ASSESSMENT OF PARTNERSHIP FIRMS
1. Hitalji Deshpande is a firm of solicitors sharing profit/loss in equal ratio. Its profits and loss account
for the year, 2007-2008 discloses a profit of Rs 5,00,000. Business expenses allowable as per
income-tax law amount Rs 2,00,000 but not charged to profit and loss account. Remuneration paid to
working partners as per partnership deed and debited to profit and loss account, Rs 6,00,000.
Compute the amount of remuneration payable to partners and taxable profit of the firm.
Computation of Book-profits and Taxable Profits for AY 2008-2009
Particulars Rs.
Net profit as per Profit & Loss Account
Less: Expenses deductible but not charged to profit/loss account
Add: Remuneration to working partners to be treated separately
Book-profit
Less: Remuneration to working partners
Taxable Business Profits
(a) Actual remuneration : Rs 6,00,000, or
(b) Statutory limit: Rs 4,30,000 (see Note below)
Whichever is less, is deductible
Taxable business profits
Note: for professional firm,
First 1,00,000 of book-profits 90% =
Next 1,00,000 of book-profits 60% =
Balance 7,00,000 of book-profits 40% =
5,00,000
2,00,000
3,00,000
6,00,000
9,00,000
(-) 4,30,000
4,70,000
90,000
60,000
2,80,000
4,30,000
2. XYZ is a partnership firm, sharing profit/loss in the ratio 3:3:2. Its profit and loss for the previous
year 2007-2008 is given below:
Particulars Rs Particulars Rs
Business expenses
Remuneration to partners
Interest on capitals
8,00,000
3,00,000
1,00,000
Gross profits Net
Net Loss
8,00,000
4,00,000
12,00,000
12,00,000
Business expenses include payments which are not deductible under Sec. 36 and 37(1): Rs 1,00,000.
Compute the remuneration payable to partners on the assumption that X and Z are working partners
and Y is a sleeping partner. Remuneration is payable equally. Partnership deed provides for interest
payment @ 10% p.a.
Compute the amount of remuneration payable to partners and taxable profits of the firm.
Computation of Book-profits and Taxable profits of the firm for AY 2008-2009
Particulars Rs Rs
Net loss as per profit/loss account
Add: 1. Expenses not deductible
2. Remuneration to Y(disallowed, being a sleeping partner)
3. Remuneration to X and Z to be treated separately
Book-profit
Less: Payment of remuneration to working partners
(a) Actual remuneration: Rs 2,00,000 or
(b) Statutory limit: Rs 50,000
whichever is less, is deductible.
Business loss
1,00,000
1,00,000
2,00,000
(-) 4,00,000
+ 4,00,000
NIL
(-) 50,000
(-) 50,000
Note: Interest is allowed if the rate of interest does not exceed 12% p.a. and it is authorised by
partnership deed.
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3. M/s LKJ, a partnership firm discloses its profit at Rs 4,00,000 for the previous year, 2007-2008. The
profit has been arrived at by debiting payments of Rs 2,00,000 which are not allowed under income
tax law. Details of remuneration paid to partners, and allowable as per partnership deed are:
Particulars Remuneration paid to partners Remuneration allowable
as per partnership deed
Rs Rs
(i) Commission paid to L (sleeping partner)
(ii) Salary paid to K (working partner)
(iii) Bonus paid to J (working partner)
50,000
1,50,000
2,00,000
50,000
1,00,000
1,50,000
Profit ratio of the partners is 2:2:1
Compute the amount of remuneration deductible and taxable profits.
