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Section 44AD r/w section 40(b)

Shikha Sharma (Chartered Accountant) (311 Points)

28 July 2011

Hi,

Section 44AD allows additional deduction of remuneration to partners u/s 40(b). Further, section 40(b) talks about % of remuneration based on book profits.

So, in this context of Section 44AD, how should book profits be interpreted? Whether is it 8% of turnover or as per Profit & Loss A/c (but this would not be prepared in this case)?

Thanks in advance

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11 Replies

CA Nitu Agarwal (CA, M.Com) (266 Points)
Replied 28 July 2011

8% of Turnover.

A.LAKSHMI NARASIMHAN (TAX CONSULTANT) (41 Points)
Replied 28 July 2011

It should be before the presumptive income u/s44AD.You can claim the interest and salary to partners as per section40(b) of the Act.The book-profit is the presumptive income as per 44AD.

CA ADITYA SHARMA (CA IN PRACTICE ) (16719 Points)
Replied 28 July 2011

you can claim interest and salary to partner after 8% profit

A.LAKSHMI NARASIMHAN (TAX CONSULTANT) (41 Points)
Replied 28 July 2011

But I have read the circular of admissibility of deduction under section 40(b) of the Act vide 737 dated 23-2-1996 which clearly states that paras 31.3 and 32.2 of Circular No.684 dated 23-02-1996 "In the case of firms, the normal deduction to the extent allowed under clause(b) of section40 " will be deleted from paras 31.3 and 32.2

CS,CA F,Numrologi TusharSampat (CS CA F Numerologist Astrologer Graphologist Face reader Vastu Expert) (85930 Points)
Replied 28 July 2011

Originally posted by : A.LAKSHMI NARASIMHAN
	It should be before the presumptive income u/s44AD.You can claim the interest and salary to partners as per section40(b) of the Act.The book-profit is the presumptive income as per 44AD.

AGREED.

Prabhakar (Manager) (22 Points)
Replied 29 July 2011

Sir, Please let me know 8 % to be calulated on turnover which includes VAT? or with out vat?

CS,CA F,Numrologi TusharSampat (CS CA F Numerologist Astrologer Graphologist Face reader Vastu Expert) (85930 Points)
Replied 29 July 2011

8% is on total turnover or gross reciept.

A.LAKSHMI NARASIMHAN (TAX CONSULTANT) (41 Points)
Replied 29 July 2011

Yes vat collected should be included. The term Turnover includes the vat collections on the sale of goods made.Hence VAT Collected should be included.

Prabhakar (Manager) (22 Points)
Replied 30 July 2011

Sir,

Since VAT collected is a Balance Sheet Item, and collected on behalf of the govt and paid and no profit is involved on VAT amount, still we have to include to net sales to arrive the 8% profit?

A.LAKSHMI NARASIMHAN (TAX CONSULTANT) (41 Points)
Replied 30 July 2011

In my opinion the vat collected is a part of the turnover.Various judicial decisions support this.Hence the VAT collected for the sales made should be included in the gross receipt for 8% calculation.If I am wrong kindly elucidate me.

A.LAKSHMI NARASIMHAN (TAX CONSULTANT) (41 Points)
Replied 30 July 2011

The interest and salary paid to partners are more than the presumptive income.For example if the total turnover is 16,79,478 +1,65,558=18,45,036.8% of Rs.18,45,036 is Rs.1,47,603.The salary allowable as per 40(b) is Rs.1,32,843.The salary paid during the financial year is Rs.1,20,000.Hence the taxable income of the firm is Rs.27,603.The tax on this is Rs.8,529 (30%+3%cess).Tax planning is increase the salary to the maximum limit by amending the partnership deed.It can be done upto Rs.1,25,000/-.

Suggest anything wrong or if it is correct please reply me.