Computation of

Total Income and UNIT 17 ASSESSMENT OF FIRMS

Tax Liability

PART – A
(GENERAL BACKGROUND)
Structure
17.1 Introduction
17.2 Objectives
17.3 Meaning and Definition of Partnership
17.4 Essential Features of Partnership Firm
17.5 Partnership Deed/Deed of Partnership
17.6 Registration of Firm
17.7 Non-Registration of Firm
PART – B
(SCHEME OF TAXATION)
17.8 General Rules and Procedure
17.9 Provisions of Section 184 Regarding Assessment of Firm
17.10 Assessment in Case of Non-Compliance of Section 184
17.11 Provisions of Section 40 (B) Regarding Assessment of Firm
17.12 Computation of Book Profit
17.13 Computation of Total Income of the Firm
17.14 Computation of Tax Liability of the Firm
17.15 Provisions of Alternate Minimum Tax (AMT) For Limited Liability
Partnerships (LLP)
17.16 Computation of Partner's Income from The Firm
17.17 Assessment of Reconstituted Firm
17.18 Assessment in Case of Succession of One Firm by Another Firm
17.19 Joint and Several Liabilities of Partners for Tax Payable by Firm
17.20 Dissolution of A Firm or Discontinuance of Business
17.21 Procedure of Tax Payment and Filing of Return of Income by Firms
17.22 Illustrations
17.23 Let Us Sum Up
17.24 Key Words
17.25 Answers to Check Your Progress
17.26 Terminal Questions/Exercises

228
 PART – A Assessment of Firms

(GENERAL BACKGROUND)

17.1 INTRODUCTION
The traditional form of business organization is sole proprietorship wherein
all the business resources are provided by the sole trader himself. This form
of business may be suitable to the small-sized business but cannot suit the
medium and large sized units. Sole proprietorship suffers from limited
means, ability, skill and unlimited liability. In case the business decides to
grow in size there will always be need for more capita, more skill, efficient
management and fellow partners, to share the risk and liabilities. In such
cases, formation of partnership is one of the ways out to meet the expansion
requirements of proprietorship.

17.2 OBJECTIVES
After studying this unit, you would be able to:

• study what scheme of taxation is followed while making an assessment

of income of the firm as well as its partners;
• learn the rules that are followed in imposing tax on firms and the partners
and how to collect it from them; and

• know what tax discipline should be followed by the firm in order to

arrive at correct taxable income and the tax payable.

17.3 DEFINITION AND MEANING OF

PARTNERSHIP
In India, partnership firm is governed by Indian Partnership Act 1932.

According to Section 4 of Indian Partnership Act, 1932, Partnership means

"The relationship between the persons who have agreed to share profit of
business carried on by all or any of them acting for all." All persons who
have entered into partnership with one another are called individually
'Partners' and collectively a 'Firm' and the name under which business is
carried on is called the 'Firm Name'.

17.4 ESSENTIAL FEATURES OF PARTNERSHIP

FIRM
• Partnership is an agreement between two or more persons. A verbal
agreement is treated as valid as a written agreement.
• Partners must agree to carry on lawful business.

• Sharing the profit or loss of the business should be the objective of the
business. 229
Computation of • There is a Mutual Agency among the partners. The business can be
Total Income and
Tax Liability carried on by all or any one of them acting for all.
• Minimum 2 persons can constitute a partnership. However, maximum
number of partners in case of banking business is 10 and in other
business are 20.

• Registration of the Firm is not compulsory as per law; however,

registration of the firm is in the interest of firm and the partners.

• Partnership business is governed by the Indian partnership Act, 1932.

17.5 PARTNERSHIP DEED/DEED OF

PARTNERSHIP
Partnership arises not from status but from contract. Contract may be verbal
or in writing. The written contract between or among the partners is known as
Partnership Deed or Partnership Agreement or Articles of Partnership. A
partnership deed includes the following points:
• Names and addresses of the firm and partners.
• Duration of partnership.

• Capital contribution of each partner.

• Whether drawings are allowed or not by the partners and if yes then to
what extent and in what manner i.e. monthly or six monthly or yearly.

• Interest on capital or interest on loan given by the partners to the firm

and interest on drawings (if any) and the rate of such interest.
• Proportion of division of profits and losses. In the absence of agreed ratio
of profit or loss, it will be shared equally.

• Right and duties and liabilities of partners.

• Procedure as to admission and retirement of partner.

• Methods of valuation of goodwill to be adopted in case of admission,
retirement or death of the partner.

• Methods of keeping accounts and audit.

• Partner’s salary (if allowed to any partner).

• Rules as to operation of Bank Account by the Partners (whenever

required).

• Methods of evaluating assets and liabilities.

• Circumstances in which firm shall be dissolved.

• In case of dispute, how the settlement is to be made between or among

230 the partners.
Above is not the final list and therefore, some other points may also be Assessment of Firms
included in the partnership deed.

17.6 REGISTRATION OF FIRM

The registration of partnership firm is not compulsory. Following advantages
are available to registered firm which are not available to an unregistered
firm:

• Registration of a firm empowers it to claim against third parties in the

court of law.

• It will enable a partner to enforce his claim against his co-partners or

against third parties.
• It also safeguards third parties against fraud or misrepresentation done by
a partner of a firm.

• By being registered an incoming partner empowers himself for dues

against other fellow partners without relying on their good faith.

• Registration of the firm can be effected at any time.

17.7 NON REGISTRATION OF FIRM

Since the registration of the firm is not compulsory, a non-registered firm is
subjected to following disadvantages.

• The firm cannot get enforced a claim against any third party for
recovering a debt exceeding Rs. 100.
• A partner loses his right to sue for enforcing his rights against any of his
co-partners or against the firm.

• Non registration does not preclude any third party to sue the firm or its
partners.

Check Your Progress A

1) Point out whether the following statements are True or False:
a) Partnership firms are governed by Indian Partnership Act, 1932.

b) There used to be a Mutual Agency among Partners.

c) Partnership arises from status and not from contract.

d) Registration of firm is compulsory.

231
Computation of PART – B
Total Income and
Tax Liability (SCHEME OF TAXATION)

17.8 GENERAL RULES AND PROCEDURE

Assessment of firm involves the following:

1) Computation of total taxable income of the firm.

2) Computation of tax payable by firm.

3) Procedure for making assessee pay tax.

In the process of dealing with the above points, certain rules and regulations
are followed which are discussed as under:

A) Residential Status:
Status of the firm may be classified into following two categories.

i) Resident

ii) Non – resident

A firm is said to be resident when its affairs are managed and controlled
wholly or partially from India.

A firm is said to be non-resident when its affairs are controlled and

managed completely from outside India.
A firm cannot be Not-ordinarily resident. If the partners or the members
are resident in India, the general presumption would be that the firm is
also resident unless it is proved by the assessee that control and
management of the affairs of the firm is situated wholly outside India.

B) Taxability of Income:
To determine taxability of an income, following two rules are important:

i) All revenue receipts are taxable unless specifically exempted.

ii) All capital receipts are exempt unless specifically taxable.

C) Taxability Income under Various Heads of Income:

According to Section 14 of Income Tax Act, there are five heads of
income. However, only following four heads of income are applicable in
case of firms:
i) Income from House Property.

ii) Profits and Gains of Business or Profession.

iii) Capital Gains.

iv) Income from Other sources.

232
D) Separate Entity: Assessment of Firms

A firm has separate entity and therefore, taxed separately.

E) Registration of Firm:
For taxation, there is no distinction between registered and unregistered
firm (subject to applicability of rules).

F) Partner’s share:
While partner's income is computed for taxation purpose, his share in
firm’s income is not included in the total income of the partner.

G) Salary, Bonus, Commission or Remuneration Payment:

Any Salary, Bonus, Commission or Remuneration by whatever name
called which is due to or received by the partner, is allowed as deduction
subject to certain restrictions. A detailed discussion in this regard is
made in the ensuing pages of this unit.

H) Payment of Interest:
Any firm if pays interest to any partner, may claim deduction of such
interest from its total income but the rate of interest cannot exceed 12 per
cent per annum. A detailed discussion regarding interest is made in the
ensuing pages of the unit.

I) Tax Rate:
The firm's income is taxed at a flat rate of 30 per cent plus Surcharge
(12% if net income exceeds Rs. 1 crore) and plus Health and Education
Cess.

J) Alternate Minimum Tax:

Any firm including a limited liability partnership is subject to Alternate
Minimum Tax at the rate of 18.5 per cent of adjusted total income.

Note:
With effect from assessment year 2010-11, provisions discussed above are
also applicable in case of limited liability partnership (LLP).

Deductibility of Remuneration / Interest:

Remuneration and interest to the partners of the firm are deductible subject to
the fulfillment of following conditions:

i) These are otherwise deductible u/s 36 and 37.

ii) Conditions prescribed u/s 184 are satisfied.

iii) Conditions prescribed u/s 40 (b) are satisfied.

233
Computation of It is, therefore, necessary to know the conditions of Section 184 and Section
Total Income and
Tax Liability 40 (b).

17.9 PROVISIONS OF SECTION 184

REGARDING ASSESSMENT OF FIRMS
1) Firm's assessment can be made (as a firm) if:

i) The partnership is evidenced by an instrument. Instrument not only

may include partnership deed but also constitute any other formal
document.

ii) The individual shares of partners are specified in that instrument. In

other words, individual share of profits in the profit of the
partnership must clearly be given in the instrument of partnership.

2) A certified copy of the instrument of partnership deed shall accompany

the returns of income of the firm for the previous year relevant to the
assessment year in respect of which assessment as a firm is first sought.
In other words, the first return of the income of the firm should
accompany a certified copy of the instrument of partnership.
3) If once a firm is assessed as a firm for any assessment year, it shall
continue to be assessed as a firm for every subsequent year if there is no
change in the constitution of the firm.
4) If a change occurs in the constitution of the firm or profit sharing ratio
during any previous year, a certified copy of the revised instrument
(partnership deed) along with return of income of the relevant
assessment year should be furnished/filed.

5) If a firm fails to comply withthe provision mentioned u/s 184, the firm
shall be assessed as firm but the following disallowance of deductions
will apply:

a) No deduction by way of payment of interest, salary, bonus,

commission or remuneration, by whatever name called, made by the
firm to its partners shall be allowed in computing the income
chargeable under the head 'Profits and Gains of Business or
profession.'

b) Such interest, salary, bonus, commission or remuneration shall not

be chargeable to tax in the hands of partners under the head Profits
and gains of business or profession u/s 28 (v).

