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Query regarding meeting personal / family expenses.

Mahesh (Proprietor) (45 Points)

17 April 2017

Hi,

I run a small propreitorship firm,marketing and promoting products of foreign companies in India on a commission basis.

If I expect a net profit of say Rs X in any financial year, can I issue numerous cheques totalling to Rs.X from my firm's

current account to directly meet my personal / family expenses ? Or should I first transfer the net profit amount from my

firm's current account to my personal savings bank a/c and then issue cheques to meet these same expenses ?

Please suggest a better way which would satisfy any income tax queries in the future regarding the same ?

Thanks & best regards.

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7 Replies

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your business have a sarpate current

and cheque relating to business should issue from there only

and for your self u have a sarpate saving a/c

personal expense cheques issued from there only

Manish Manu (198 Points)
Replied 17 April 2017

Dear Mahesh,

The fact that you are paying your personal expenses from your firms account or transferring fund from firm to your saving account and then meeting your personal expense is irrelevant.

You can pay by whatever account and whichever mode you wish. However, the only thing you need to consider is that you are not claiming any of the personal expenses as expenditure in the income tax return.

Personal expenses are not allowed u/s 58 in Income Tax.

Hope, I am able to solve your query.:)

Dhrunil Bhatt (Chartered Accountant) (232 Points)
Replied 18 April 2017

Dear Sir,

I completely agree with Mr. Mahesh Manu. You can issue cheque either by transferring funds from firm's current account to personal saving bank account or directly from your firm's current account. This transaction would not create any problem under Income Tax Act, untill and unless you donot book that expense as you business expense.

My question to you experts is that in case the querist goes with an option to directly pay personal expenses from the current account of the firm, then what would be the accounting entry for the same.

As per my view : Querist's Capital Account ........... Dr (XXX)

To Firm's Current Bank Account (XXX)

Kindly correct if I am wrong somewhere.

Thanks and Regards,

Dhrunil Bhatt

Manish Manu (198 Points)
Replied 18 April 2017

Dear Dhrunil,

You are correct with the Accounting Entry. The amount paid from the firm's bank account will be considered as drawing of the assessee resulting in reduction of capital.

Dhrunil Bhatt (Chartered Accountant) (232 Points)
Replied 19 April 2017

Great ... thanks Mr Manu for your reply. Can you please explain the implication of same while calculating limit for interest on capital under section 40(b)

Manish Manu (198 Points)
Replied 19 April 2017

Dhrunil....sec 40(b) is applicable to a partnership firm and not to a sole proprietorship concern and as such your query is not applicable in the present case.

Further, in case of sole proprietorship concern, it is either introduction of capital or drawing i.e. the fund is transferred from one hand of the assessee to another hand and so there is no interest on capital.

Mahesh (Proprietor) (45 Points)
Replied 21 May 2017

Dear Mr.Manish Manu & Dhruni,

Thanks for your replies.

I now understand that I can transfer the net annual profit from my firm's current account to my personal savings account and it will be treated as reduction in capital.

In the financial year of April'16 - March'17 my firm did not have any income and hence suffered a loss of Rs.X.

In the financial year April'17 - March'18,my firm is expected to have a gross profit of Rs.Y.

Can I offset the loss incurred financial year 16-17 in FY 17-18 ? In such a case will net profit in FY 17-18 be calculated as follows :

( Y i.e.Gross profit in FY 17-18 ) - ( X i.e loss incurred in FY 16-17 ) - ( business expenses incurred in FY 17-18 ) = Net profit in FY 17-18.

Thanks in advance for your advice.

Best regards.