Computation of Book-profits and Taxable profits for AY 2008-2009
Particulars Rs Rs
Business profit
Add: Inadmissible items:
i) Expenses not deductible
ii)Commission to sleeping partner not be allowed
iii)Remuneration not in accordance with partnership deed
(a) Salary to K
(b) Bonus to J
(iv) Remuneration to working partners as per partnership deed to be
treated separately
Book-profits
Less: Remuneration allowable to working partners:
(a) Actual remuneration as per partnership deed:
Salary to K + bonus to J =
(b) Statutory limit: (see Note below)
Whichever is less, is deductible
Business profit
Note:
(1) Statutory limit:
First 75,000 of book-profit 90% =
Next 75,000 of book-profit 60% =
Balance 8,50,000 of book-profit 40% =
(2) Commission to N, a non-working partner cannot be allowed even if it is
authorised by partnership deed.
2,00,000
50,000
50,000
50,000
250,000
6,00,000
2,50,000
4,52,500
4,00,000
6,00,000
10,00,000
(-) 2,50,000
7,50,000
67,500
45,000
3,40,000
4,52,500
4. K, B and C are partners in a firm. They share profits in the ratio 2:2:1.
Profit & Loss A/c of the firm for the year ended 2007-2008
Particulars Rs Particulars Rs
Establishment expenses 5,00,000 Gross profit 22,00,000
Depreciation 3,00,000 Income from other sources:
Remuneration to partners 7,00,000 Interest on securities (gross) 50,000
Interest to partners @16% 2,00,000
Income tax 1,50,000
Sundry expenses 50,000
Net profit 3,50,000
22,50,000 22,50,000
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You are further informed that:
(i) Remuneration allowable as per partnership deed is given as below:
(a) K :Rs 2,00,000 (b) B: Rs 1,50,000 (c) C: Rs 1,50,000
(ii) Carried forward losses and allowance are given as below:
Particulars Assessment year Rs
Depreciation
Business loss
2004-2005
2005-2006
5,00,000
8,00,000
Compute the admissible amount of remuneration and the total income. Would you change your
answer in the following cases:
(i) there is no carried forward business loss;
(ii) there is no carry forward depreciation;
(iii) there is carried forward business loss of Rs 14,00,000 instead of Rs 8,00,000.
Computation of amount of remuneration payable to partners and total income of the partnership firm
Particulars Case I
Rs
Case II
Rs
Case III
Rs
Case IV
Rs
Net profit
Add: (i) Income tax
(ii) Interest to partners 2,00,000 x 4 % / 16 %
(iii) Remuneration in excess of partnership deed
(iv) Remuneration to working partners to be
treated separately
3,50,000
1,50,000
50,000
2,00,000
5,00,000
3,50,000
1,50,000
50,000
2,00,000
5,00,000
3,50,000
1,50,000
50,000
2,00,000
5,00,000
3,50,000
1,50,000
50,000
2,00,000
5,00,000
Less : Interest on securities
12,50,000
50,000
12,50,000
50,000
12,50,000
50,000
12,50,000
50,000
Book profits before adjusting carried forward depreciation
Less : Unabsorbed depreciation :
However, carried forward business loss, first should be
reduced notionally [Sec. 32(2) r.w.Sec (2)]
12,00,000
(-) 4,00,000
12,00,000
(-)5,00,000
12,00,000
Nil
12,00,000
Nil
Book-profit
8,00,000 7,00,000 12,00,000 12,00,000
Remuneration allowable to partners (see Note below)
Computation of Total Income
3,72,500 3,32,500 5,00,000 5,00,000
Book-profit before carried forward depreciation 12,00,000 12,00,000 12,00,000 12,00,000
Less: Remuneration to partners (-) 3,72,500 (-) 3,32,500 (-) 5,00,000 (-) 5,00,000
Business profit
8,27,500 8,67,500 7,00,000 7,00,000
Add: Interest on securities 50,000 50,000 50,000 50,000
Aggregate income 8,77,500 9,17,500 7,50,000 7,50,000
Less: 1. Carried forward business loss (-) 8,00,000 Nil (-) 7,00,000 (-) 7,00,000
2. Carried forward depreciation (-) 77,500 (-) 5,00,000 Nil (-) 50,000
Total income Nil 4,17,500 50,000 Nil
Note: Remuneration allowable
(i) Remuneration as per partnership deed 5,00,000 5,00,000 5,00,000 5,00,000
(ii) Statutory limit: Computed with reference to bookprofits
at prescribed rates
3,72,500 3,32,500 5,32,500 5,32,500
Whichever is less, is allowed 3,72,500 3,32,500 5,00,000 5,00,000
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5. ABC & Associates,Profit and loss account for the year ended 31.3.2008
Particulars Rs Particulars Rs
Purchases 15,45,000 Sales 40,00,000
Direct and indirect expenses 8,00,000 Interest on securities (tax deducted at
source
Depreciation 2,00,000 Rs 5,000) 45,000
Interest to partners 2,00,000
Salaries to partners 6,60,000
Net profit 6,40,000
40,45,000 40,45,000
You are further informed:
(i) Depreciation allowable as per Sec. 32 is Rs 1,50,000.