17.10 ASSESSMENT IN CASE OF

NON-COMPLIANCE OF SECTION 184
According to Section 185, following shall be the consequences of non-
compliance of the provisions of Section 184:
234
1) Firm shall be assessed as a firm for the assessment year concerned to Assessment of Firms
non-compliance.
2) No deduction by way of payment of interest, salary, bonus, commission,
or remuneration by whatever name called, made by firm to its partners
shall be allowed in computing the income chargeable under the head
'Profits and Gains of Business or Profession.'

3) Such interest, salary, bonus, commission or remuneration shall not be

chargeable to tax in the hands of partners under the head 'Profits and
Gains of Business or Profession [u/s 28 (v)].

17.11 PROVISIONS OF SECTION 40 (b)

REGARDING ASSESSMENT OF FIRM
Provisions of Section 40 (b) disallow the following expenses:
i) Any payment of salary, bonus, commission or other remuneration paid
or payable to a non-working partner. In brief, these expenses are
disallowed.
ii) Any payment of remuneration which is not authorized in the
partnership deed and also not in accordance of the partnership deed,
terms and conditions to any working partner is disallowed. In brief,
these payments are disallowed.
iii) The remuneration to the working partners as per the partnership deed
should be payable after the date of deed. In other words, if such
payment of remuneration is made from a date prior to the date of
partnership deed, it would not be allowed as deduction unless the
earlier deed provides for such payment.
iv) Payment of salary, bonus, commission or other remuneration if made to
the working partners in accordance with and as authorized by the terms
of the partnership deed and in relation to any period falling after the
date of partnership deed, it may be allowed as deduction in the hands of
the firm. However, W.e.f. assessment year 2010-11, the maximum
amount of such payment to all the partners in the previous year should
not exceed the specified limit given below; then, any amount exceeding
the specified limit would be disallowed.
Table 17.1: Specified limit for availing deduction
Particulars Rs.
(a) If Book profit is negative i.e. in case of loss 1,50,000
(b) In case Book profit is positive i.e. in case of
profit:
i) On the first Rs. 3,00,000 of book profit 1,50,000 or
90% of Book
Profit,
whichever is
more 235
Computation of ii) On the balance of the book profit 60% of book
Total Income and
Tax Liability profit

v) Payment of interest to any partner is disallowed if it is neither

authorized nor in accordance with the terms of partnership deed.
vi) Payment of interest should pertain to period after the partnership deed
otherwise it will be disallowed. In other words, any payment of interest
as per the terms of the earlier partnership deed to any partner for any
subsequent period is allowed as deduction subject to the condition that
it should be payable after the date of partnership deed.

vii) If the payment of interest to any partner is authorized by and is in

accordance with the terms of partnership deed and also it relates to the
period falling after the date of partnership deed is allowed as deduction,
subject to the condition that the rate of simple interest should not
exceed @ 12% per annum. If the rate of interest exceeds @ 12% per
annum, the excess of interest amount shall not be allowed as deduction.

viii) Where a firm charges interest on drawings, it means the firm may pay
as well as receive interest from the same partner. In such cases, interest
received by the firm will be chargeable to tax. For interest paid to the
same partner will be allowed according to the provisions of Section 40
(b).

Explanations regarding Section 40 (b)

1) Partners of the firm may be classified as Working partner and
Non-working partner. Working partner is an individual who is actively
engaged in conducting the affairs of business or profession of the firm of
which he is a partner. Non-working partner may be non-acting financing
or Sleeping Partner.

2) Partner in representative capacity is an individual who is a partner in a

firm on behalf or for the benefit of any other person. Payment of interest
by the firm to such individual otherwise than as 'Partner in a
Representative Capacity' shall not be taken into account for the purpose
of this Section i.e. 40 (b).

3) Interest paid by the firm to such individual as partner in a representative

capacity and interest paid by the firm to the person so represented is
taken into account for the purpose of Section 40 (b).

4) Book profit is the Net Profit arrived at as per profit and Loss Account for
the relevant previous year after making adjustments as provided by
Section 28 to 44D and adding remuneration to partners, if debited to
profit and loss account.

5) Merely stating in the partnership deed that the remuneration shall be paid
to the working partners does not entitle the firm of the deduction u/s 40
236 (b).
To be eligible to claim deduction regarding working partners remuneration Assessment of Firms
u/s 40 (b), the partnership deed must specifically state the amount of
remuneration payable to each working partner or how the remuneration will
be computed, otherwise no deduction will be allowed [u/s 40 (b)] in this
regard.

17.12 COMPUTATION OF BOOK PROFIT

Book profit of the firm is the profit before deducting remuneration to
partners; it is shown by profit and loss account which has been calculated
under provisions under Sections 28 to 44 of income tax act, 1961.This profit
is then, increased by the amount of remuneration given or to be given to
partners provided this remuneration had already been deducted in
ascertaining the net profit.
Steps to calculate Book profit:
1) Profit or loss is calculated by preparing profit and loss account, if profit
or loss is given, then, then it is taken as base.
2) The necessary adjustments mentioned in Section 28 to 44D are made in
profit and loss account.
3) The remuneration given to the partners is added in net profit.
The final amount so arrived shall be the book profit of the firm.
Note:
a) Following items are not included in book profit of the firm
i) Capital gains of the firm
ii) Income from other sources
iii) Income from house property of firm
b) Following items are not to be deducted from book profit of the firm
i) Deduction u/s 80Cto 80U from gross total income (while
computing total income of the firm the deductions can be
deducted)
ii) Brought forward of business losses (while computing income from
business, this loss can be deducted)
As per provisions of Section 40 (b), Book Profit is required to be computed,
Book Profit may be computed in the following proforma:
Table 17.2: Proforma for computation of Book Profit
Particulars Rs. Rs.
Net profit as per profit and loss account -
Add:
1) Expenses disallowed but debited to profit & -
loss a/c (not covered u/s 28 to 44 D)
2) Incomes which are taxable under the head -
237
Computation of Profits and Gains of Business or Profession
Total Income and
Tax Liability but not credited to P & L a/c
3) Remuneration of Partners, if debited to -
P & L a/c
4) Disallowance of interest in excess of 12% - -
p.a.

-
Less:
i) Incomes not taxable under the head Profits -
and Gains of Business or Profession but
credited to P & L a/c
ii) Expenses / Losses allowed but not debited - -
to P & L a/c

Book profit -

Note-1:
Brought forward unabsorbed business loss is not deductible in computation
of Book Profit.
Note-2:
Non-business incomes and their concerned Non-business expenses are not
included to arrive at the Book Profit.
Note-3:
In case of loss, the above rules shall be reversed i.e. in the above proforma
items of addition shall be deducted from loss and items of deduction shall be
added to the loss.
Note-4:
Incomes chargeable to tax under the heads 'Income from House Property',
'Capital Gains' and ‘Income from Other Sources' will not be a part of Book
Profit.
Note-5:
Permissible deductions under Section 80-C to 80-U from Gross Total Income
shall be ignored while computing 'Book Profit'.

Provision in case of Firm’s Losses

When the firm is unable to set off its losses in the same year from the profits
of other business etc., the losses which could not be set off in the same year
may be carried forward to be set off in subsequent years. Subject to the
certain rules of income tax,'Losses' brought forward to be set off in
subsequent years shall be dealt as under:

238
a) Losses of speculative business can be set off against the income of Assessment of Firms
speculative business of the firm in subsequent 4 years from the year in
which loss was incurred.

b) Losses of non-speculative business can be set off against any profit of

business of the firm in subsequent 8 years from the year in which loss
was incurred.

c) Short-terms capital losses can be set off against short-term as well as

Long-term capital gains of the firm in subsequent 8 years from the year
in which loss was incurred.

d) Long-term capital losses can be set off against long-term capital gains of
the firm in subsequent 8 years from the year in which loss was incurred.

e) Unabsorbed depreciation can be set off against business income or any

other income of the firm.

17.13 COMPUTATION OF TOTAL INCOME OF

THE FIRM
When a Profit &Loss a/c is given to compute the total income of the firm,
then profit or loss as revealed by Profit &Loss a/c shall be adjusted in the
same manner as is done in the computation of income under the head Profit
and Gains of Business or Profession. After arriving at aforesaid profit as
under the head ‘Profits and Gain of Business or profession’ and under the
other heads of income (i.e. Income from House property, Capital Gains and
Income from Other Sources) is computed and added in the income computed
under the head Profits and Gains of Business or Profession and the resultant
amount is the Gross Total Income (GTI) of firm.
Incomes exempt under Section 10 to 13-A shall be ignored while computing
income under various heads of income as stated above.

From the Gross Total Income of the firm, deductions allowed u/s 80C to
80U shall be deducted and the balance shall be the Total Income of the Firm.
It is to be noted that deductions u/s 80 G, 80 GGA, 80 GGC, 80 IA, 80 IAB,
80 IB, 80 IC, 80 ID, 80 IE, 80 JJA and 80 JJAA only are applicable to a firm.

The deductions under the above mentioned Section will not be allowed
against short-term capital gains (specified in Section 111-A) and Long-term
capital gains (u/s 112).

239
Computation of Table 17.3: Proforma for computation of Total Income of Firm
Total Income and
Tax Liability
Particulars Rs. Rs.
Book profit (of the firm) -
Less: Remuneration paid to working partners:
(a) Actual Remuneration -
(b)Statutory Limit (u/s 40 b) Whichever - -
is less

Profits and Gains of Business or Profession of the -

firm
Add: Income under other heads of income and -
sources.
Gross Total Income -
Less:
Deductions u/s 80 C to 80 U (As applicable on firm) -
Total income -

17.14 COMPUTATION OF TAX LIABILITY OF

THE FIRM
The following procedure is adopted to find out Tax Liability of the firm:

a) Find out Income Tax on Net Income.

b) Add surcharge @ 12% (If total income exceeds Rs. 1 crore).

c) Add Health and Education Cess @ 4% on the total of above (a) and (b)
i.e. (a+b).

d) Tax liability will be total of a, b and c above i.e. (a+b+c).

