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Share of Profit

Vivek (Finally passed CA Final...!!!!!) (1097 Points)

11 January 2010

Hi all,

We all know that Share of profit from Partnership Firm is exempt from tax under 10(2A).... Now i want to know whether it is before tax or after tax. E.g; Total income of Partnership firm is Rs. 1 lac. Tax @ 30% 30,000. A partner has 10% share... How much income he must show as exempt under section 10(2A) in his ITR return...? Whether 10000 or 7000...?

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30 Replies

Amir (Learner) (4016 Points)
Replied 11 January 2010

Dear Vivek,

ONLY BEFORE TAX INCOME BE MADE EXEMPT FROM TAX...

SHARE IN THE TOTAL INCOME OF THE FIRM...

1 LAC IN UR EXAMPLE

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 11 January 2010

Hi amir, i think its Rs. 7000 only

The simple logic is....

The tax on PARTNERSHIP profit is already deducted.., that means, on remaining amount (that is post tax income to be distributed among partners), partners are not suppose to pay tax (avoidance of double taxation)... and hence it becomes exemtion....

Hence, the amount to be considered is Rs. 70000 for firm (post tax) and 7000 for that partner

ashish gupta ( student) (1922 Points)
Replied 11 January 2010

the partnership firm after paying the tax should distribute its profits. so firm after paying of tax Rs.30000 on its profits shall distribute the income and hence 7000 will be exempted

Amir (Learner) (4016 Points)
Replied 11 January 2010

Hi Dhiraj,

Sec 10(2A) reads as follows:-

the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm.

Explanation.—For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits ;]

How can a "After tax Income" be said as exempt..

Vivek (Finally passed CA Final...!!!!!) (1097 Points)
Replied 11 January 2010

Yes... Amir is right i think...

Amir (Learner) (4016 Points)
Replied 11 January 2010

Dear Vivek,

Trust me, i am confident on this..

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 11 January 2010

Look, i didnt know that u need a detailed answer....

I answered for the net impact., i.e considering the capital account of such partner.... Carry on in every aspect, the net impact of exempted income will be Rs. 7000

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Naveen (Learner) (116 Points)
Replied 11 January 2010

Dheeraj is correct. Firm and partners are two different "Persons" under the income tax act assessed separately. Thus once the income of firm is taxed at 30%. Then the share of Partner in the remaining proft (Distributable profit) ie 10% of Rs 70,000 will be exempt in the hands of partner.

Also Amir

What i can understand from your this reply is :

ONLY BEFORE TAX INCOME BE MADE EXEMPT FROM TAX...

SHARE IN THE TOTAL INCOME OF THE FIRM...

1 LAC IN UR EXAMPLE"

If you say share in the total income, then how can you take total income of the firm into consideration while calculation income of partner. Please note that in the given example 1lac is total income of the Firm which can never be added fully while calculating income of parter who enjoys only 10% share in the profits.

I Hope this clarifies the situation.. Thanks.

Cheers. :-)

Venkat M (FCA) (133 Points)
Replied 12 January 2010

After tax profit to be considered . In this case Rs.7000

Amir (Learner) (4016 Points)
Replied 12 January 2010

Dear Naveen & venkat,

Trust me the amount of profit which is exempt is Rs. 1 Lac as per Sec 10(2A)

If u want u can refer text books to clarify this point..

Tell me what does "TOTAL INCOME" means...is it the "Taxable Income" or the "Income after tax"...

It is certainly "TAXABLE INCOME"

Sandeep Ladha (N.A) (435 Points)
Replied 12 January 2010

Agree with Dhiraj......

CA. Megha Topiwala (Job) (1534 Points)
Replied 12 January 2010

hey... it will b Rs. 10,000 i.e. before tax..... [(2A) in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm.

Explanation.

—For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits ;]

CA Radhika Arde (Chartered Accountant) (67 Points)
Replied 12 January 2010

Hey guys.........Nice discusson........Dheeraj is correct...........you will distribute profit only after paying taxes on it...........profit & loss is concerned we always made provision for taxes as prudent accounting policy........and after that we distribute profit as apropriation of profits..........

CA. Megha Topiwala (Job) (1534 Points)
Replied 12 January 2010

hey... fnds... plz its TAXABLE INCOME which is distributed... n not profits after tax..... n hence taxable income is always income before tax..... hence partners has to show income b4 tax... as receied by him as his share.... its will b Rs. 10000 in ur case.....