(ii) Purchases include cash purchase of Rs 1,50,000
(iii) A, B, C, share profits in the ratio of 2:1:1. C is a sleeping partner,
(iv) Interest is paid to partners @ 20% p.a. Interest is authorised by partnership deed.
(v) Salaries, authorised by partnership deed, are paid to all the partners equally.
Compute (i) book-profit and (ii) total income of the firm in the following cases:
(I) It is a professional firm.(II) It is business firm.
(Ill) It does not file the return of its income, leading to best judgement assessment.
Computation of Book-profits and Total Income for the PY 2007-2008/AY 2008-2009
Particulars Case I
(Rs)
Case II
(Rs)
Case lll
(Rs)
Net profit 6,40,000 6,40,000 6,40,000
Add: Inadmissible items:
(i) Cash purchases- of Rs. 1,50,000 [Sec. 40A(3)] 1,50,000 1,50,000 1,50,000
(ii) Interest paid to partners 80,000 80,000 2,00,000
(iii) Salary paid to C - sleeping partner (disallowed) 2,20,000 2,20,000 2,20,000
(iv) Salary paid to A&B- working partners(to be treated separately) 4,40,000 4,40,000 4,40,000
(v) Depreciation 50,000 50,000 50,000
15,80,000 15,80,000 17,00,000
Less: Income not related to business or profession: Interest on
securities
(-) 45,000 (-) 45,000 (-) 45,000
Book-profit 15,35,000 15,35,000 16,55,000
Less: Remuneration allowable to working partners [Note 1] (-) 4,40,000 (-) 4,40,00 Nil
Income from business or profession 10,95,000 10,95,000 16,55,000
Add: Income from other sources— interest on securities 50,000 50,000 50,000
Taxable income 11,45,000 11,45,000 17,05,000
Note 1:
Professional firms
Remuneration allowable to working partners
Business firms
Remuneration allowable to working partners
Particulars Rs. Particulars Rs.
(a) Actual remuneration
(b) Statutory limit:
First 1,00,000 90%
Next 1,00,000 60%
Balance13,15,000 40%
Whichever is lower is allowed
4,40,000
90,000
60,000
5,34,000
6,84,000
4,40,000
(a)Actual remuneration
(b)Statutory limit:
First 75,000 90%
Next 75,000 60%
Balance 13,85,000 40%
Whichever is lower is allowed
4,40,000
67,500
45,000
5,54,000
6,66,500
4,40,000
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Note 2: In case III, no deduction has been allowed in respect of interest and remuneration paid to
partners because the firm is assessed by way of best judgement assessment.
Note 3: In cases I & II, interest is allowed @ 12% p.a. Excess interest @ 8% p.a. has been
disallowed.
6. M/s JP & Co. discloses net profit of Rs.1,70,000 for the PY 2007-2008 after debiting and crediting
the following:
Particulars Rs.
