Understanding Section 40B of Income Tax Act AY 2018-19
Section 40B of the Income Tax Act deals with the deduction of remuneration to a working partner of a firm. It applies to all firms, whether they are registered or not under the Indian Partnership Act. In this blog, we will discuss the various aspects of section 40B of the Income Tax Act AY 2018-19.
What is Section 40B of the Income Tax Act?
Section 40B of the Income Tax Act specifies the maximum amount of remuneration that can be paid to a working partner of a firm. The section provides that any payment made to a working partner of a firm shall be allowed as a deduction if it is within the prescribed limits.
Maximum Deduction Limit under Section 40B
The maximum deduction limit for remuneration paid to a working partner of a firm is determined by the following factors:
Profit of the firm: The deduction limit is based on the profits earned by the firm during the financial year in which the remuneration is paid.
Remuneration of partners: The maximum deduction limit is also dependent on the remuneration paid to other partners of the firm.
Eligibility: Only a working partner is eligible to receive remuneration, and not a sleeping partner.
Calculation of Maximum Deduction Limit
The maximum deduction limit for remuneration paid to a working partner of a firm is calculated as follows:
A. The total remuneration payable to all partners of the firm, including the working partner, shall not exceed the following limits:
On the first Rs. 3,00,000 of book-profit or in case of loss – Rs. 1,50,000, whichever is higher – 90% of book-profit
On the balance of the book-profit – 60% of the balance of book-profit
B. The maximum amount of remuneration that can be paid to a working partner is calculated as follows:
If the book-profit of the firm is not more than Rs. 3,00,000 or the firm has incurred a loss, the maximum remuneration that can be paid to the working partner is Rs. 1,50,000.
If the book-profit of the firm is more than Rs. 3,00,000, the maximum remuneration that can be paid to the working partner is the higher of the following two amounts:
i. The amount calculated as per the above formula A.
ii. The amount of remuneration paid to other partners of the firm.
Consequences of Non-Compliance with Section 40B
If a firm does not comply with the provisions of Section 40B, the remuneration paid to the working partner in excess of the prescribed limits will not be allowed as a deduction while computing the income of the firm. The excess amount will be disallowed, and tax will be levied on it as if it were part of the firm’s income.
Who is considered a working partner?
A working partner is a partner who is actively involved in the management and operations of the firm. They are responsible for carrying out the day-to-day activities of the firm and are typically involved in decision-making processes. A working partner is entitled to receive remuneration for their services, and this remuneration is subject to the limits set out in Section 40B.
What is book-profit?
Book-profit is the profit earned by the firm as per the profit and loss account prepared in accordance with the provisions of the Income Tax Act. It is calculated by deducting all expenses, including depreciation and other allowances, from the gross receipts of the firm.
What happens if the firm has only one working partner?
If the firm has only one working partner, the maximum remuneration that can be paid to them is 90% of the book-profit or Rs. 1,50,000, whichever is higher, in case of loss, as per the formula given in Section 40B.
Can remuneration be paid to a sleeping partner?
No, remuneration cannot be paid to a sleeping partner. A sleeping partner is a partner who does not actively participate in the management and operations of the firm. They do not contribute to the day-to-day activities of the firm and are not entitled to receive remuneration.
What is the penalty for non-compliance with Section 40B?
If a firm fails to comply with the provisions of Section 40B, the excess remuneration paid to the working partner will be disallowed while computing the income of the firm, and tax will be levied on it as if it were part of the firm’s income. In addition, the firm may also be subject to penalties and fines as per the provisions of the Income Tax Act.
How is the remuneration paid to a working partner taxed?
The remuneration paid to a working partner is taxed as per the applicable tax slab rates. The working partner is required to report the remuneration received in their individual income tax return and pay tax on it accordingly. The firm is also required to deduct TDS (tax deducted at source) on the remuneration paid to the working partner, as per the applicable rates.
Can the maximum deduction limit be increased?
Yes, the maximum deduction limit specified in Section 40B can be increased if the firm meets certain conditions. If the firm can prove that the payment of higher remuneration is justified based on commercial expediency and in the interest of the firm, the limit can be increased. However, the burden of proving the commercial expediency rests with the firm.
What is the treatment of remuneration paid to a deceased working partner?
If a working partner dies during the financial year, the remuneration paid to them until the date of their death is allowed as a deduction to the firm. However, any remuneration paid to the legal heirs or representatives of the deceased partner after their death is not allowed as a deduction under Section 40B.
Can a partner receive both salary and share of profit?
Yes, a working partner can receive both salary and share of profit from the firm. The salary is paid for their services to the firm, while the share of profit is paid based on their ownership in the firm. However, the total remuneration paid to the partner, including salary and share of profit, must not exceed the maximum deduction limit specified in Section 40B.
Conclusion
Section 40B of the Income Tax Act is an important provision that governs the payment of remuneration to a working partner of a firm. It specifies the maximum amount of remuneration that can be paid to a working partner and the conditions that must be met for such a payment to be allowed as a deduction. Firms must ensure that they comply with the provisions of this section to avoid any adverse consequences.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
- What is Section 40B of the Income Tax Act?
Section 40B of the Income Tax Act specifies the maximum limit for the deduction of remuneration paid to working partners of firms.
2. Who is considered a working partner under Section 40B?
A working partner is a partner who is actively involved in the management and operations of the firm and is entitled to receive remuneration for their services.
3. What is the maximum remuneration limit for a working partner?
The maximum remuneration that can be paid to a working partner is 90% of the book-profit or Rs. 1,50,000, whichever is higher, in case of loss, as per the formula given in Section 40B.
4. Can a sleeping partner receive remuneration?
No, remuneration cannot be paid to a sleeping partner. A sleeping partner is a partner who does not actively participate in the management and operations of the firm.
5. How is the remuneration paid to a working partner taxed?
The remuneration paid to a working partner is taxed as per the applicable tax slab rates. The working partner is required to report the remuneration received in their individual income tax return and pay tax on it accordingly.
6. Can the maximum deduction limit be increased?
Yes, the maximum deduction limit specified in Section 40B can be increased if the firm can prove that the payment of higher remuneration is justified based on commercial expediency and in the interest of the firm.
7. What is the treatment of remuneration paid to a deceased working partner?
If a working partner dies during the financial year, the remuneration paid to them until the date of their death is allowed as a deduction to the firm. However, any remuneration paid to the legal heirs or representatives of the deceased partner after their death is not allowed as a deduction under Section 40B.
8. Can a partner receive both salary and share of profit?
Yes, a working partner can receive both salary and share of profit from the firm, provided that the total remuneration paid to the partner, including salary and share of profit, does not exceed the maximum deduction limit specified in Section 40B.
9. What happens if a firm fails to comply with Section 40B?
If a firm fails to comply with the provisions of Section 40B, the excess remuneration paid to the working partner will be disallowed while computing the income of the firm, and tax will be levied on it as if it were part of the firm’s income.
10. Is there any penalty for non-compliance with Section 40B?
Yes, the firm may be subject to penalties and fines as per the provisions of the Income Tax Act if it fails to comply with the provisions of Section 40B.
