How to distribute profit

This query is : Open

Querist : Anonymous

Querist : Anonymous (Querist)

18 August 2013 Dear sir,
i am doing a govt contract and the work order is under my personal name. Now, although the work order is under my name, we are 3 persons executing the work. Now the profit also has to be shared between all four of us. So how do I distribute the profit. Say our work order amount is Rs. 8 lac, expense Rs. 4 lac. So gross profit out of the work is Rs. 4 lac. I already come under 30 % tax bracket.
My questions are
1. Now how do I distribute remaining 4 lac between four of us.
2. Do I need to take out my 30 percent tax amount before distribution. Or what will be the exact distributed amount amongst 4 of us.
3. Do I need to consider the distributed Rs. 3 lac ( given to other three guys) under expenses.

CA Mukesh Jain S

CA Mukesh Jain S (Expert)
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18 August 2013 The third option seems to be better. You have taken the contract in your name, hence you will be liable to all the taxes. Hence you can show the share of other guys as consultancy charges or sub contracting fee. The same will be allowable as expense. However on your share you will be liable to pay 30% tax.

Querist : Anonymous

Querist : Anonymous (Querist)

25 August 2013 Thanks Mukesh ji for your valued reply. Your suggestion to show it as consultancy charge is quite impressive. I'll go for the same. But do I need to deduct any TDS from them.
Thanks n Regards

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CA Mukesh Jain S

CA Mukesh Jain S (Expert)
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26 August 2013 Yes TDS needs to be deducted u/s 194C of the IT Act.

CA PARTH SHAH

CA PARTH SHAH (Expert)
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10 May 2015 Even I feel that 3rd option is better. However TDS is to be deducted only if your proprietorship is liable under tax audit u/s 44AB during the previous year.

However another option is that you create a partnership or LLP and take the govt contracts under partnership firm. Int that case firm can distribute remuneration to the partners and also interest on capital the partners. You can keep lower % share in and remuneration keep your profit share higher. By doing so you can reduce your individual tax liability lower as profit share form the parntership is exempt u/s 10(2A) in the hands of the partner while the remuneration is taxable in the hands of the partner.