Is deduction of partner remuneration and interest paid to partners, is not deductible from AY2016-17

Share
Share This Thread
  1. H Shrinath Bhat

    H Shrinath Bhat New Member

    Under section 44AD, it reads like this.

    18[Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.]

    And for 18, it is explained that, this is omitted with effect from 1-4-2017. What it means ?.

    Is it mean that, after we calculate the profit of 8% on the total turn over, from that amount, we cannot deduct the interest paid and Partners remuneration to arrive taxable income ?.
     
  2. ZED

    ZED Well-Known Member

    Yes, the deduction shall not be allowed from the 8% profit.


    It is also proposed that the expenditure in the nature of salary, remuneration, interest etc. paid to the partner as per clause (b) of section 40 shall not be deductible while computing the income under section 44AD as the said section 40 does not mandate for allowance of any expenditure but puts restriction on deduction of amounts , otherwise allowable under section 30 to 38.
     
  3. H Shrinath Bhat

    H Shrinath Bhat New Member


    Section 44AD clearly mentions what deductions are not allowed, and in that list, nothing said about 40(b).

    If 40(b) does not mandate but only mentions the limits for the firm, in which section there is a mandate to consider 40(b) for partner remuneration deduction, in case the audit is done under 44AB ?
     
  4. ZED

    ZED Well-Known Member

    Its not that S.40(b) has become obsolete.

    S.40(b) restricts the deduction for salary etc.

    Extracts from the memorandum explaining the provisions of F.A 16
    It is also proposed that the expenditure in the nature of salary, remuneration, interest etc. paid to the partner as per clause (b) of section 40 shall not be deductible while computing the income under section 44AD as the said section 40 does not mandate for allowance of any expenditure but puts restriction on deduction of amounts , otherwise allowable under section 30 to 38



    Deduction u/s 30 to 38 has been deemed to be allowed and the above expense are covered under the aforementioned sections. Therefore it can be deemed that salary etc has already been deemed to be allowed and that 8% income is derived after considering all expenses and deduction which are covered u/s 30-38 (both inclusive)

    Now, its not that deduction is not allowed for items covered u/s 30-38, its that deduction is deemed to be allowed.
    Once we have allowed the expense then the provision of S.40(b) can come into picture. Since now, its S.40(b) which has the power to restrict the deduction which has been allowed.


    This is my personal view and I have tried to emulate what an AO would think.
    I would like to hear your views aswell.
     
  5. ZED

    ZED Well-Known Member

    @H Shrinath Bhat , I read your views in the other thread. Kindly copy paste the relevant points from that post to this post so that discussion can be carried out at one place.
     
  6. H Shrinath Bhat

    H Shrinath Bhat New Member

    Let us consider that deduction 40(b) is not available to a firm which is filing returns under 44AD. Sure this will lead to many, not opting for this. Let us consider new situation, where, partnership deed is altered and Remuneration and Interest payable to partner is made nil. In this case ,firm makes payment to the partner as a remuneration, even though partnership deed does not allow this. Now this income at the hands of partner becomes purely business income. Can the partner file his returns considering this income under 44AD ?.
     
  7. ZED

    ZED Well-Known Member

    But 40(b) is not in respect of a deduction, it restrict deduction claimed u/s 30-38.

    S.44AD is available to an assessee carrying an eligible business.
    Now, tell me who is carrying a business, the firm or the partner?
     
  8. H Shrinath Bhat

    H Shrinath Bhat New Member


    While I agree with you as a concept, but please refer to the section 28, extracts given below.

    Profits and gains of business or profession.

    28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",—
    .
    .
    .
    (v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm :

    Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted ;

    It clearly says, the remuneration received, which is not allowed under 40(b) has to be considered as income from business of profession.
     
  9. ZED

    ZED Well-Known Member

    Yup, I agree with you on that. But to claim S.44AD , assessee should also be engaged in a business. In this case partner in not carrying the business, its the firm. Firm and partner are different identity in the eye of law. They both have different PAN.



    44AD.(1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession".
     
  10. H Shrinath Bhat

    H Shrinath Bhat New Member

    There is explanation in 44AD for eligible business. If we go by that, and consider section 28 (v), it becomes clear that, money received by the partner from the firm should be considered as business income only.

    In case of a company, the director of the company and the company are two different entities. If profit of the company is drawn by the director, it is taxable in the hand of the director. Because, here Company is doing the business and not the director. Companies liability is not directors liability. In case of Partnership company, the income earned by the firm is not taxable in the hand of Partner. Reason is for any liability of the Partnership company, the partners are directly and personally responsible. Hence you cannot differentiate between the partner and the firm.

    Please see below extract from Partnership act where the definitions are provided.

    Section4

    DEFINITION OF "PARTNERSHIP", "PARTNER", "FIRM" AND "FIRM-NAME".
    "Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

    Persons who have entered into partnership with one another are called individually, "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm-name".

    So, partners are carrying the business in the name of Firm.
     
Draft saved Draft deleted
Loading...
Similar Threads Forum Date
Deductions U/s.57 Income Tax Aug 26, 2018
standard deduction 40000/- Income Tax Aug 20, 2018
tax deduction for LIC Deposit, Self occupied house Property tax Income Tax Apr 10, 2018
Query Regarding Standard Deduction Income Tax Apr 10, 2018
income tax deduction (TDS) on payment of new home Income Tax Mar 9, 2018