Income from Profits & Gains of Business or Profession

PROFITS AND GAINS OF BUSINESS OR PROFESSION

Remuneration to partners will be given on the basis of BOOK PROFIT.

BOOK PROFIT is not real like NET PROFIT.

NET PROFIT is INCOME of the FIRM.

Method to compute BOOK PROFIT:

1.      First of all, take NET PROFIT. If any income other than Business or Profession is included in net profit, we should reduce it.

2.      INTEREST paid more than 12% will be added to it.

3.      DEPRECIATION will be adjusted as per IT Act.

4.      REMUNERATION to partners (both working and non-working) will be added.

5.      Any EXTRA EXPENSES which were not necessary for business will be added.

The final amount will be BOOK PROFIT.

Shortcut to learn – N    I    D    R    E   

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Question:

Dr.				Cr.
To Purchase		1725000	By Sales	2434000
To Salary		80000
To Office Expenses		60000
To Donation to PM relief fund		25000
Remuneration to partners
A	120000
B	120000
C	60000	300000
To Interest to partner on Capital @24%
A	40000
B	24000
C	20000	84000
To Depreciation		100000
To Net Profit
A	20000
B	20000
C	20000	60000

Other relevant information:-

i.                    All the three partners are working.

ii.                  The partnership deed provides for payment of interest on capital @24%.

iii.                Depreciation admissible under IT Act is 1,06,000.

Answer:

Net Profit (N) = 60000

Interest (I) = 42000 (up to 12% is allowed. Therefore, 84000/2=42000)

Depreciation (D) = 100000 – 106000 =  - 6000

Remuneration (R) = 300000

Extra Expenses (E) = 25000

Book Profit = 60000 + 42000 + (-6000) + 300000 + 25000 = 421000 /-         

Question:

Dr.			Cr.
To Purchase	40500	By Sales	70000
To Travelling Expenses	2000
To Charity & Donation	1000
To Remuneration	5000
To Depreciation	2400
Interest to partners on Capital @22%	1100
Net Profit	18000

Other relevant information :

i.                    Partnership deed provides 22% interest.

ii.                  Depreciation as per IT Act is Rs. 2700 /-

Answer:

Net Profit (N) = 18000

Interest (I) = 500 (up to 12% is allowed. Extra Interest to be added is 10%.)

Depreciation (D) = 2400 – 2700 =  - 300

Remuneration (R) = 5000

Extra Expenses (E) = 1000

Book Profit = 18000 + 500 + (-300) + 5000 + 1000 = 24200 /-                       

If Net Profit of a firm is Rs. 100 and depreciation claimed is Rs. 20. If depreciation as per IT Act is Rs. 40. Then compute the Book Profit ?

Answer: 100 + (20 – 40) = 100 – 20 = 80 /-

Question:

Dr.			Cr.
To Purchase	200000	By Sales	1000000
To Salary	100000
To Office Expenses	100000
To Donation to CM fund	100000
To Remuneration to partners	300000
Interest to partners on Capital @30%	150000
To Depreciation	40000
To Net Profit	10000

Other relevant information:

i.                    Partnership deed provides interest @30%

ii.                  Depreciation as per IT Act is Rs. 50000 /-

Compute Book Profit.

Answer:

Net Profit (N) = 10000

Interest (I) = 90000 (up to 12% is allowed. Extra Interest to be added is 18%.)

Depreciation (D) = 40000 – 50000 = - 10000

Remuneration (R) = 300000

Extra Expenses (E) = 100000 (CM Relief Fund)

Book Profit = 10000 + 90000 + (-10000) + 300000 + 100000 = 490000 /-     

Method to compute Remuneration to Partners:

i.                    If the value of Book Profit is NIL or NEGATIVE,  then maximum Remuneration given to partners should not be more than Rs. 1,50,000 /-

ii.                  If the value of Book Profit is Positive then:

a.       Up to Rs. 3,00,000 of Book Profit = 90% of Book Profit or Rs. 1,50,000 (whichever is more)

b.      If Book Profit is more than Rs. 3,00,000 then 60% of Balance of the Book Profit.

Examples:

Question : If Book Profit is Rs. 10,00,000. Find the maximum amount of remuneration given to partners.