Table 17.4: Format of Computing Tax Liability on Total Income of a Firm

Particulars Rs.
1) Tax on winning from lotteries, card games, cross word -
puzzles, horse race etc and other casual income @ 30%
2) Tax on Long-term capital Gains @ 20% -
3) Tax on Short-term capital gains @ 15% (Liable for STT or -
u/s 11A)
4) Tax on other taxable income @ 30% -
-
Add:
240
 Surcharge @ 12% (If applicable) - Assessment of Firms

-
Add:
Health and Education Cess @ 4% -
Tax payable -

Note:
i) Surcharge is applicable when total taxable income exceeds Rs. 1 crore.

ii) Tax payable (as shown in the above proforma) is subject to adjustment
by way of Marginal relief in surcharge.

Firm having taxable income Rs. 1 crore is liable to pay surcharge @ 12 per
cent on the tax. However, the total amount payable as income tax and
surcharge on total income exceeding Rs. 1 crore shall not exceed the total
amount payable as income tax on the total income of Rs. 1 crore by more
than the amount of income that exceeds Rs. 1 crore.

Table 17.5: Format of computing Tax Liability where a Firm is liable for
payment of Surcharge is as under

Particulars Rs. Rs.

Tax on Total Income -
Add: Surcharge -
(a) -

Or
Tax on Rs. 1 crore -
Add: Amount of taxable income in excess of -
Rs. 1 Crore
(b) -

Amount of (a) or (b) whichever is less -

Add: Health and Education Cess @ 4% -
Tax payable -

17.15 PROVISIONS OF ALTERNATE MINIMUM

TAX (AMT) FOR LIMITED LIABILITY
PARTNERSHIPS (LLP) OR ANY OTHER
NON-CORPORATE ASSESSEE
Alternate Minimum Tax (AMT) is computed on the Adjusted Total Income
of Limited Liability Partnership (LLP) and other Non-corporate assessee. 241
Computation of AMT is applicable to individual HUF, AOP, BOI, Artificial Judicial person
Total Income and
Tax Liability only when they satisfy following two conditions:
i) They have claimed deductions u/s 10-AA, 35 AD and Chapter VI
heading C.

ii) The adjusted total income exceeds Rs. 20 Lakhs.

In all other cases (LLP, partnership firms and Non-corporate assessees), the
limit of Rs. 20 Lakh does not apply.

Thus, where the regular income tax payable by a Limited Liability

Partnership (LLP) is less than the Alternate Minimum Tax (AMT) payable
for such previous year, the Adjusted Total Income shall be deemed to be the
total income of LLP. In other words, the tax liability of LLP shall be tax on
Total Taxable Income or AMT whichever is higher.
LPP shall be liable to pay tax on the adjusted total income @ 18.5% + Health
and Education Cess @ 4%

Table 17.6: The Adjusted Total Income of LLP can be computed as

under:

Particulars Rs.
Total taxable income of LLP -
Add:
(i) Deduction claimed under chapter VI-A from 80 H to -
80-RRB (not being Section 80-P)
(ii) Deduction claimed if any under Section 10-AA -
(iii) Deduction claimed if any under Section 35 AD reduced by -
regular depreciation allowed.
Adjusted Total Income -

Table 17.7: Alternate Minimum Tax can be calculated as under:

Particulars Rs.
Tax on adjusted total income @ 18.5% -
Add: Surcharge @ 12% (if adjusted total income -
exceeds Rs. 1 crore)
-
Add: Health and Education Cess @ 4% -
Alternate Minimum Tax (AMT) -

Provisions of Tax credit in respect of Tax paid on Adjusted Total Income

of LLP
i) Tax credit shall be the excess of the AMT paid over the tax payable on
the total income computed under the provisions of the Act.
242
ii) The tax credit is allowed to be carried forward for a maximum 15 Assessment of Firms
assessment years immediately succeeding the assessment year in which
the credit becomes allowable.

iii) Tax credit = Total income- Tax payable under AMT.

iv) Set off the tax credit shall be allowed for the assessment year in which
the regular income tax exceeds AMT to the extent of the excess of
regular income tax over the AMT.
v) No interest shall be paid on tax credit.

vi) Where as a result of assessment, reassessment, rectification of mistake,

appeal or revision, settlement, there is reduction or increase in the
amount of tax payable, the tax credit amount will also be reduced or
increased accordingly.

vii) If provisions of AMT are applicable, the LLP will have to obtain a report
in prescribed format from a chartered accountant.

17.16 COMPUTATION OF PARTNER'S INCOME

FROM THE FIRM
1) Share of profit
Partner's share of profit in the firm is exempt u/s 10 (2A). Therefore, it
will not be included in his income.
2) Remuneration
Any remuneration such as salary, bonus, commission or other
remuneration received by a partner as per the provisions of partnership
deed but not violating the provisions of Section 40 (b) shall not be
taxable under the head 'Salaries' because a partner is not an employee of
the firm. However, if remuneration as stated above is paid to the partner
in excess of the amount admissible u/s 40 (b), the excess amount shall
not be included in the taxable income of the partner as it must have
already been included in the firms total income. Therefore, double
taxation cannot be implemented on tax payer.
3) Interest
If a partner receives interest as per provisions of partnership deed not
exceeding 12% p.a. then, such interest is treated as business income and
included under head 'Profits and Gains of Business or Profession'.
4) Rent
If a building of a partner is let out to the firm, the rent received by the
partner will be taxable under the head 'Income from House Property.'
Otherwise, the problem of double taxation would be generated.

243
Computation of 5) Rent Free Accommodation
Total Income and
Tax Liability If the partner of a firm is provided rent free accommodation with free
electricity, such expenses are not allowed in the hands of the firm.
Hence, this amount is not assessable in the hands of the partner.
6) Deductions
Following deductions may be claimed by the partner in computation of
income under the head 'Profits and Gains of Business or Profession.'
a) The partner is entitled to deduction of interest on the borrowed
capital which is to be invested in the firm. This does not make any
impact on this provision whether the firm has utilized such money
for what purpose and the partner shall be entitled for such
deduction in all circumstances including the situation when he
receives or not receives income from the firm.
b) Sometimes, partners are required to maintain a minimum balance
of their capital in the firm. In case the minimum balance of the
partner's capital goes down for any reason, firm may charge
interest on his deficit capital. Such interest on deficit capital of the
partner is allowed as deduction. However, interest paid to the firm
on the amount withdrawn for the payment of personal advance tax
and personal expenses, is not deductible from the interest income
of the firm.
c) To earn the remuneration from the firm, if the partner incur any
other expenses such as travelling expenses, expenses on
maintenance of car and depreciation of car etc., such expenses are
allowed as deduction under the head 'Profits and Gains of Business
or Profession.'

17.17 ASSESSMENT OF RECONSTITUTED FIRM

A firm is said to be a reconstituted firm when following changes take place in
its constitution: -

i) When one or more partners cease to be the partners but remaining

partners continue to be partners (Due to Death or retirement).

ii) When one or more new partners are admitted in a firm but at least one
old partner continues to be a partner.

iii) When there used to be a change in the respective share or change in the
share of some of the partners.
In case of a reconstituted firm, the assessment shall be made on the firm as
constituted at the time of making the assessment where a firm has two
partners only, on the death of one partner the firm will cease to exist and
assessment shall be made separately for the period before and after death of
the partner.

244
17.18 ASSESSMENT IN CASE OF SUCCESSION Assessment of Firms

OF ONE FIRM BY ANOTHER FIRM

When all the partners of the firm are replaced by other partners and the firm
is dissolved and reconstituted, it is said succession of one firm by another
firm has taken place. In reconstituted Firm, there may be all the new partners
or some of them may be old ones. Thus, while substantially identity and
continuity of the business is preserved and whole of the business is
transferred with the change of ownership.
In case of succession of one firm by another (carrying on business or
profession) separate assessment shall be made on the predecessor and the
successor firm. Predecessor firm shall be assessed for its income related with
the period of pre-transfer of ownership and the successor firm shall be
assessed on its income related with after the transfer of ownership.

17.19 JOINT AND SEVERAL LIABILITIES OF

PARTNERS FOR TAX PAYABLE BY THE
FIRM
According to Section 188 A, Every person who was during the previous year,
a partner of the firm and the legal representative of any such person who is
deceased shall be jointly and severally liable along with the firm for the
amount of the tax, penalty, or some other amount payable by the firm for the
assessment year to which such previous year is relevant, and all the
provisions of the Act shall apply to the assessment of such tax or imposition
or every of such penalty or other sum.

17.20 DISSOLUTION OF A FIRM OR

DISCONTINUANCE OF BUSINESS
Complete cessation of business is known as discontinuance of business.
Change in constitution of the Firm or change of ownership is not
discontinuance of business. However, where the business of the firm is split
up on dissolution and portions or branches of the business are divided among
the partners, there is a discontinuance of the old business and it does not
make any impact even if such portions or branches carry their business by the
partners. Provisions regarding the assessment of such business are as under:

i) Where the business or profession carried on by the firm is discontinued

or where a firm is dissolved, the assessment shall be made of the total
income of the firm as if no such discontinuance or dissolution had taken
place.

ii) Every person who was a partner and the legal representative of a
deceased partner in the firm shall be jointly and severally liable for the
amount of the tax, penalty or other sum payable by the firm.
245
Computation of iii) Inspite of the fact that discontinuance or dissolution of firm has taken
Total Income and
Tax Liability place, and the proceedings in respect of an assessment year have
commenced, the proceedings may be continued against persons
mentioned in (ii) above.

Check Your Progress B

1) Choose the correct answer in each of the following:

i) In case of Book Loss, the maximum allowable remuneration to

working partner shall be:
(a) NIL (b) Rs. 1,50,000(c) Rs. 3,00,000 (d) Rs. 1,20,000

ii) Interest paid to any partner of a firm is disallowed u/s 40(b) in

excess of:
(a) 6% (b) Rs. 12% (c) 15% (d) Rs. 20%

iii) A firm has Book profit of Rs. 9,36,000, the admissible remuneration
to working partner for income tax purpose shall be:
(a) Rs. 6,51,600 (b) Rs. 6,81,600
(c) Rs. 2,70,000 (d) None of (a), (b), (c)

iv) According to Income Tax Act, 1961, interest on capital received by

a partner from a partnership firm is chargeable under the head:

a) Profits and gains of business or profession

b) Income from house property

c) Capital gains

d) Income from other sources

v) Provision of Alternate Minimum Tax (AMT) u/s 115 JC are not

applicable to:

(a) Company (b) Individual

(c) Partnership firm (d) Association of persons (AOP)

2) Fill in the blanks:

a) Total income of a firm is chargeable to tax at ………….

b) From tax point of view, a Limited Liability Partnership (LLP) is

treated as ………………..

c) Surcharge is levied on the income of a partnership firm when its

income exceeds Rs. ………….

d) Interest on capital contributed by partners is admissible at ……

e) Surcharge (if applicable) shall be paid on firm’s income @.........

