Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether Remuneration To Partners On “Book Profit” To Be Worked Out At The Year End?

QUERY: In a partnership firm, the remuneration to the partners are calculated and paid as per Sec. 40(b)(v) and according to the slabs prescribed in the Income Tax Act, 1961, which is authorized by, and in accordance with, the terms of partnership deed and relates to the period falling after the date of such partnership deed.

Now a Finance Bill is passed on 27-7-2009 in which an amendment is carried out in Sec. 40(b)(v) in respect of remuneration of partners and is made applicable for entire Financial Year 2009-10 i.e. from 1-4-2009 onwards.

Since Finance Bill was passed on 27-7-2009, the amendment to remuneration clause can be carried out in supplementary partnership deed only after 27-7-2009.

Now in the circumstances, whether such amendment to partnership deed can be applicable to remuneration for the entire Financial Year 2009-10 so for the new limits or whether the amendment can only be prospective from the date of amendment in Partnership Deed?
ANSWER: The payment of remuneration within the prescribed limits to working partners is allowable. Such remuneration is allowable on the basis of ‘book profit’ as defined in Explanation 3 to section 40(b) of the Act.

As per the said explanation, ‘book profit’ means the net profit, as shown in, the profit and loss account for the relevant previous year.

So the firm after preparing profit and loss account for the financial year 2009-10, has to work out ‘book profit’ and pay remuneration to working partners not exceeding the new limit prescribed under section 40(b) of the Act, on the basis of supplementary deed.

Posted in Income-tax

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Credit: Several of the queries and answers are reproduced with permission from the AIFTP Journal. We thank AIFTP for generously allowing us to host their research material.
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