Answer:  300000 * (90%) = 270000 or 150000 (whichever is maximum)

Balance amount 700000 * 60% = 420000

Amount of remuneration will be = 270000 + 420000 = 690000 /-

Question: If Book Profit is Rs. 6,50,000. Compute maximum remuneration given to partners.

Answer: 300000 * 90% = 270000 or 150000 (whichever is maximum)

Balance amount 350000 * 60% = 210000

Amount of remuneration will be = 270000 + 210000 = 480000 /-

·         NET PROFIT IS INCOME OF THE FIRM

Question: If Book Profit is Rs. 7,00,000 and Remuneration given to partners is Rs. 4,50,000. Compute the amount of EXTRA remuneration which should be added to income of the firm.

Answer: 300000 * 90% = 270000 or 150000 (whichever is maximum)

Balance amount 400000 * 60% = 240000

Amount of remuneration will be = 270000 + 240000 = 510000 /-

And actual remuneration given to partners in the question is = 450000/- which is LESS than the calculated amount of remuneration i.e., 510000/-

Therefore, NIL will be added to the income of the firm.

Question: If Book Profit is Rs. 10,00,000 and Remuneration given to partners is Rs. 7,00,000. Compute the amount of EXTRA remuneration which should be added to income of the firm.

Answer: 300000 * 90% = 270000 or 150000 (whichever is maximum)

Balance amount 700000 * 60% = 420000

Amount of remuneration will be = 270000 + 420000 = 690000 /-

And actual remuneration given to partners in the question is = 700000/- which is MORE than the calculated amount of remuneration i.e., 690000/-

Therefore, the amount that should be added to the income of the firm is (700000 – 690000) = 10000 /-

Question: If Book Profit is Rs. 15,00,000 and Remuneration given to partners is Rs. 8,50,000. Compute the amount of EXTRA remuneration which should be added to income of the firm.

Answer: 300000 * 90% = 270000 or 150000 (whichever is maximum)

Balance amount 1200000 * 60% = 720000

Amount of remuneration will be = 270000 + 720000 = 990000 /-

And actual remuneration given to partners in the question is = 850000/- which is LESS than the calculated amount of remuneration i.e., 990000/-

Therefore, the amount that should be added to the income of the firm is NIL.

Question: If the interest provided to partners @30% is Rs. 1800. Find the EXTRA amount of interest that should be added to the income of the firm.

Answer: As we know that the interest allowable for exemption is 12% only. The extra interest i.e., 30% - 12% = 18% will be added to the income of the firm.

Therefore, we will now calculate the value of 18%.

30% of interest is = 1800/-

1% of interest is = 1800 / 30 = 60

Therefore, 18% of interest is = 60 * 18 = Rs. 1080 which will be added to the income of the firm.

Question: If the interest provided to partners @20% is Rs. 50000. Find the EXTRA amount of interest that should be added to the income of the firm.

Answer: As we know that the interest allowable for exemption is 12% only. The extra interest i.e., 20% - 12% = 8% will be added to the income of the firm.

Therefore, we will now calculate the value of 8%.

20% of interest is = 50000/-

1% of interest is = 50000 / 20 = 2500

Therefore, 8% of interest is = 2500 * 8 = Rs. 20000 which will be added to the income of the firm.

Question: A, B & C are partners of a firm.

Remuneration given to partner A = 2,00,000

 Remuneration given to partner B = 3,00,000

Remuneration given to partner C = 1,00,000

If Book Profit of the firm is Rs. 12,00,000 then compute the amount of remuneration that should be added to the income of the firm, if B is not a working partner.

Answer: 300000 * 90% = 270000 or 150000 (whichever is maximum)

Balance amount 900000 * 60% = 540000

Amount of remuneration will be = 270000 + 540000 = 810000 /-

And actual remuneration given to working partners (A & C only) in the question is = 300000/- which is LESS than the calculated amount of remuneration i.e., 810000/-

Therefore, the amount that should be added to the income of the firm is NIL.

But the remuneration given to SLEEPING PARTNER i.e., Partner B will be fully added to the income of the firm. So, Remuneration given to B of Rs. 300000 will be added to the income of the firm.

Question: If Book Profit is Rs. 100000 and B & C are sleeping partners of a firm.

