Library / Income-tax Act, 2025: The Professional's Master Guide
50. Case Study 3: Partnership Firm and its Partners
Facts. Patel Brothers, a trading firm with two working partners A and B, reports net profit of Rs. 10,00,000 for Tax Year 2026-27 after debiting: remuneration to A and B of Rs. 6,00,000 each (Rs. 12,00,000), and interest on capital at 15% (A: capital Rs. 20 lakh, interest Rs. 3,00,000; B: capital Rs. 10 lakh, interest Rs. 1,50,000). A cash payment of Rs. 25,000 to one supplier in a day is included in expenses. The deed authorises remuneration and interest.
50.1 Step 1: book profit
Net profit as per accounts | 10,00,000 |
Add: interest in excess of 12% (3% of Rs. 30 lakh) | 90,000 |
Add: cash payment disallowed (section 36) | 25,000 |
Add: remuneration to partners (to compute book profit) | 12,00,000 |
Book profit | 23,15,000 |
50.2 Step 2: allowable remuneration
First Rs. 6,00,000: higher of Rs. 3,00,000 and 90% (Rs. 5,40,000) | 5,40,000 |
Balance Rs. 17,15,000 at 60% | 10,29,000 |
Maximum allowable | 15,69,000 |
Actual remuneration (fully allowed, being within limit) | 12,00,000 |
50.3 Step 3: firm's tax
Book profit | 23,15,000 |
Less: remuneration allowed | (12,00,000) |
Taxable income of the firm | 11,15,000 |
Tax at 30% | 3,34,500 |
Cess at 4% (no surcharge, income below Rs. 1 crore) | 13,380 |
Total tax | 3,47,880 |
50.4 Step 4: partners
Partner | Remuneration | Interest allowed (12%) | Business income | TDS by firm (10%) |
|---|---|---|---|---|
A | 6,00,000 | 2,40,000 | 8,40,000 | 84,000 |
B | 6,00,000 | 1,20,000 | 7,20,000 | 72,000 |
Share of profit from the firm is exempt in the partners' hands. The excess interest of Rs. 90,000 (3%) that was disallowed to the firm is also not taxed in the partners' hands, because partners are taxed only to the extent allowed to the firm. Each partner files ITR-3.
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