the year ended 31st March 2023. Showed a net profit of ₹ 2,00,000 after debiting the following:

1. Salary of ₹10,000 paid to R.

2. Commission to Q ₹5,000

3. Donation to NDF ₹15,000

The amount of net profit includes ₹ 10,000 interest on Government Securities. All the partners are working partners.

Compute Firm’s business profits for the Assessment Year 2023-24.

Illustration – 24

A, B and C are the partners sharing profits and losses equally in a firm. During the year 2022-23 the firm incurs a net loss of₹6,00,000 after deducting the following:

  1. Commission to A₹ 40,000
  2. Bonus to B and C ₹80,000 each
  3. Salary to A, B and C ₹ 1,60,000 each
  4. Donation to PM’s National Relief Fund ₹80,000
  5. Income Tax₹40,000
  6. Sales Tax ₹ 1,00,000
  7. Office rent ₹1,00,000
  8. Depreciation on assets ₹4,00,000 (Allowable depreciation as per IT law is ₹ 4,80,000)
  9. Interest on Capital Calculated at 20%

A – ₹64,000

B – ₹56,000

C – ₹72,000

The profit and loss account also included the following incomes:

  1. Long term Capital gain ₹90,000
  2. Short term Capital gain ₹70,000
  3. Export earnings₹ 3,80,000

Compute the book profit of the firm for the A. Y. 2023-24

Illustration – 25

Sheela, Nirmala and Sharmila are partners in a Firm sharing profits & losses in the ratio of 2:2:1 respectively. The Profit & Loss Account for the year ended 31st March 2023 is as follows:

Profit & Loss A/c

ParticularsParticulars
To Rent of Factory1,56,000By Gross Profit b/d4,78,200
To Interest on Capital in excess of specified limit By Interest on non-Govt. Securities10,000
Sheela1,000  
Nirmala500  
Sharmila500  
To Salary to Nirmala72,000  
To Commission to Sharmila36,000  
To Net Profit2,22,200  
 4,88,200 4,88,200

Compute the Total Income of the Firm & Taxable Income of the three partners in the Firm. Nirmala and Sharmila are working partners.

Illustration – 26

 Priyanka and Shruthi are working partners in a professional firm sharing profit and loss equally. The Partnership deed has authorised the firm to pay interest to partners on their capitals at 20% p.a. The firm is considered as eligible firm as it satisfies all the requirements of Sections 184 and 40(b) of IT Act. From the following information calculate book profit, admissible remuneration to partners, total income and tax liability of the firm for the Assessment Year 2023-24.

Profit & Loss Account of the firm for the year ending 31.3.2023

ParticularsParticulars
To Other expenses1,25,500By Gross Profit8,15,500
To Interest on capitals: By Interest from customers10,000
Priyanka    40,000 By Interest on debentures (Gross)6,50,000
Shruthi    60,00040,000 
To Salary, Bonus and other remuneration to partners  
Priyanka    6,50,000  
Shruthi       3,50,00010,00,000 
To Net profit2,50,000 
 14,75,500 14,75,500

Other Information:

  1. The firm is eligible for 100% deduction U/S 80 IB as the firm is engaged in development of SEZ.
  2. Depreciation allowable as per IT rules works out to ₹ 35,500
  3. other expenses to the extent of₹ 62, 500 is not deductible.

Illustration – 28

Profit and loss account of ABC and Co. for the year ending 31st March 2023 is as follows (a firm of chartered accounts and satisfies all conditions of Section 184 and 40 (b):

ParticularsParticulars
Expenses5,76,000Receipts from clients for tax advice7,20,000
Depreciation4,64,000Audit fees5,44,000
Remuneration to partners5,50,000Net loss4,36,000
Interest on capital to partners1,10,000 
 17,00,000 17,00,000

Other information:

a) Out of expenses 1,14,500 is not deductible under Sections 36 and 37

b) Depreciation as per Section 32 is ₹ 6,46,200

c) Interest on capital to partners, not deductible under Section 40 (b) is ₹35,800.

Find out the amount of net income of the firm for the assessment year 2023-24.

Illustration – 29

Compute the total income of a firm for the Assessment Year 2023-24.

