Salary to partners

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

05 August 2012 Dear experts,
There is a partnership firm having 3 partners and in partnership deed all are working partners.Respective details of firm are as -
1. firm was formed on 25/04/2011 for the business of civil construction.
2. one partner has been retired on 07/08/2011, just after 4 months of formation.
3. firm has received in FY 2011-12, the civil contracts of Rs. 22 lacs and going to opt sec. 44AD, hence net profit say to Rs. 176000/-

Now I have following queries -
A. whether the firm can distribute whole net profit Rs. 176000/- as salary to partners. As 90% of profit upto 3 lacs is allowed as salary and said clause was already inserted in partnership deed.
B. whether the retired partner is eligible for salary of 4 months and what should be amount salary for 4 months.
C. whether, if 2 partners are agreed to not to take any salary, then whole salary can be transfered to capital a/c of 3rd partner.
Please advise me.

Naresh Kansala

Naresh Kansala (Expert)
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06 August 2012 1. u can pay salary upto 90% of book profit... say if book profit is 176000 u can pay 158400.
2. yes retired partner was entitled for 4 months salary.

Take care if salary paid to partners is unreasonable n not as per the legitimate need of business AO can evoke sec 40A(2) n disallow excess salary paid...

3. if both the partners ready to forfeit their right to receive salary even then salary is taxable in the hands of respective partner... n the third partner who transfer it in his capital a/c too assessed for same amount under head income from other source if total sum received is more then 50000/-

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Querist : Anonymous

Querist : Anonymous (Querist)

06 August 2012 In case of partnership firms, whether the working partner can not receive the salary above Rs. 50000/-?

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Naresh Kansala

Naresh Kansala (Expert)
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06 August 2012 dear it depends upon the work the person performing n not the nature of person (i.e partner or other employee)

Querist : Anonymous

Querist : Anonymous (Querist)

06 August 2012 In my case, if I credits the whole 158400/- as salary to the capital a/c of only one partner, whether it would be allowed by departmet?

Naresh Kansala

Naresh Kansala (Expert)
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06 August 2012 no, its not allowed by AO because u all are working partners and salary must be paid to working partner as per partnership deed. but you can pay different amount of salary to different partner as per there work.

Querist : Anonymous

Querist : Anonymous (Querist)

06 August 2012 Sir, please advise me how to calculate 4 months salary out of the amount of 158400/-?

Naresh Kansala

Naresh Kansala (Expert)
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06 August 2012 check your partnership deed as per IT Act to claim deduction it is mandatory to mention the amount of salary to be paid to working partner or the way to calculate the salary if any of these clause is not present in your deed u can't claim the deduction for salary paid to working partner.

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Querist : Anonymous

Querist : Anonymous (Querist)

06 August 2012 clause in partnership deed is as -
on the first 3 lacs - 150000/- or 90% whichever is more
Above 3 lacs - 60%
and salary so calculated shall be distributed in profit & loss ratios.
There ratios are
1st- 60% and remain whole year
2nd- 20% and remain whole year
3rd- 20% and remain only 4 months
now please tell me how to distribute said salary among the partners.

Querist : Anonymous

Querist : Anonymous (Querist)

06 August 2012 please reply soon

Naresh Kansala

Naresh Kansala (Expert)
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06 August 2012 actual we have to read the full partnership deed. so is good if u go to your Tax consultant Or to any CA in your locality.