246
3) State whether the following statements are True or False: Assessment of Firms

a) A partner is liable to pay tax on his share of profit from the firm.

b) Partner can set off losses of the firm from their income.

c) AMT is calculated on adjusted total income of firm.

d) No interest shall be payable to LLP on tax credit.

17.21 PROCEDURE OF TAX PAYMENT AND

FILING OF RETURN OF INCOME BY
FIRMS
1. Mode of Payment of Tax
Tax can be paid in any of the following modes:
a) Physical Mode: Payment can be made by furnishing the hard copy
of the challan at the designated bank.

b) Electronic Mode: Payment can be made by using electronic mode.

It is also called E-payment mode. Payment by E- payment mode is
mandatory for a firm which is liable to get its accounts audited u/s
44AB of the Income Tax Act.

2. Payment of Advance Tax

Firms should also pay Advance Tax on the basis of expected tax liability
of the year on due dates. Also called 'Pay as you earn Scheme', advance
tax is payable if tax liability exceeds Rs. 10,000/- in a year. It is paid in
the year of receipt of income.

3. Filing of Return of Income

• Every firm should file its return of income mandatorily irrespective
of the amount of its income or loss.

• E-filing of return of income can be made with or without digital

signatures.

• A partnership firm may also file its return of income under

electronic verification code (EVC).
• If the accounts of the firm are liable to be audited u/s 44 AB it shall
furnish return electronically under digital signature.

• Designated partner should normally sign the return of income of the

firm, however, if for any unavoidable reason designated partner is
unable to sign or in case where there is no designated partner, then,
any partner may sign the return.

• Return of Income should be signed by managing partner in case of

LLP.
247
Computation of • Return of income should be filed in the prescribed form by the
Total Income and
Tax Liability income tax authorities.
• The return of income should be filed on or before the prescribed due
date for this purpose.

Check Your Progress C

1) State whether the following statements are True or False:

a) Payment of tax by E-payment mode is mandatory for a firm if

Section 44 AB is applicable on it (firm).
b) A firm should pay advance tax if its tax liability exceeds Rs.
10,000 in a year.

c) It is not mandatory for a firm which incurs loss to file its return of
income.

d) A firm on which Section 44AB is applicable shall furnish return of

income electronically under digital signature.
2) Short answer questions
a) What is the rate of tax of a firm?

………………………………………...............................................
………………………………………...............................................

………………………………………...............................................

………………………………………...............................................
b) State the two conditions to be fulfilled for the partnership firm to
be assessed as firm.

………………………………………...............................................

………………………………………...............................................
………………………………………...............................................

………………………………………...............................................

17.22 ILLUSTRATIONS
Illustration- 1
The following is the Profit and Loss Account of partnership firm of x y z
assessed firm, for the year ended 31st March 2023. Compute 'Book Profits' for
Assessment Year 2023-24.

248
Dr. Cr. Assessment of Firms

Particulars Rs. Particulars Rs.

General Expenses 7,00,000 Gross Profit 28,75,000
Entertainment Expenses 2,75,000 Interest on Bank 1,45,000
Deposits
Advertising 4,45,000 Excise Duty Refund 1,80,000
Rent, Rates and Taxes 2,90,000
Salary to Partners
X – Rs. 1,00,000
Y- Rs. 1,50,000
Z- Rs. 1,75,000 4,25,000
Interest on Capital
X – @ 20% - Rs.
40,000
Y- @ 10% - Rs. 20,000 90,000
Z- @ 15% - Rs. 30,000
Donations 4,36,000
Income Tax 49,000
Net Profits 4,90,000
32,00,000 32,00,000

Other Information:
1) General expenses include Rs. 1,25,000 which is inadmissible.

2) Advertising includes Rs. 1,45,000 for advertising in a souvenir of a

Political Party.

3) Payment of interest on capital and salary to partners is provided for in the

Partnership Deed.

Solution:

Computation of Book Profitsfor Assessment Year2023-24

Particulars Rs. Rs.

Net Profits as per Profit and Loss Account 4,90,000
Add:
General expenses to the extent inadmissible 1,25,000
Expenditure on advertising in a publication of 1,45,000
Political Party
Salary to Partners 4,25,000
Interest on Capital in excess of 12%
X: (Rs. 40,000×8/20) = Rs. 16,000
Z: (Rs. 30,000×3/15) = Rs. 6,000 22,000
Donations 4,36,000 249
Computation of Income Tax 49,000 12,02,000
Total Income and
Tax Liability 16,92,000
Less:
Interest on Bank Deposits 1,45,000
Book Profits 15,47,000
Note:
i) In computation of Book Profit, Remuneration to Partners is fully
inadmissible.
ii) If partnership deed permits, interest on capital is admissible upto 12%
only.
Illustration- 2
Compute the amount of admissible remuneration of a partnership firm in the
following cases, if the Book Profits are as under:
Case (1): (-) Rs. 3, 00,000
Case (2): Rs. 1, 25,000
Case (3): Rs. 2, 75,000
Case (4): Rs. 5, 00,000
Case (5): Rs. 8, 00,000
Partnership deed provides for the following salary to the partners:
A. Being working partner Rs. 2,40,000
B. Non-working partner Rs. 1,40,000
C. Being working partner Rs. 1,20,000
Also calculate amount of salary taxable in the hands of partners.
Calculation of admissible maximum limit
Case Book Calculation: [(a) 90% of Higher Admissible
Profit Rs. 3,00,000 of Book Profit Amount Maximum
Rs. + 60% of balance of book Rs. Limit
profit or Rs. 1,50,000, Rs.
whichever is higher]
1. -3,00,000 Book Profit is negative 1,50,000 1,50,000
2. 1,25,000 90% of Rs. 1,25,000 or Rs. 1,50,000 1,50,000
1,50,000 whichever is higher
3. 2,75,000 90% of Rs. 2,75,000 or Rs. 2, 47,500 2,47,500
1,50,000 whichever is higher (90%)
4. 5,00,000 90% of Rs. 3,00,000 = 3,90,000 3,90,000
2,70,000 +60% of Bal. Rs.
2,00,000 = 1,20,000 = Rs.
2,70,000 or Rs. 1,50,000
whichever is higher
250
5. 8,00,000 90% of Rs. 3,00,000 + 60% 5,70,000 5,70,000 Assessment of Firms

of Bal. Rs. 5,00,000 (Rs.

2,70,000 + Rs. 3,00,000)
=Rs. 2,70,000 or Rs.
1,50,000 whichever is higher

Note:
In case of Loss (Negative Book Profit) Rs. 1, 50,000 is allowed as admissible
maximum limit.

Calculation of Admissible Remuneration

Rs.

Case 1 Case 2 Case 3 Case 4 Case 5

Eligible admissible 3,60,000 3,60,000 3,60,000 3,60,000 3,60,000
actual remuneration
i.e. remuneration of
working partners as
per deed (A+C)
Maximum Limit 1,50,000 1,50,000 2,47,500 3,90,000 5,70,000
Admissible 1,50,000 1,50,000 2,47,500 3,60,000 3,60,000
remuneration
(Least of the Above
Two)

Calculation of Amount Taxable in the Hands of Partners

Rs.

Case 1 Case 2 Case 3 Case 4 Case 5

Admissible 1,50,000 1,50,000 2,47,500 3,60,000 3,60,000
Remuneration for the
Firm
Remuneration 1,00,000 1,00,000 1,65,000 2,40,000 2,40,000
Taxable in the hands
of A [Admissible
Remuneration
�,��,���
× �,��,���]
Remuneration NIL NIL NIL NIL NIL
Taxable in the hands
of Non-working
partner-B
Remuneration 50,000 50,000 82,500 1,20,000 1,20,000
Taxable in the hands
of C [Admissible
Remuneration×
�,��,���
�,��,���
]
251
Computation of Illustration- 3
Total Income and
Tax Liability
From the information given below, compute the total income of the firm and
tax payable by it for the Assessment Year 2023-24

Particulars Rs.
Profit from small scale industrial undertaking 6,50,000
Profit from the animal breeding business 2,20,000
Short term capital loss 2,50,000
Long term capital gain 4,50,000
Interest from bank (Gross) 80,000
Donation to charitable institution (approved) by cheque 1,30,000

Solution:
Computation of Total Income for Assessment Year 2023-24
Income from Business: Rs. Rs.
Industrial undertaking 6,50,000
Animal breeding 2,20,000 8,70,000
Capital Gains:
LTCG 4,50,000
Less: STCL 2,50,000 2,00,000
Income from other sources:
Interest 80,000
Gross Total Income 11,50,000
Less: Deduction u/s 80G 47,500
Total income 11,02,500

Computation of Tax Payable for the Assessment Year 2023-24

Rs.
Total Income Rs. 11,02,500
Tax on LTCG Rs. 2,00,000 @ 20% 40,000
Tax on Rs. 9,02,500 @ 30% 2,70,750
3,10,750
Add: Health and Education cess @ 4% 12,430
Tax Payable 3,23,180

Note:
Deduction u/s 80G has been computed as under:

252
Qualifying amount: 10% of Rs. 11, 50,000 – (LTCG) Rs. 2, 00,000) = Assessment of Firms
Rs. 95,000
Deduction 50% of Rs. 95,000 = Rs. 47,500

Illustration- 4
P and Q are two partners having profit sharing ratio (1: 2) of P Q Co. [a
limited liability partnership (LLP)]. The Profit & Loss Account of the LLP
for the year ending March 31, 2023 is as follows:

Dr. Cr.

Particulars Rs. Particulars Rs.