  1. Profit from garment industry₹5,50,000. a)
  2. Profit from small scale industrial undertaking established in backward state in March 2021 ₹50,000. (Industrial undertaking iseligiblefor100% deduction u/s80IB)
  3. Long term capital gain₹4,00,000.
  4. Short term capital loss ₹ 2,00,000
  5. Interest from Non-Government Securities (Gross) ₹ 50,000


Illustration -30

The following is the Profit and Loss account of X Co:

A firm of X, Y and Z which satisfies all conditions of Section 184 0 (b) for the year ending March 31, 2023 is as follows:

Sale tax of the previous year 2022-23, 1,461 in paid on 01-01-2023 and it is not recorded In the

books. Compute book profit.

ParticularsParticulars
Cost of goods sold23,95,000Sales (commission agency business)33,00,000
Remuneration to partners Rent of house property (half portion)25,000
X3,00,000Interest on debentures (non-trade investment)30,000
Y4,50,000 
Z27,500 
Income tax4,000 
Interest to partners @ 13.5%  
X20,000 
Y5,000 
Z30,000 
Municipal tax of house  
Property (entire property)2,500 
Other expenses80,750 
Donations paid in cash24,250 
Net profit16,000 
 33,55,000 33,55,000

Illustration – 31

Profit and Loss account of Vijayalakshmi Company (a partnership firm) for the year ending 31-3-2023 is as follows:

ParticularsParticulars
Cost of Goods Sold10,00,000Sales18,00,000
Remuneration to partners4,49,000Rent from House property60,000
Interest to partners at 18% p.a.60,000Dividend1,70,000
Municipal tax of house property25,000 
Other expenses2,36,000 
Net profit2,60,000 
 20,30,000 20,30,000

Other Information:

  1. Out of other expenses₹ 18,400 is not deductible U/S 36, 38(1) and 43B.
  2. On 15-1-2022 the firm pays an outstanding sales tax liability of ₹ 54,700 of the previous year 2018-19. As this amount pertain to the previous year 2022-23 it has not been debited to the aforesaid Profit and Loss Account.

Calculate Book-Profit, Business Income and Gross Total Income.

Illustration -32

Veena and Lakshmi are partners sharing profit and losses equally. The following is the Profit and Loss A/c for the year ending 31-03-2023.

ParticularsParticulars
Office expenses1,50,000Receipts from clients5,30,000
Salary to employees40,000Interest recovered from Veena and Lakshmi drawing2,500
Income tax20,000Interest from Govt. Securities2,85,000
Salary to Veena1,20,000STCG1,00,000
Salary to Lakshmi1,32,000 
Interest on capital Veena @ 15%7,500 
Interest on capital Lakshmi @ 15%10,000 
Net profit4,38,000 
 9,17,500 9,17,500

Additional Information:

  1. Out of office expenses ₹ 12,500 is not deductible by virtue of Section 30 to 37.
  2. During the year the firm sells a capital asset for ₹ 5,00,000 (indexed cost of acquisition being

₹ 1,00,000)

Find out the net income and tax liability of the firm for the A.Y. 2023-24.

Illustration- 33

The profit and loss account of the fashion and others in the year ending 31.3.2023 was as under:

ParticularsParticulars
To Purchases10,00,000By Sales20,30,000
To Interest to Partners By Long term capital gain5,00,000
A 30,000(20%) By Interest on debenture40,000
B 2,20,000 (24%) By Business income1,00,000
C 70,000 (20%)3,20,000  
To Direct expenses5,00,000  
To Depreciation1,80,000  
To Remuneration to partners   
A (working partner) 1,02,000   
B (sleeping partner) 60,000   
C (working partner) 72,0002,34,000  
To Sundry expenses98,000  
To Donation to prime minister National relief fund82,000  
To Net profit2,56,000  
 26,70,000 26,70,000

Additional details:

  1. Admissible depreciation according to IT provisions is 96,000.
    1. Carried forward business loss is ₹ 10,000 & long-term capital loss is ₹ 40,000.

Compute the tax payable by the firm for the A.Y. 2023-24.

Short Type Questions

  1. What is partnership deed?
  2. Define partnership
  3. How do you treat interest payable to partner’s capital during assessment of firms?
  4. Mention the conditions U/S40b.
  5. Who is a working partner?
  6. Mention any 2 differences between firm and LLP
  7. How AMT is calculated?
  8. Mention any disadvantages of limited liability partnership
  9. How AMT is calculated?
  10. Mention the advantages of Partnership firm.
  11. How do you treat the various losses of the firm?
  12. Mention any 4 deductions U/S 80 applicable a Partnership firm.

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