Partnership firm

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ARVIND JAIN (Querist)
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09 June 2013 A Registered Partnership firm having no business activity hereafter other than renting assets on which depreciation claimed.Can it provide Interest and remuneration to its partners?Can it claim depreciation on assets?Can rental income be adjusted against remuneration and interest and depreciation if allowable?

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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09 June 2013 Yes, the firm can provide interest and remuneration to its partners where the rental income is being shown in the Profit & Loss A/c of the firm. Depreciation can be claimed as the asset is used for the purpose of the business.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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09 June 2013 If rent is 'composite' ,necessarily, rental income has to be offered under the head 'income from other sources' as per section 56(2)(iii) and deduction therefrom can be availed for depreciation, insurance, repairs etc as per section 57(ii) and (iii) but remuneration and interest on capital can't be claimed.

ARVIND JAIN

ARVIND JAIN (Querist)
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10 June 2013 The important point to note is that their is no business activity and rental income shall be chargeable as income from house property, so how can business expenditure u/s 40(a) & 40(b) claimed and depreciation claimed as assets are not put to use for business.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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09 August 2024 In the situation where a registered partnership firm is no longer conducting active business operations but is instead renting out assets, there are specific considerations for handling interest, remuneration, depreciation, and other financial aspects. Here’s a detailed analysis based on the provisions of the Income Tax Act, 1961:

### **1. Interest and Remuneration to Partners**

**Interest and Remuneration to Partners:**
- **Interest on Capital:** The firm can pay interest on partners' capital as per the partnership deed. However, the amount of interest that can be claimed as a deduction under Section 40(b) is subject to a maximum limit specified under the Income Tax Act.
- **Remuneration:** Similarly, the firm can pay remuneration to partners as per the partnership deed. The deduction for such remuneration is also limited by the provisions of Section 40(b). The limits for remuneration are based on the profitability of the firm and the limits prescribed by the Income Tax Act.

**Relevant Provisions:**
- **Section 40(b):** This section deals with the limits on deductions for interest and remuneration paid to partners. For firms not having any active business, the deduction limits would still apply, but actual practice and interpretation can vary, so consulting a tax advisor is crucial.

### **2. Depreciation on Assets**

**Claiming Depreciation:**
- **Depreciation Claim:** Depreciation can be claimed on assets even if the firm is no longer actively conducting business. As long as the assets are used for earning income, such as renting them out, depreciation is allowable. The assets used for earning rental income can be depreciated as they are part of the firm’s capital assets.

**Relevant Provisions:**
- **Section 32:** This section allows depreciation on assets used for business or profession. If the assets are used for earning rental income, they are still considered as being used for the purpose of business or profession, so depreciation can be claimed.

### **3. Rental Income and Adjustments**

**Rental Income Adjustments:**
- **Income Classification:** Rental income from assets is typically classified under “Income from House Property” if the firm is no longer in active business. However, if the firm has not formally ceased operations, and rental income is still considered as part of the firm's income, it may be classified under business income.

**Adjustments:**
- **Adjusting Against Remuneration and Interest:** Rental income can be used to meet the payment obligations of interest and remuneration, but these adjustments are subject to tax provisions.

**Tax Provisions:**
- **Section 40(a) and Section 40(b):** These sections specify deductions and limits on interest and remuneration. Since the firm is no longer conducting active business, it’s crucial to ensure that payments and deductions comply with the limits specified in these sections.

### **4. Practical Considerations**

1. **Transition to House Property Income:** If the firm is effectively not conducting active business, you may need to reclassify rental income as income from house property for tax purposes, and this could affect the treatment of expenses and deductions.
2. **Business vs. House Property Income:** Ensure that the treatment of rental income and related expenses is correctly classified according to the nature of income. The firm might need to address the issue of how rental income and related deductions are treated based on whether it’s considered business income or income from house property.
3. **Consult with a Tax Advisor:** Given the complexities involved in handling business vs. house property income, and the specific provisions of Sections 40(a) and 40(b), consulting with a tax advisor or chartered accountant is recommended to ensure compliance and optimize tax treatment.

### **Summary**

1. **Interest and Remuneration:** Can be provided to partners within the limits specified under Section 40(b), even if there is no active business.
2. **Depreciation:** Can be claimed on assets used for generating rental income, as per Section 32.
3. **Rental Income:** Should be carefully classified and accounted for. Adjustments against remuneration and interest should follow tax provisions and limits.

**Note:** This response is based on general provisions of the Income Tax Act and practical application may vary. It’s advisable to consult with a tax professional for precise guidance tailored to the specific circumstances of the partnership firm.

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