Cost of Goods sold 12,00,000 Sales 23,25,000
Salary to Staff 3,00,000 Long term Capital
Gains (according to
Depreciation 80,000 40,000
Section 48)
Remuneration to Other Business 31,000
Partners: Receipts
P 2,00,000
Q 1,60,000
Interest on Capital @
14%:
P 28,000
Q 14,000
Other Expenses 3,93,000
Net Profit 21,000
23,96,000 23,96,000

Other Information:
i) The LLP completed all legal formalities to get the status of 'firm'.
ii) The LLP is not eligible for deduction under Section 80-IB.

iii) The LLP has given donation of Rs. 80,000 to a Notified Public
Charitable Trust by cheque which is included in other expenses.
iv) Salary and interest is paid to partners as per the Partnership Deed.

v) Depreciation allowable u/s 32 is Rs. 78,000.

253
Computation of vi) Income and investment of P and Q are as follows:
Total Income and
Tax Liability
Particulars P Q
Rs. Rs.
Interest on Company Deposits 30,000 15,000
Dividend from companies registered outside India 7,000 11,000
Long-term Capital Gains 2,80,000 30,000
Short term Capital Gains 3,000 (-) 6,000
Winning from lottery 4,000 -
Contribution towards Home Loan Account of the - 60,000
National Housing Bank

Find out net income and tax liability on total income of the LLP and partners
for the Assessment Year 2023-24.

Solution:

Computation of Total Income and Tax Liability of P. Q. Co (LLP) for

Assessment Year 2023-24
Particulars Rs.
Net Profit 21,000
Adjustments:
Depreciation 2,000
Remuneration to Partners 3,60,000
Interest to Partners 6,000
Other Expenses (Donation) 80,000
Long-term Capital Gains (-) 40,000
Book Profit 4,29,000
Less: Remuneration to Partners:
90% of Rs. 3,00,000+60% of Rs. 1,29,000 = 3,47,400 or
Remuneration as per deed Rs, 3,60,000, whichever is less 3,47,400
Business Income 81,600
Long-term Capital Gain 40,000
Gross Total Income 1,21,600

Less: Deduction under Section 80G (50% of 10% of Business 4,080

Income, Rs 81,600)
Net Income 1,17,520

254 Tax Computation of P Q Co. Rs.

 Tax on LTCG of Rs. 40,000 @ 20% 8,000 Assessment of Firms

Tax on Rs. 77,520 @ 30% 23,256

31,256
Add: Health and Education cess @ 4% 1,250
Tax Liability 32,506

Rounded off 32,510

Computation of Income and Tax of P and Q for Assessment

Year 2023-24
Rs.
Business Income: (P) (Q)
Remuneration from P. Q. Co. (Rs. 3,47,400 divided in
the ratio of 20:16) 1,93,000 1,54,400
Interest 24,000 12,000
Business Income 2,17,000 1,66,400
Capital Gains (Long term + S.T.C.G.) 2,83,000 24,000
Income from Other Sources:
P: Rs. 30,000 + Rs. 7,000+Rs. 4,000 41,000
Q: Rs. 15,000 + Rs. 11,000 26,000
Gross Total Income 5,41,000 2,16,400
Less: Deduction under Section 80C - 60,000
Net Income 5,41,000 1,56,400

Tax on Long-term Capital Gains (20% of Rs. 56,000 -

2,80,000)
On winning from lottery (30% of Rs. 4,000) 1,200 -
On Balance 350 -
Total 57,550 -
Add: Health and Education cess @ 4% 2,302 -
Tax Liability 59,852 -

Rounded off 59,850

Note:
Total Income of does not exceed Rs. 2,50,000, hence tax is not payable.

255
Computation of Illustration- 5
Total Income and
Tax Liability
A firm with P, Q and R as equal partners, furnished following information for
the Previous Year 2022-23

Particulars Rs.
Profit from business (after deducting the following 1,81,000
amounts)
(i) Salary to P 7,000
(ii) Interest paid for non-payment of GST 5,000
(iii) Interest on capital @ 12% :
P 5,000
Q 4,000
R 3,000 12,000
(iv) Donation to approved institution by cheque 4,000
(v) Donation to a Research Association for 20,000
scientific research (Not debited to P & L A/c)
Other Incomes:
(a) Long-term capital gains (LTCG) 20,000
(b) Interest on securities (gross) 39,000
(c) Income from house property (computed) 24,000

Compute the Taxable Income of the firm and allocate it amongst the partners.
The firm fulfills the conditions of Section 184.

Solution:
Computation of Total Income for Assessment Year2023-24

Particulars Rs.
Profit from Business 1,81,000
Add: Disallowed expenses:
Salary to P 7,000
Donation 4000
1,92,000
Less: Donation to Scientific Research Association:
100% of amount donated 20,000
Book Profits 2,32,000
Less: Remuneration (Salary) to Partner
(Amount is less than the prescribed limit) 7,000
Business Income 2,25,000

256
 Statement showing Taxable Incomefor Assessment Year2023-24 Assessment of Firms

Particulars Rs.
Income from House Property 24,000
Business Income 2,25,000
Capital Gains – LTCG 20,000
Income from Other Sources:
Interest on Securities 39,000
Gross Taxable Income 3,08,000
Less: Donation: 50% of Rs. 4,000 2,000
Taxable Income 3,06,000

Statement of Income of Partners for Assessment Year2023-24

Particulars P Q R
Rs. Rs. Rs.
Salary 7,000 - -
Interest 5,000 4,000 3,000
Share in profit Exempt Exempt Exempt
12,000 4,000 3,000

Illustration- 6
X, Y and Z are partners in a firm which fulfills the conditions of Section 184.
Z is non-working partner. They share profits and losses in the ratio of 3:2:1.
The following is the profit and loss account for the year ended 31.03.2023.
Dr. Cr.

Particular Rs. Particular Rs.

Establishment Expenses 51,000 Gross profit 1,30,000
Rent to partner 10,000 Interest from Bank 4,000
Salary to partners: Interest on Government
Rs. Securities 6,000
X 35,000
Y 25,000 60,000 Net Loss 60,000
Interest on Capital
(14%):
X
7,000
Y
5,600
Z 14,000
257
Computation of 1,400
Total Income and
Tax Liability Bonus to partners:
X 15,000
Y 10,000
Z 5,000 30,000
Profession tax 2,000
Income tax 12,000
Income tax provisions 8,000
Loss on sale of 8,000
machinery
Depreciation 5,000
2,00,000 2,00,000

a) Establishment expenses include commission paid to Z Rs. 10,000 and for

furniture purchased Rs. 2,000.
b) Machinery which is sold during the previous year for Rs. 10,000 is of the
W.D.V. Rs. 18,000 as on 01.04.2020.
c) Depreciation allowable as per rules is Rs. 2,000.
Compute the Total Income of the firm for the Assessment Year 2023-24.
Solution:
Computation of Total Income of the Firm for Assessment Year 2023-24

Rs.
Net Loss (-) 60,000
Add: Disallowed expenses: Rs.
Salary to partners 60,000
Bonus to partners 30,000
Commission to Z 10,000
1,00,000
Interest to partners in excess of 12% 2,000
(1,000+800+200)
Income tax 12,000
Income tax provision 8,000
Loss on sale of machinery 8,000
Excess depreciation (5,000 – 2,000) 3,000
Furniture purchased 2,000 (+)
1,35,000
75,000
Less:Incomes not taxable under the head Business:
258
 Interest from bank 4,000 Assessment of Firms

Interest on Govt. Securities 6,000 10,000

Book-profit 65,000
Less: Remuneration to working partners:
(i) Rs. 85,000 to X and Y as per deed or
(ii) 90% of Rs. 65,000 = Rs. 58,500 or Rs.
1,50,000, whichever is more
Deductible (i) or (ii), whichever is less 85,000
Business Income (Loss) (a) 20,000
Income from Other Sources:
Interest from bank 4,000
Interest on Govt. Securities 6,000
(b) 10,000
Gross Total Income being Total Income – Loss 10,000
(b-a)

Note:
1) Loss on sale of machine is STCL. It is assumed that there is no other
machine in this block of asset. There is no capital gain, hence, the loss
will be c/f and set-off against capital gains in the following eight years.
2) Remuneration to working partners (X and Y) = Salary of X and Y +
Bonus to X and Y
= 35,000+25,000+15,000+ 10,000= Rs 85,000

Illustration -7
A, B and C share profits of a firm equally as partners. For the Assessment
Year 2023-24,following details are available:

Rs. Rs.
i) Loss as per profit and loss 4,84,000
account(After debiting Partners
Remunerationand interest on capital)
ii) Remuneration to Partners:A 1,68,000
B 1,68,000
C 84,000 4,20,000
iii) Interest on capital: Capital as on
1.4.2022 Interest
A 1,00,000 12,000
B 2,00,000 24,000
C 1,00,000 12,000
You are required to work out the income of the firm and its partners for the
Assessment Year 2023-24, if the partners have no other income.
259
Computation of Solution:
Total Income and
Tax Liability Computation of Total Income of Firmfor Assessment Year 2023-24
Particulars Rs.
Loss as per P & L A/c (-) 4,84,000
Add: Remuneration to partners (+) 4,20,000
Book Profit (Loss) (-) 64,000
Add: Remuneration to partners Rs. 1,50,000 or 90% of
book profit, whichever is more or Actual
remuneration Rs. 4,20,000, whichever is less (-) 1,50,000
Loss of the Firm c/f (-) 2,14,000

Computation of Income of the Partnersfor Assessment Year 2023-24

A B C
Rs. Rs. Rs.
Interest 12,000 24,000 12,000
Remuneration 2 : 2 : 1 60,000 60,000 30,000
72,000 84,000 42,000

Illustration- 8
P, Q and R partners in a firm sharing Profit and Loss in the ratio of 2 : 2: 1.
For the assessment year 2021-22, the firm incurred a loss of Rs. 2, 25,000
from business, which has not been set off. P died on 30.11.2022 and Q and R
continued the business. The profits of the business for the year 2022-23 were
Rs. 1,35,000, find out the income and unabsorbed loss of the firm for the
Assessment Year 2023-24.

Solution:

Computation of Income and Unabsorbed Loss for Assessment Year

2023-24

P Q R
Rs. Rs. Rs.
Profit from 1.4.2022 to 30.11.2022 36,000 36,000 18,000
Profit from 1.12.2022 to 31.03.2023 - 30,000 15,000
36,000 66,000 33,000
Less: B/f loss 90,000 90,000 45,000
Loss c/f Nil (-) 24,000 (-) 12,000

Note: Deceased partner's (P) loss cannot be carried forward. Hence it is NIL.