(a) Debits:
(i) Installation of computers in September 2007
(ii) Advance tax
(iii) Interest to partners—J&P @ 16% p.a., duly authorised by partnership deed
(iv) Business expenses
(v) Commission to J, authorised by partnership deed
(vi) Salary to P, authorised by partnership deed
(vii) Donation to National Defence Fund
(b) Credits:
(i) Dividend received from Indian companies
(ii) Refund of sales tax allowed as deduction
1,00,000
25,000
1,60,000
5,00,000
1,00,000
1,00,000
50,000
75,000
60,000
Compute (i) book-profits and total income of the firm in the following cases: (I) M/s JP & Co. is a
business firm. (II) M/s JP & Co. is a professional firm.
Computation of book-profits and total income of M/s JP & Co. AY 2008-2009
Particulars
Case I
(Rs)
Case II
(Rs)
Net profit 1,70,000 1,70,000
Add: Inadmissible items:
(i) Purchase of computers 1,00,000 1,00,000
(ii) Advance tax 25,000 25,000
(iii) Interest to partners in excess of 12% 40,000 40,000
(iv) Commission and Salary to J and P to be treated separately 2,00,000 2,00,000
(v) Donation to National Defence Fund 50,000 50,000
5,85,000 5,85,000
Less: Dividend from Indian companies (-) 75,000 (-) 75,000
5,10,000 5,10,000
Less: Depreciation on computers not included in debits:
60% of Rs 1,00,000 (-) 60,000 (-) 60,000
Book-profits 4,50,000 4,50,000
Less: Remuneration to J&P [see Note below] (-) 2,00,000 (-) 2,00,000
Taxable business income 2,50,000 2,50,000
Add: Income from other sources: dividends from Indian companies: Exempt — —
Gross total income 2,50,000 2,50,000
Less: Deductions from GTI
Donation to National Defence Fund @ 100% of Rs 50,000 (-) 50,000 (-) 50,000
Total income 2,00,000 2,00,000
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Note :1
Remuneration to partners : Business firms Remuneration allowable to partners : Professional firms
(a) Actual remuneration 2,00,000 or
(b) Statutory limit based on book-profit:
First 75,000 90% 67,500
Next 75,000 60% 45,000
Balance 3,00,000 40% 120,000
232,500
Whichever is less is allowed 2,00,000
Actual remuneration 2,00,000 or
Statutory limit based on book-profit:
First 1,00,000 90% 90,000
Next 1,00,000 60% 60,000
Balance 2,50,000 40% 1,00,000
2,50,500
Whichever is less is allowed 2,00,000
7. J, K & P are partners in a firm sharing profit and losses in the ratio of 2:1:1.
'K' retires w.e.f. 31 October 2007. The firm income for the PY 2007-2008, before setting-off carried
forward losses and allowances, includes the following:
Rs
(i) Business profits 8,00,000
(ii) Long-term capital gains accruing from land on 1 January 2008 4,00,000
(iii) Income from other sources 1,00,000
Carried forward losses and allowances are given as below:
(i) Business loss C.F. from the AY 2006-2007 5,00,000
(ii) Short-term capital loss C.F. from the AY 2007-2008 2,00,000
(iii) Depreciation C.F. from the AY 2005-2006 1,75,000
Compute the total income and tax liability of the firm for the AY 2008-2009
Computation of remuneration allowable to partners and total income of the firm for the AY 2007-2008
Income form Business 8,00,000
Long term Capital gain 4,00,000
Income from other Sources 1,00,000
Aggregate Income 13,00,000
Less: Carried forward Losses / allowances :
i) Business los to be set-off against business profits 5,00,000
ii) Short term capital loss to be set off against long term capital gains 2,00,000
iii) Depreciation to be set of against business profits 1,75,000
Total Income 4,25,000
Computation of Tax Liability
LTCG @ 20% on 2,00,000 (4,00,000 – 2,00,000) 40,000
Other Income @ 30% on 2,25,000 67,500
1,07,500
(+) Surcharge @ 10% 10,750
1,18,250
(+) Education Cess @ 2% 2,365
(+) SHEC @ 1% 1,183
1,21,798
Tax payable Rounded off u/s 288 B 1,21,800
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