Remuneration given to partner A = 1,50,000

 Remuneration given to partner B = 2,10,000

Remuneration given to partner C = 90,000

Compute the amount of remuneration that should be added to the income of the firm.

Answer: 100000 * 90% = 90000 or 150000 (whichever is maximum)

Amount of remuneration will be = 150000 /-

And actual remuneration given to working partners (A only) in the question is = 150000/- which is EQUAL to the calculated amount of remuneration i.e., 150000/-

Therefore, the amount that should be added to the income of the firm is NIL.

But the remuneration given to SLEEPING PARTNER i.e., Partner B & C will be fully added to the income of the firm. So, Remuneration given to B & C amounts to Rs. (210000 + 90000) = 300000 will be added to the income of the firm.

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Dr.						Cr.
To Purchase				1725000	By Sales	2434000
To Salary				80000
To Office Expenses				60000
To Donation to PM’s Relief Fund				25000
To remuneration to partners				300000
A		120000
B		120000
C		60000
To Interest to partners on capital @24%				84000
A	40000
B	24000
C	20000
To Depreciation				100000
To Net Profit				60000
A			20000
B			20000
C			20000

Other relevant information is as under:

i.                    All the three partners are working partners.

ii.                  Partnership deed provides for payment of interest @24% of capital.

iii.                Depreciation allowable under the IT Act is Rs. 106000.

Compute the Gross Income of the firm? Compute the Gross Total Income of each partner?

Answer:

Net Profit (N) = 60000

Interest (I) = 42000 (up to 12% is allowed. Therefore, 84000/2 = 42000)

Depreciation (D) = 100000 – 106000 = - 6000

Remuneration (R) = 300000

Extra Expenses (E) = 25000

Book Profit = 60000 + 42000 + (-6000) + 300000 + 25000 = 421000 /-

For Remuneration: - 300000 * 90% = 270000 or 150000 (whichever is maximum)

Balance Amount 121000 * 60% = 72600

Amount of Remuneration will be = 270000 + 72600 = 342600 /-

And actual remuneration given to working partners (A+B+C) in the question is = 300000 /-

which is LESS than the calculated amount of remuneration i.e., 342600 /-

Therefore, the amount that should be added to the income of the firm is NIL.

GROSS TOTAL INCOME OF THE FIRM:-

 Net Profit + Extra Expenses + Remuneration + Interest + Depreciation =

60000        + 25000                + NIL                 + 42000   + (100000-106000) = 121000 /-

ALL DEDUCTIONS WILL BE ADDED TO THE GROSS TOTAL INCOME.

NET TOTAL INCOME OF THE FIRM:-

Gross Total Income – Deductions Allowable (u/s 80C to 80U) = 121000 – 25000 = 96000 /-

GROSS TOTAL INCOME OF PARTNER A:-

The amount of interest [((40000/24)*12) =20000] will be added to the income of the partner. Remuneration to partner ‘A’ is Rs. 120000. Therefore, GTI of ‘A’ = 120000 + 20000 = 140000 /-

For A.Y. 2012-13, Tax Liability of ‘A’ will be NIL.

GROSS TOTAL INCOME OF PARTNER B:-

The amount of interest [((24000/24)*12) =12000] will be added to the income of the partner. Remuneration to partner ‘B’ is Rs. 120000. Therefore, GTI of ‘B’ = 120000 + 12000 = 132000 /-

For A.Y. 2012-13, Tax Liability of ‘B’ will be NIL.

GROSS TOTAL INCOME OF PARTNER C:-

The amount of interest [((20000/24)*12) =10000] will be added to the income of the partner. Remuneration to partner ‘C’ is Rs. 60000. Therefore, GTI of ‘C’ = 60000 + 10000 = 70000 /-

For A.Y. 2012-13, Tax Liability of ‘C’ will be NIL.

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 INTEREST MORE THAN 12% WILL BE ADDED TO THE INCOME OF THE FIRM. THAT INTEREST WILL NOT BE ADDED AGAIN INTO THE INCOME OF THE PARTNER.

For Example =1) If the interest is given to partners @48% and partnership deed provides interest on capital @48%, then it is clear that there is NO VIOLATION of the deed as the partners restricted themselves to 48% only. Now, we know that, interest up to 12% is allowed and the excess interest i.e., 48-12=36% will be added to the income of the firm. And the 12% of the interest which was allowed will be distributed between partners.