260
Illustration- 9 Assessment of Firms

Shri Ivin, Shri Uvin and Shri Hivin are partners in a firm sharing profits in
the ratio 5: 3: 2. The net profit of the firm as per its P & L account for the
year ending 31st March, 2023 was Rs. 3, 00,000.
The debits to the Profit and Loss Account included the following:

i) Rs. 3,600 for depreciation of Motor cycle purchased by Ivn for Rs.
18,000 on 1st April, 2022 which is used wholly for the business of the
firm and Rs. 3,600 p.a. for petrol and repairs etc. of this Motor cycle, is
paid to Ivin as Motor cycle allowance.

ii) Smt. Shivim wife of Uvin, was paid Rs. 25,000 as commission for acting
as the Sole Selling Agent of the firm.

iii) Smt. Hervin wife of Hivin was paid Rs. 3,000 for appearing as an
advocate in an appeal filed by the firm in the High Court.

iv) Rs. 80,000 spent on scientific research which includes Rs. 30,000 for the
construction of research laboratory completed on 30th September, 2022.
v) Firm spent Rs. 10,000 for promoting family planning amongst its
employees including Rs. 5,000 capital expenditure.
vi) Rs. 8,000 paid in proportion of 5:3:2 to the Life Insurance Corporation
for getting each partner's life insured for Rs. 25,000.

Prepare the statement of Total Income of the firm and compute the income-
tax payable by the firm on its total income.

Solution:

Computation of Firm's Total Income for Assessment Year 2023-24

Particulars Rs.
Profit as per Profit & Loss Account 3,00,000
Add: Items disallowed: Rs.
(i) Depreciation on Motor Cycle 3,600
(ii) Capital Expenditure on Family Planning 5,000
(iii) Life Insurance Premium 8,000 16,600
Total Income 3,16,600
Income tax on Rs. 3,16,600 @ 30% 94,980
Add: Health and Education cess @ 4% 3,799
Total Tax payable 98,779

Rounded off 98,780

261
Computation of Note:
Total Income and
Tax Liability
1) U/s 32, depreciation will not be allowed as Motor Cycle is not owned by
the firm.

2) Motor cycle allowance to partner is not covered by Section 40(b),

therefore, it is correctly charged to Profit and Loss Account of the firm.
3) Amounts paid as commission and fee to the wives of the partners of the
firm are allowed as deduction in computing the profits and gains of
business or profession, as the payment to the wives of the partners is not
a payment to the partners; but is should be a reasonable amount in the
opinion of the assessing officer.

4) The whole of the capital expenditure incurred in any previous year on

scientific research related to the business is allowed as a deduction in
computing the profit and gains of the business for that previous year.

5) Under Section 37 (1), revenue expenditure incurred for promoting family

planning amongst its employees is allowed as a deduction.

6) Life insurance premium paid by the firm for getting each partner's life
insured is disallowed.

7) In computing the total income of Ivin, Motor cycle allowance will not be
included in his total income as it is for meeting the running cost wholly
for business.

Illustration- 10
The Profit & Loss Account of a firm of professionals XYZ & Co. (having
three partners X, Y and Z), covered by Section 44AA, for the previous year
relevant to the Assessment Year 2023-24 is given below:

Dr. Cr.
Particulars Rs. Particulars Rs.
Expenses (Office) 70,000 Fees & Professional 2,50,000
receipts
Remuneration to 1,60,000 Income from other 80,000
working partners sources
Interest on Capital to 50,000 Net Loss 25,000
Partners @ 10%
Depreciation 75,000
3,55,000 3,55,000

Additional Information:
1) Out of office expenses of Rs. 70,000, Rs. 8,500 is not deductible u/s 36
and 37. Depreciation allowable u/s 32 is Rs. 65,000.

262
2) Work out the net income of the firm and partners for the Assessment Assessment of Firms
Year 2023-24. You may make the following assumptions:
i) Payment of remuneration and interest has been made according to
the partnership deed.
ii) Profit sharing ratio is 1: 3: 2.

iii) Other income of the partners: X Y Z

Rs. Rs. Rs.

a) Income from share of H.U.F. 50,000 10,000 70,000

b) Interest on securities (gross) 40,000 20,000 18,000

c) Half share of profit from an A.O.P. 13,000 - -

(A.O.P. has not paid tax on its income)

Solution:
Computation of book profitfor Assessment Year 2023-24

Particulars Rs.
Net Loss as per Profit & Loss Account (-) 25,000
Add: Amounts inadmissible: Rs.
(i) Expenses 8,500
(ii) Depreciation 10,000
(iii) Remuneration of Partners 1,60,000 (+)
1,78,500
Total Income 1,53,500
Less: Income from Other Sources being not 80,000
Professional Income
Book Profit 73,500

Computation of Firm's Total Incomefor Assessment Year 2023-24

Particulars Rs.
Book Profit (+) 73,500
Less: Admissible Remuneration to Partners:
90% of Book Profit of Rs. 73,500 or
Rs. 1,50,000, whichever is more
Or
Actual remuneration Rs. 1,60,000, whichever is
less (-) 1,50,000
Income from Profession – Loss (-) 76,500
Income from Other Sources (+) 80,000
Firm's Total Income/Loss 3,500
263
Computation of Computation of income of partners based on assumption that
Total Income and
Tax Liability remuneration and interest have been distributed equally among the
partners:

X Y Z
Particulars Rs. Rs. Rs.
Remuneration from firm 53,333 53,333 53,334
Interest from firm 16,666 16,667 16,666
Interest on securities 40,000 20,000 18,000
Share of Profit from an A.O.P. 13,001 - -
Gross Total Income 1,23,000 90,000 88,000
Less: Deduction Nil Nil Nil
Total Income 1,23,000 90,000 88,000

Illustration- 11
'X' and 'Y' are partners in a firm assessed as such. They share profits and
losses in the ratio of 60% and 40% respectively. The firm runs a small-scale
industrial undertaking. The Profit & Loss Account for the Financial Year
2022-23 is as under:

Dr. Cr.

Particulars Rs. Particulars Rs.

Salaries & Wages 5,00,000 Gross Profit 14,50,000
Advertisement 2,00,000 Long-term Capital 4,00,000
Gains
Travelling Expenses 1,50,000 Recovery of Bad Debts 50,000
Depreciation as per I.T. 80,000
record
Approved Donation by 70,000
cheque
Interest payable 2,00,000
General Expenses 4,00,000
Net Profit 3,00,000
19,00,000 19,00,000

Additional Information:
i) 25% plant and machinery of the industrial undertaking is old.
ii) Salaries and wages include the sum of Rs. 90,000 and Rs. 60,000 paid to
'X' and 'Y' respectively.
iii) Interest payable includes:
a) Interest to 'X' on a deposit made by his minor son 'A' amounting to
264 Rs. 30,000 @ 15%. Rs. 30,000 is the amount of interest.
 b) Interest to 'Y' amounting to Rs. 30,000 @ 12%. Assessment of Firms

c) Interest of Rs. 10,000 payable to Industrial Development Bank of

India on loan taken for the industrial undertaking.
iv) Travelling expenses include visit of 'X' to Mumbai for business purposes
for 15 days where his hotel bill was Rs. 5,000 per day.
v) Salary and interest payments have been authorized by partnership deed.
vi) 'B', a minor son of 'Y' has been admitted to the benefits of partnership in
another firm. He has received salary and interest amounting to Rs.
40,000 and Rs. 15,000 from that firm out of which salary of Rs. 10,000
and interest of Rs. 5,000 has been disallowed to the firm.
vii) Income from Mutual Fund (Gross): 'X' Rs. 30,000, 'Y' Rs. 50,000.
viii) 'X' has purchased NSC VIII Issue on 31.03.2023 for Rs. 40,000 and 'Y'
has deposited Rs. 60,000 in Public Provident Fund during the Financial
Year 2022-23.
Compute for the Assessment Year 2022-23, (a) total income of the firm (b)
tax liability of the firm on its total income, (c) total income of the partners.

Solution:
Computation of Total Income of Firmfor Assessment Year 2023-24

Particulars Rs.
Net Profit 3,00,000
Add: Disallowed Expenses:
(i) Travelling Expenses of X Fully allowed -
(ii) Donation 70,000
(iii) Interest to IDBI – Not paid (disallowed u/s 43 B) 10,000
(iv) Remuneration to Partners (Rs. 90,000+60,000) 1,50,000
6,30,000
Less: Long-term Capital Gains 4,00,000
Book Profit 2,30,000
Less: Remuneration to Partners:
90% of Rs. 2,30,000 or Actual remuneration Rs. 1,50,000,
whichever is less 1,50,000
Business Income 80,000
Add: Long-term Capital Gains 4,00,000
Gross Total Income 4,80,000
Less: Donations u/s 80G:
Qualifying Amount 10% of Rs. 70,000
Deduction 50% of Rs. 7,000 3,500
Total Income 4,76,500
265
Computation of Computation of Tax Liability of the Firm for Assessment Year 2023-24
Total Income and
Tax Liability Particulars Rs.
Tax on Business Income Rs. 76,500 @ 30% 22,950
Tax on LTCG Rs. 4,00,000 @ 20% 80,000
1,02,950
Add: Health and Education cess @ 4% 4,118
Tax Liability 1,07,068
Rounded off 1,07,070

Computation of Total Income of Partners for Assessment year 2023-24

Particulars Rs. Rs.

Share in the income of firm – Exempt u/s 10(2A) - -
Remuneration 90,000 60,000
Interest to Y allowed to the firm - 30,000
Income from M.F. (Exempt) - -
Interest Income of Minor Son 30,000 10,000
1,20,000 1,00,000
Less: Exempt u/s 10 (32)- Minor Son's Income 1,500 1,500
1,18,500 98,500
Less: Deduction u/s 80C 40,000 60,000
78,500 38,500

Note: Salary income of B, minor son is not includible in the income of Y

since it is from manual work.

Illustration- 12
The Profit & Loss Account of the firm of M/s A and B, sharing profits and
losses in the ratio of 3: 2 for the previous year ending on 31st March, 2023 are
as follows:

Dr. Cr.

