salary of partner

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vishwa (Querist)
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13 October 2009 hi we are two partners of a partnership firm in construction businees. for the year 2008-2009 we have made a profit of 15lacs. our deed prescribes a limit of 50,000/- per month salary. can we deduct Rs.10,00,000/- as salary for both the partners and deduct it in the profit while paying tax or else what would be the max amount of salary that we can deduct from profit. please let me know. asap

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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13 October 2009 Salary to partner's is governed by section 40 (b) of The Income tax Act,1961. However the payment should be in accordance with the provisions of the Instrument of Partnership. Therefore, the partnership deed should necessarily contain the following clauses viz,
1) minimum amount of remuneration,2) method of quantifying the remuneration and 3) pattern of sharing remuneration among partners.
Unless the book profit and the terms in the partnership is not known correct amount of remuneration cannot be worked out here.

CA Suresh Choudhary

CA Suresh Choudhary (Expert)
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13 October 2009 agree with expert

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vishwa

vishwa (Querist)
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13 October 2009 hello mr.chakrapani.thank you for the response.the information u asked
1. minimun salary not specified but maximium salary of rs.50,000/- each per month subject to limits laid in incometax act 1961.

2.we have not specified the method of quantifying the remuneration.

3.we are both working partners sharing ratio of profit and loss is 50:50.

i hope i have answered everything u have asked. vishwa

vishwa

vishwa (Querist)
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chetan soni

chetan soni (Expert)
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15 October 2009 Agreed with Mr. Chakrapani, but at the same time the deduction should be as per sec 40(b) of income tax act. You may dr. the salary in the profit & loss account as per the provisions of partnership deed but the deduction will be as per the provision of income tax act.

In your case if you wish to dr. Rs. 10L to profit & loss account as partners salary, then while computation of business income of the firm the excess of salary over sec 40(b) will be disallowed. Now deduction as per sec 40(b) will be 90% of first 75K of profit + 60% of next 75K of the profit + 40% of balance profit. This comes to Rs. 652500/-. Then amount of Rs. 347500 will be disallowed in the computation of the firm and firm will pay taxes on this amount. Also this amount will be taxable in the hands of the partners.

So as a advice provide the salary in the books of the firms as per the sec 40(b) limits.

CA SANJAY MUKHERJEE

CA SANJAY MUKHERJEE (Expert)
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15 October 2009 Hi Chetan,

I have confusion about only last but on line in your comment.

How the disallowed remuneration will be taxable in the hands of the partners. I may be wrong in interpretation of this line.
Please help.

Thanks Sanjay

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chetan soni

chetan soni (Expert)
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16 October 2009 Sanjay,

You are right, when the partners salary is diallowed in the hands of firms then the same will not be taxable in the hands of the partners. I forgot to make the sink of sec 184 & 40(b).

Thanks for making such correction. Good catch Sanjay.

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