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3. M/s.MN & Co. a partnership firm is engaged in the business of plying and hiring goods vehicles. It owns
following vehicles as on 1st April 2023:
Gross vehicle weight (in kgs.) Number of vehicles
7000 2
9000 2
12000 3
15000 2
It purchased a vehicle weighing 15000 kg on 6th June, 2023 which was put to use only on 10th July, 2023.
Net profits of the firm [after claiming partners remuneration of Rs.1,50,000 and within the limits
prescribed under section 40(b)] from the above business as per books of accounts amounted to
Rs.6,50,000. The firm has declared its income for the Assessment Year 2024-25 in accordance with the
provisions of presumptive income under section 44AE.
i. Compute the income of the firm if it opts for the provisions of section 44AE for the AY 2024-25.
ii. If the firm wants to claim its income as per books of accounts for the Assessment Year 2024-25,
what are its obligations under the Income-tax Act 1961?
iii. What is the due date for filing its return of income under both the options?
SECTION 40 (b): REMUNERATION AND INTEREST TO PARTNERS:
1. Maximum remuneration allowed u/s.40 (b) is as follows:
On first Rs.3,00,000 of book profit: 90% of book profit or Rs.1,50,000 (weh.)
On the balance of book profit: 60% of book profit
“BOOK-PROFIT” is computed after adjusting all admissible expenses, depreciation including
unabsorbed depreciation (if any) and interest on capital to the extent allowed except remuneration.
Remuneration should be paid only to working partner.
Remuneration should be authorized by the partnership deed.
2. Interest on capital to partners will be allowed subject to a maximum of 12% p.a.
Interest can be paid to any partner but should be authorized by the partnership deed.
Salary received by partners & interest on capital (to the extent allowed in the hands of the firm) shall
be taxed in the hands of the partners under the head “business or profession”.
The firm pays tax on its total income and therefore, share of profit received by each partner is
EXEMPT from tax u.s.10(2A).
1. A firm has paid Rs.7,50,000 as remuneration to its partners for the previous year 2023-24, in accordance
with its partnership deed and it has a book profit of Rs.10,00,000. What is the remuneration allowable as
deduction?
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2. The profit and loss account of ABC & Co. (a firm of chartered accountants & LLP) for the year ended 31st
March, 2024 is given below:
Expenses 3,00,000 Receipts from clients and audit fees 14,36,000
Depreciation 60,000 Dividend from companies 45,000
Remuneration to partners
Partner X 4,20,000
Partner Y 2,80,000
Interest to partners
Partner X @ 15% 60,000
Partner Y @ 15% 45,000
Net profit 3,16,000
Other information:
a) Depreciation as per IT Rules is Rs.52,000.
b) Payment to partners (remuneration and interest) are authorized by the deed
c) Other incomes of the partners: X: Rs.12,00,000 and Y: Rs.8,00,000
Compute total income of the firm and its partners clearly indicating the tax treatment of partner’s salary,
interest on capital and share of profit received in their hands.
3. Rao and Jain, a partnership firm consisting of two partners, reports a net profit of Rs.7,00,000 before
deduction of the following items:
a. Salary of Rs.20,000 each per month payable to working partners of the firm (as authorized by the
deed of partnership)
b. Depreciation on plant and machinery computed under section 32: Rs.1,50,000
c. Interest on capital @ 15% p.a. (as per the deed of partnership). The amount of capital eligible for
interest Rs.5,00,000.
Compute book-profit u.s.40(b) and allowable working partner salary for the A.Y. 2024-25.
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SECTION 40A(3): PAYMENT EXCEEDING Rs.10,000 BY WAY OF CASH
Any payment exceeding Rs.10,000 by way of cash or bearer cheque or crossed cheque will be fully
disallowed. Payment should be made only by an account payee cheque or by an account payee bank draft
or use of ECS through a bank account or through other prescribed electronic modes.
Payment exceeding Rs.10,000 in aggregate in a day made to a person against an expenditure shall also be
disallowed.
The limit of Rs.10,000 has been increased to Rs.35,000 in the case of payment made to transport operators
for plying, hiring or leasing goods carriages.
Deduction allowed on ‘due’ basis in one year for which cash payment is made in a subsequent year:
Any payment by cash exceeding Rs.10,000 for which deduction was already allowed on “due basis”, the
payment so made in any subsequent year shall be deemed as income in the year in which such payment is
made.
Note: Section 40A (3) is attracted where: bill amount should exceed Rs.10,000 and payment should
also exceed Rs.10,000 at a time.
Other prescribed electronic modes: Credit card, debit card, net banking, IMPS (Immediate
Payment Service), UPI (Unified Payment Interface), RTGS (Real
Time Gross Settlement), NEFT (National Electronic Fund
Transfer) and BHIM (Bharat Interface for Money) Aadhar Pay
Cases where payment can exceed Rs.10,000 by way of cash: Rule 6DD Exceptions
1. Payment made to Banks, LIC
2. Payment made to Government which is required to be made in legal tender
3. Payment to a person in a village not served by any bank
4. Payment made on a day where banks were closed either on account of holiday or strike (removed)
5. Payment made for purchase of agricultural or forest produce or produce of animal husbandry or dairy
or poultry farming or fish or fish products to the cultivator, grower or producer.
6. Payment is made for the purchase of products manufactured without the aid of power in a cottage
industry, to the producer of such products;
7. Payment by book entry (adjustment in accounts)
8. Payment of terminal or retirement benefits (e.g. gratuity) provided such payment < Rs.50,000
9. Where the payment is made by way of salary to an employee after tds and when such employee is
temporarily posted for a continuous period of 15 days or more in a place other than his normal place of
duty or on a ship; and does not maintain any bank account at such place or ship.
10. Payment is made by an authorized dealer or a money changer against purchase of foreign currency.
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1. An assessee has incurred an expenditure of Rs.14,000 for purchase of raw material from Mr.B. He makes
separate payments of Rs.3,000; Rs.5,000 and Rs.6,000 all by cash in a single day. Advice whether the above
are admissible.
2. A bill is raised for an expenditure of Rs.32,000.
Cash payment is made as follows:
1.10.2023 5,000
2.10.2023 5,000
3.10.2023 5,000
4.10.2023 5,000
5.10.2023 12,000 What will be the amount of disallowance under section 40A (3)
3. Bill raised for Rs.65,000 by a transporter for hiring of trucks for carriage of goods. Payments made to him
in cash as under: What would be the amount of disallowance?
1.12.2023 38,000
2.12.2023 12,000
3.12.2023 15,000
4. When a cash payment of Rs.15,000 is made on 10.11.2023 towards purchase of raw material effected in the
earlier year, i.e., on 5.2.2023, the amount liable for disallowance would be…………
a. Nil c. 20% of such payment
b. 100% of payment d. 30% of such payment
5. The following are details of Mr.X, state whether the following payments are admissible or not?
• Payment of Rs.50,000 by using credit card for fire insurance
• Purchase of oil seeds of Rs.15,000 in cash from a farmer on a banking day
• X purchases goods in cash for Rs.14,000 from R, a villager and makes payment to R in his village
where no banking facility is available.
• Purchase of stock amounting to Rs.27,000 due for payment on the day when the banks were closed
due to floods in Bangalore during September, 2023.
• Payment of Rs.12,000 and Rs.13,000 in cash on 03.12.2023 and 10.12.2023 respectively for
purchase of crabs, lobster & squid to Mr.R, a fisherman and Mr.K, a middleman for these products
respectively.