Particulars Rs. Particulars Rs.

Cost of Goods sold 6,45,000 Sales 10,50,000
Remuneration of Partners 3,00,000 Dividends 30,000
Remuneration to 1,50,000 Long-term capital gains 1,80,000
Employees
Interest to Partners 15,000
Other Expenses 1,20,000
GST outstanding 10,000
Net Profit 20,000
266 12,60,000 12,60,000
Additional information is given below: Assessment of Firms

1) Other expenses include the following:

i) Entertainment expenses Rs. 40,000
ii) Mobiles, costing of Rs. 2,500 each given to ten dealers who
exceeded the sales target fixed under sales promotion scheme.
iii) Rs. 35,500 paid in cash to an advertising agency.
2) Outstanding GST was paid on 14th July, 2023.
3) The firm is not evidenced by instrument.
4) Other incomes of A Rs. 1,00,000 and B Rs. 81,000.
You are required to compute for the assessment year 2023-24
i) Total income of the firm and (ii) Tax liability of the firm on its total
income.

Solution:

(a) Computation of Income from Business for Assessment Year 2023-24

Particulars Rs.
Net Profit as per Profit and Loss Account 20,000
Add: Inadmissible Payments:
Interest to Partners 15,000
Entertainment: Fully allowed -
Sales Promotion Expenses: Fully allowed -
(Mobiles)
100% of Rs. 35,500 cash payment to advertising 35,500
agency
Remuneration to Partners 3,00,000
3,70,500
Less: (i) Dividend 30,000
(ii) Long-term Capital Gain 1,80,000 2,10,000
Income of business 1,60,500

(b) Computation of Income of the Firm for Assessment Year 2023-24

Particulars Rs.
Profits and Gains of Business 1,60,500
Long-term capital gain 1,80,000
Income from other sources: Dividend Exempt
Total Income 3,40,500

267
Computation of (c) Computation of Tax Liability of the Firm for Assessment Year 20223-24
Total Income and
Tax Liability
Particulars Rs.
(i) Long-term Capital Gain: Rs. 1,80,000 @20% 36,000
(ii) Business Incomes: Rs. 1,60,500 @ 30% 48,150
84,150
Add: Health and Education cess @ 4% 1,926
Tax liability 86,076
Rounded off 86,080

Note: Though firm does not fulfill conditions of sec. 184 still it will be
assessed as firm hence, interest and remuneration to partners will not be
allowed as a deduction in computing the income of the firm and these
payment shall not be included in the income of the partners under the head
Profits and Gains of Business or Profession.

Illustration-13
L, P and J are partners of a firm sharing profits/losses in the ratio of 7:5:3. In
the Previous Year 2020-21 the firm incurred a loss of Rs. 2,10,000.
On 30th November, 2022, P retired from the firm though L and J continued
the business agreeing to share profits/losses in the ratio of 7:3. In previous
year 2022-23, the firm made a profit of Rs. 3,15,000. Determine the taxable
profit of the firm for Assessment Year 2023-24.
Solution:
Computation of Taxable Profits of the Firmfor Assessment
Year 2023-24
Profit of the firm = Rs. 3,15,000
Profits from 1.4.2022 to 30.11.2022= Rs. 2,10,000
Profits from 1.12.2022 to 31.3.2023= Rs. 1,05,000

Share of profit of partners

Particulars L P J
Rs. Rs. Rs.
Profit up to retirement date
Rs. 2,10,000 in 7 : 5: 3 98,000 70,000 42,000
Profit for post-retirement period 73,500 - 31,500
Rs. 1,05,000 in 7 : 3
1,71,500 70,000 73,500
Loss: 7 : 5 : 3 (Rs. 2,10,000) 98,000 70,000 42,000
73,500 NIL 31,500

268
 Rs. Assessment of Firms

Max. deduction allowable regarding share of loss of P NIL

Profit of business 3,15,000
Less: Loss (98,000+NIL+42,000) 1,40,000
Business income being Total Income 1,75,000

Illustration-14
Profit and Loss Account of A Co. (Partnership firm assessed as such of A, B
and C) for the year ending March 31, 2023 is as follows:

Dr. Cr.

Particulars Rs. Particulars Rs.

Cost of Goods sold 17,70,000 Sales 30,00,000
Remuneration of Partners Rent of the house 1,00,000
property (half portion)
A 2,00,000 Interest on debentures 1,20,000
(Gross)
B 2,00,000
C 2,00,000
Interest to Partners
A 80,000
B 80,000
C 90,000
Municipal tax of the 10,000
house property (Entire
property)
Other expenses 5,00,000
Net Profit 90,000
32,20,000 32,20,000

Other Information:
i) On scrutiny, it was found that the firm purchased raw material on credit
from D-brother of partner A. The amount of bill is Rs. 62,000 (market
value is Rs. 48,000). The bill is paid in cash on August 5, 2022.

ii) On December 1, 2022, firm pays an outstanding custom duty liability of

Rs. 50,000 of the Previous Year 2021-22. As this amount pertains to the
Previous Year 2021-22, it has not been debited to the aforesaid profit and
loss account.
iii) C is not a working partner. Salary has been given as per the partnership
deed.
269
Computation of iv) Interest on capital to partners not deductible under Section 40(b) is Rs.
Total Income and
Tax Liability 35,000.
v) The firm owns a house, the ground floor is used for business purposes,
and the first floor is given on rent. The municipal taxes were due on
31.03.2023and were paid on July 1, 2023.

vi) The firm donated by chequeRs. 20,000 to Prime Minister's National

Relief Fund. This amount of Rs. 20,000 is included in other expenses
duly debited to Profit and Loss A/c.

Find out the net income of the firm (and also the tax treatment of the
payments to partners in their hands) for the Assessment Year 2023-24,
assuming that three concerned partners are to share profits and losses equally.

Solution:
Computation of Book-profit for Assessment Year 2023-24

Particulars Rs.
Net Profit 90,000
Add: Disallowed items:
Remuneration to Partners 6,00,000
Excess interest to partners 35,000
Municipal tax 1/2 let out portion 5,000
Excess payment to brother 14,000
Amount paid in cash
100% disallowed of Rs. 48,000 48,000
Donation 20,000
(a) 8,12,000
Less: Custom Duty 50,000
Rent 1,00,000
Interest on debentures 1,20,000
(b) 2,70,000

Book profit (a - b) 5,42,000

Less: Remuneration to partners:
On Rs. 3,00,000 @ 90% or Rs. 1,50,000 2,70,000
whichever is higher
On Rs. 2,42,000 @ 60% 1,45,200
4,15,200
Or
Rs. 5,00,000 as per deed, whichever is less 4,15,200
Business Income (A) 1,26,800
270
Income from House Property: Assessment of Firms

G.A.V. (Rent) 1,00,000

Less: Municipal Tax (unpaid) -
Annual Value 1,00,000
Less: 30% of A.V. 30,000
(B) 70,000
Income from other sources :
Interest on debentures (C) 1,20,000
Gross Total Income (A+B+C) 3,16,800
Less: Deduction u/s 80G: Donation 20,000
Total Income (D) 2,96,800

Computation of Income of Partners for Assessment Year 2022-23

A B C
Particulars Rs. Rs. Rs.
1. Interest (14% disallowed) 68,800 68,800 77,400
2. Remuneration A and B (2:2) 2,07,600 2,07,600 -
3. Share in profit – Exempt - - -
Amount taxable in the hands of 2,76,400 2,76,400 77,400
partners
Note:
1) Amount of municipal tax has been paid before the due date of furnishing
the return, tax for building used for business purposes is allowable.

2) C is not a working partner. Hence, he is not entitled to remuneration.

3) Remuneration allowed Rs. 4, 15,200 divided in the ratio of 2: 2.

35,000×100
4) Interest disallowed = 2,50,000
= 14%

17.23 LETUS SUM UP

For assessment of a firm as a firm, it is necessary that partnership is
evidenced by an instrument in which partner's individual share should also be
specified. The return on income of the firm should accompany a certified
copy of the instrument (partnership deed) when it (Return) is filed for the
previous year relevant to the assessment year in respect of which assessment
as a firm is first sought. The remuneration and interest to be paid to the
partners should be duly authorized by and accordance with the partnership
deed. A limit is prescribed beyond which payment of remuneration to the
partner's shall not be allowed even if is authorized by partnership deed.
Following are such limits:
271
Computation of Upto first Rs. 3,00,000 of Book Profit/Loss- Rs. 1,50,000/- or 90% of Book
Total Income and
Tax Liability Profit, whichever is more , on the balance of Book Profit over Rs. 3,00,000/-
60%.

Provisions of Section 184 and Section 40(b) are to be compiled by the firm. If
the firm fails to fulfill the conditions of Section 184, the firm shall be
assessed as firm but interest and remuneration to partners shall not be
allowed as deduction. Similarly, deductions can be claimed within the four
corners of Section 40 (b).

Computation of firm's income is based on its Book Profit and Adjustment of

profit and lossaccount. In case of change in the constitution of the firm, the
assessment shall be made on the firm as re-constituted.

In case of dissolution of firm or discontinuance of business, the assessment of

the firm's total income shall be made as if no such dissolution or
discontinuance has taken place and every partner at the time of such
dissolution or discontinuance shall jointly and severally be liable for tax,
penalty or interest due from the firm.
As provided in partnership deed [but not exceeding as provided in
Section 40 (b)], if Salary, Bonus, Commission or other remuneration is paid
to the partners while computing the income of partners from the firm, such
payments will be taxable as business income in the hands of partners and not
under the head 'Salaries'. Interest on capital and loan to the partners, if
authorized by the partnership deed, is allowable as deduction from the firm's
profit but it cannot exceed @ 12% per annum. Similarly, if a firm pays rent to
any partner for using his building for firm's business, such rent paid is an
allowable expenditure in the firm.

Firm's losses can be carried forward to be set off in future under the income
tax rules. However, the share of loss of a partner in the firm cannot be set off
by the partner from his income.

Tax can be paid by either physical mode or electronic mode (E- payment
mode), however, payment of tax by E- payment mode is mandatory for the
firm which is liable to get its accounts audited u/s 44 AB of Income Tax Act.
A firm is also liable to pay advance tax as per Income Tax Law.