2) If the interest is given to partners @48% and partnership deed provides interest on capital @20%, then it is clear that there is VIOLATION of the deed as the partners did not restrict themselves to 20% only. So, whole interest i.e., 48% will be added to the income of the firm as PENALTY and NIL will be added to income of the partner.

3) If the interest is given to partners @18% and partnership deed provides interest on capital @48%, then it is clear that there is NO VIOLATION of the deed as the partners restricted themselves to 18%, although they could have given up to 48%. Now, we know that, interest up to 12% is allowed and the excess interest i.e., 48-18=30% will be added to the income of the firm. And the 12% of the interest which was allowed will be distributed between partners. So NIL will be added to income of the partner.

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Dr.						Cr.
To Cost of Goods				40500	By Sales	70000
To Travelling Expenses				2000
To Charity & Donation				1000
To remuneration to partners				5000
X		3000
Y		2000
Z		NIL
To Interest to partners on capital @24%				1100
X	500
Y	400
Z	200
To Depreciation				2400
To Net Profit				18000
X			6000
Y			6000
Z			6000

Other relevant information is as under:

i.                    Y is not the working partner.

ii.                  Partnership deed provides for payment of interest @10% of capital.

iii.                Depreciation allowable under the IT Act is Rs. 2700.

Compute the Gross Income of the firm? Compute the Gross Total Income of each partner?

Answer:

Net Profit (N) = 18000

Interest (I) = 1100 (Violation of the deed. So, whole interest will be added)

Depreciation (D) = 2400 – 2700 = - 300

Remuneration (R) = 5000 (Both working partner & non-working partners)

Extra Expenses (E) = 1000

Book Profit = 18000 + 1100 + (-300) + 5000 + 1000 = 24800 /-

For Remuneration: - 24800 * 90% = 22320 or 150000 (whichever is maximum)

Therefore, Amount of Remuneration can be given up to = 150000 /-

And actual remuneration given to working partners (X + Z) in the question is = 3000 /-

which is LESS than the calculated amount of remuneration i.e., 150000 /-

Therefore, the amount that should be added to the income of the firm is NIL.

But the remuneration given to SLEEPING PARTNER i.e., Partner Y will be fully added to the income of the firm. So, Remuneration given to Y is Rs. 2000 will be added to the income of the firm.

GROSS TOTAL INCOME OF THE FIRM:-

 Net Profit + Extra Expenses + Remuneration + Interest + Depreciation =

18000        + 1000                 + 2000                 + 1100    + (2400-2700) = 21800 /-

ALL DEDUCTIONS WILL BE ADDED TO THE GROSS TOTAL INCOME.

NET TOTAL INCOME OF THE FIRM:-

Gross Total Income – Deductions Allowable (u/s 80C to 80U) =

21800 – (1000/2)(u/s 80G) = 21300 /-

GROSS TOTAL INCOME OF PARTNER X:-

The amount of interest NIL will be added to the income of the partner as the whole interest is already added to the income of the firm because of violation of the deed.

Remuneration to partner ‘X’ is Rs. 3000. Therefore, GTI of ‘X’ = 3000 + NIL = 3000 /-

For A.Y. 2012-13, Tax Liability of ‘X’ will be NIL.

GROSS TOTAL INCOME OF PARTNER Y:-

The amount of interest NIL will be added to the income of the partner as the whole interest is already added to the income of the firm because of violation of the deed.

Remuneration to partner ‘Y’ is Rs. 2000 but NIL will be added to the income of the firm because remuneration of Rs. 2000 is already added to income of the firm being a SLEEPING PARTNER. Therefore, GTI of ‘Y’ = NIL + NIL = NIL

For A.Y. 2012-13, Tax Liability of ‘Y’ will be NIL.

GROSS TOTAL INCOME OF PARTNER Z:-

The amount of interest NIL will be added to the income of the partner as the whole interest is already added to the income of the firm because of violation of the deed.

Remuneration to partner ‘Z’ is given NIL. Therefore, GTI of ‘Z’ = NIL + NIL = NIL

For A.Y. 2012-13, Tax Liability of ‘Z’ will be NIL.

FOR ANY CORRECTION OR UPDATION, KINDLY LEAVE YOUR COMMENTS.
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