It is mandatory for every firm to file its return of income no matter it has
profit or loss. It is not mandatory for all firms to have digital signature in E-
filing of Return of Income. However, digital signatures are required in the
return of firms falling under the provision of Section 44 AB.

272
17.24 KEY WORDS Assessment of Firms

Partnership: According to Indian Partnership Act 1932, Section 4,

partnership is "the relationship between persons who have agreed to share
profits of a business carried on by all or any of them, acting for all."

Partners: Any persons who have entered into partnership with one another
as per provisions of Section 4 Partnership Act, 1932, are called individually
'Partners',

Firm: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.
Working Partner: A person engaged actively in conducting the affairs of the
business or profession of the firm of which he is a partner. A non-working
partner does not take part in the activities of the firm.
Book Profit: Net profit as calculated by profit & loss account for the relevant
previous year computed in accordance with Section 30 to 44D as increased
by the aggregate amount of remuneration paid to all the partners, if the firm
of such amount has been deducted while computing the net profit.
Limited Liability Partnership (LLP): According to the Limited Liability
Partnership Act, 2008 [Section 2], Limited Liability Partnership is a
partnership formed and registered under the Act. A Limited Liability
Partnership (LLP) is a body corporate formed and incorporated under the
Limited Partnership Act, 2008. The entity of LLP is legally separate from
that of its partners.

A LLP is liable to the full extent of its assets but liability of the partners is
limited to their agreed contribution in the LLP. Since, liability of partners in
LLP is restricted to their agreed contribution; the LLP contains elements of
both a corporate structure as well as a partnership firm structure.

Alternate Minimum Tax (AMT): The provisions of AMT are applicable to

all the partnership firms. Tax payable by the firm cannot be less than 18.5%
(+ Surcharge + Health and Education Cess) of adjusted total income as per
Section 115 JC. The deduction under Section 80 HH to 80 RRB can be
claimed only by paying minimum tax @ 18.5% on Adjusted Total Income of
partnership firms including LLP's.

Adjusted Total Income: Adjusted Total Income = Taxable Income +

Deduction claimed under Chapter VI A (if any) from Section 80 H to 80
RRB except 80 P. + Deduction claimed if any u/s 10 AA + deduction claimed
if any u/s 35 AD as reduced by regular depreciation allowed.

E-filing of Return of Income: When return of income is filed by electronic

mode, it is called E- filling of Return of Income.

273
Computation of
Total Income and 17.25 ANSWERS TO CHECK YOUR PROGRESS
Tax Liability
Check Your Progress A
1) (a) True (b) True (c) False (d) False
Check Your Progress B
1) (i) b (ii) b (iii) a (iv) a (v) a
2) (a) 30% (b) General partnership firm (c) one crore (d) 12% p.a.
(e) 12% p.a.
3) (a) False (b) False (c) True (d) True.
Check Your Progress C
1) (a) True (b) True (c) False (d) True

17.26 TERMINAL QUESTIONS/EXERCISES

1) Who can be a Partner of a firm? Distinguish between a Working Partner
and a Non-working Partner.
2) Explain with example the term Book Profit in relation to the assessment
of firms.
3) Explain the procedure of computation of total income of the firm. Give a
proforma and such computation.
4) What items are disallowed as deduction in computation of firm's income
from business or profession under Section 40(b).
5) Explain in detail provisions of Section 184 in relation to the assessment
of the firm.
6) Explain fully, the rules related with the filing of return of income by the
firm.
7) From the following information compute the total income of the firm and
tax payable by it for the Assessment Year 2023-24.
Rs. Rs.
i) Profit from an industrial undertaking 35,000
ii) Profit from business of glass work 25,000
iii) Short-term capital gains 20,000
iv) Long term capital gains 40,000
v) Interest from bank 6,000
vi) Loss from house property Rs. 10,000
(on account of interest on loan taken
to construct the property).
vii) Donation to approved Charitable
institution by cheque 15,000

[Answer: (a) Total Income Rs. 1,12,200 (b) Tax Liability Rs. 30,850]
274
8) Profit and Loss Account of Kamal & Co. (a partnership firm of Assessment of Firms
Chartered Accountants) for the year ending 31st March, 2023 is as
follows:

Particulars Rs. Particulars Rs.

Expenses 85,000 Audit fee 80,000
Depreciation 40,000 Receipt from Clients for 62,000
tax advice
Interest on capital to 8,000 Net Loss 58,000
partners
Remuneration to partners 67,000
2,00,000 2,00,000

Addition information:
i) Out of expenses of Rs. 85,000, Rs. 16,000 is not deductible u/s 36, 37 (i)
and 43 (b).

ii) Allowable depreciation u/s 32 is Rs. 42,000.

iii) Interest to the extent of Rs. 800 is not allowed to be deducted u/s 40(b).
Compute the deductible remuneration in relation to partner' remuneration and
Book Profit u/s 40(b).

[Answer: Book Profit Rs. 23,800, Allowable Remuneration Rs. 67,000]

9) X, Y and Z are equal partners in a firm. For the previous year, the
particulars of income of the firm are given below:

Particulars Rs.
a) Profit from business (after debiting remuneration to 3,00,000
partners)
b) Long-term capital gains 1,20,000
c) Interest on Bank deposit 50,000
d) Remuneration to partners 1,80,000
e) Unabsorbed depreciation 30,000
f) Brought forward business loss 3,00,000
g) Capital gain invested in specified assets 35,000
h) Amount deposited in Capital Gain A/c Scheme, 1988 45,000

Compute total income and tax liability of the firm.

[Answer: (a) Book Profit Rs. 4,50,000 (b) Total Income Rs. 60,000
(c) Tax liabilities Rs. 14,560]

275
Computation of 10) Partnershipfirm X, Y and Co. furnishes the following particulars for the
Total Income and
Tax Liability Assessment Year 2023-24.

Particulars Rs. Rs.

Loss as per Profit and Loss A/c after debiting the 1,50,000
following
a) Remuneration to partners:
X 90,000
Y 60,000
Z 30,000 1,80,000
b) Interest on Capital @ 16%
X 20,000
Y 24,000
Z 18,000 62,000
c) Patent rights acquired 1,00,000
d) Donation to National Defence Fund by 20,000
cheque
e) Preliminary Expenses paid 20,000
Remuneration to Partners is as per
Partnership deed.

Calculate total income of the firm.

[Answer: Book Profit Rs. 1,56,500, Total Income – Nil]

11) Bose & Co., dealers in hardware, show sales of Rs. 40,00,000. Their
purchases amounted to Rs. 42,50,000. The value of the closing stock
was (a) according to cost price Rs. 10,00,000 and (b) according to
market rate Rs. 9,00,000

Their establishment and other expenses amounted to Rs. 2,50,000. The

expenses included the following:

Particulars Rs.
Bad Debts 12,000
Bad Debts Reserve 6,000
Donation to a Political Party by cheque 3,000
Entertainment Expenses 6,000
Professional Tax 1,000
Loss of Stock in trade by theft 5,000
Legal costs incurred to defend their title on their business 7,250
premises owned by them
Loss on sale of motor. The written-down value was Rs. 47,000. It 7,000
276 was sold for Rs. 40,000
They owned another motor and the W.D.V. of it is Rs. 77,000. Provision has Assessment of Firms
to be made for its depreciation at 15%. Work out the firm's taxable income.

[Answer: Taxable Income Rs. 4,00,400]

12) A, B and C are partners of a firm with equal shares. The profit and loss
accounts for the year ended 31.3.2023 shows a net profit of Rs. 99,750
after debiting the following as per deed.

i) Salaries of Rs. 17,000 and 18,000 to A and B respectively.

ii) Bonus to C Rs. 15,000.
iii) Rs. 5,000 for interest on capital to 'A' calculated @ 20%.
iv) Rs. 15,000 for rent of the business premises paid to 'B'.
v) Commission of Rs. 5,000 to 'C'.

Compute Book Profit and the total income of the firm for the Assessment
Year 2023-24, assuming that it is a professional firm and all are working
partners.

[Answer: (a) Book Profit Rs. 1,56,750

(b) Total Income Rs. 1,01,750]
13) The Profit & Loss Account of M/s XY pottery Works for the year
ending on 31st March, 2023 is:

Particulars Rs. Particulars Rs.

Stock 1,50,000 Sales 4,50,000
Purchases 1,30,000 Stock 25,000
Penalties and Fines 59,000 Rent from House 12,000
Property
Office Expenses 4,000
Selling Expenses 10,000
Interest to Partners 6,000
Net Profit 1,28,000
4,87,000 4,87,000
i) Interest of Rs. 6,000 @ 8% has been paid to X on capital.
ii) Penalties and fines have been levied because of illegal sale and
purchase of raw materials.
iii) Remuneration payable to partners: X Rs. 2,00,000 and Y Rs. 1,00,000
has not been debited to Profit & Loss Account.
iv) X and Y are equal partners in the firm.
Compute the tax payable by the firm and the total income of the partners.

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Computation of [Answer: (a) Book Profit Rs. 1,75,000
Total Income and
Tax Liability (b) G.T.I. Rs. 25,900
(c) Tax payable 8,081 or 8,080 (Rounded off)
(d) Income of partners X Rs. 1,11,000 , Y Rs. 52,500]
14) X, Y and Z are partners in a firm, sharing profits and losses in the
proportions of 2/5th, 2/5th and 1/5th respectively. The Profit and Loss
Account for the year ended 31st March, 2023 is as follows:

Particulars Rs. Particulars Rs.

To Sundry Trade 1,22,000 By Gross Profit b/d 4,88,200
Expenses
Interest on Capital @ Interest on Securities 10,000
13% Gross
X 13,000
Y 6,500
Z 6,500 26,000
Rent to Y 20,000
Salary to Y 72,000
Commission to Z 36,000
Net Profit 2,22,200
4,98,200 4,98,200

Compute the total income of the firm and taxable income of the three partners
in the firm, Y and Z are working partners.

[Answer: a) Book profit Rs. 3,22,200

b) Business income Rs. 2,14,200.
c) Total income Rs. 2,24,200.
d) Taxable income of partners
(X Rs. 12,000, Y Rs. 78,000, ZRs. 42,000)]

Note: These questions and illustrations are helpful to understand this

unit. Do efforts for writing answers to these questions but do not send
your answers to university. It is only for your practice.

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