Taxation Of Firms Including Llp And Provisions Of Alternate Minimum Tax U/S 115jc Of Income Tax Act – Advanced Tax Laws and Practice Important Questions
Question 1.
JC & Co., a partnership firm, constituted by two partners Arun and Barun, reports a net profit of ₹ 10,00,000 before deduction of the following items for the previous year ended 31st March 2021:
(1) Salary of ₹ 30,000 each paid per month to both the working partners of the firm, which is authorized by the deed of partnership.
(2) Depreciation on fixed assets as per the Income-tax Act, 1961 of ₹ 2,50,000.
(3) Interest on capital to be allowed @15% per annum as authorized by the deed of partnership. The amount of capital as contributed by each of the partners is ₹ 5,00,000.
You are required to compute:
- Book profits of the firm;
- The allowable amount of salary to the working partners for the assessment year 2021-22, as per the provisions of Income-tax Act, 1961.
Adduce brief reasons/notes for your calculations.
Answer:
(1) As per Explanation 3 to section 40( b) of the Income Tax Act, 1961 /‘Book Profits” shall mean the net profit as per the profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to the partners of the firm, if the same has been already deducted while computing the net profit. In the present case, the net profit given is before deduction of depreciation on fixed assets, interest on capital of partners, and salary paid to the working partners.
Therefore, the book profits shall be computed as under:
| Particulars | Amount(₹) | Amount(₹) |
| Net Profit before deduction of depreciation, remuneration to partners, and interest on partners’ capital | 10,00,000 | |
| Less: Depreciation u/s 32 of Income Tax Act | 2,50,000 | |
| Less: Interest at 12% p.a. {Being maximum allowable as per section 40( b) of Income Tax Act} | 1,20,000 | (3,70,000) |
| Therefore, Book Profits | 6,30,000 |
Note: Salary paid to work partners have not been added for computation of Book Profits in terms of Explanation III of section 40(b) of the Act as it was initially not deducted (debited) while computation of net profit reported by JC & Company.
(2) Salary actually paid to the working partners not charged is ₹ 30,000 × 2 × 12 = ₹ 7,20,000.
As per provisions of section 40(b) of the Income Tax Act, the salary paid to work partners is allowed subject to the following limits:
| On first ₹ 3,00,000 of book profits or in case of loss | ₹ 1,50,000 or 90% of book profits, whichever is higher. |
| On the balance of book profits | 60% of balance book profits |
The maximum allowable salary to the working partners for the Assessment Year 2021-22, in this case, would be:
| Particulars | Amount(₹) |
| On the first × 3,00,000 of Book Profits (₹ 1,50,000 or 90% of × 3,00,000, whichever is higher) | 2,70,000 |
| On the balance of book profits {60% of (₹ 6,30,000 – 3,00,000)} = 60% of ₹ 3,30,000 | 1,98,000 |
| Maximum Allowable Partner’s Remuneration | 4,68,000 |
Since, the above amount is lower than the actual remuneration paid, the allowable working partners’ salary for the Assessment Year 2021-22 as per provisions of section 40(b) of Income Tax Act, 1961 is ₹ 4,68,000.
Question 2.
Work out the taxable income and the tax payable thereon for A.Y. 2021-22 of a partnership firm engaged in retail trade business from the following particulars:
- Net profit of ₹ 3,65,000 arrived at after debit of interest on capital of partners of ₹ 1,80,000 and salaries paid to the working partners of ₹ 4,80,000.
- The total capital of the partners on which interest was paid as debited in the profit and loss account was ₹ 10,00,000.
- Both the payments of interest on capital and the salary to the working partners have been authorized by the deed.
Answer:
Computation of Taxable Income and tax liability of partnership firm for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount(₹) | Amount(₹) |
| Net Profit as per Profit and Loss Account | 3,65,000 | |
| Add: Interest on Capital (Disallowed in excess of 12% of Partner’s Capital: ₹ 1,80,000 – ₹ 1,20,000) | 60,000 | |
| Add: Salaries to Partners | 4,80,000 | 5,40,000 |
| Book Profits | 9,05,000 | |
| Admissible amount of Partner’s Remuneration | ||
| Lower of the following: | ||
| (a) Actual Remuneration debited towards Working Partners; or | 4,80,000 | |
| (b) Ceiling limit as per section 40(b) | ||
| On Book Profits of first ₹ 3,00,000, at 90% : 2,70,000 | ||
| On balance book profits’at 60% (₹ 6,05,000 × 60%): 3,63,000 | 6,33,000 | |
| Therefore, Allowable Remuneration | (4,80,000) | |
| Therefore, Total Income | 4,25,000 | |
| Tax at 30% | 1,27,50 | |
| Add: Health and Education Cess @ 4% | 5,100 | |
| Total Tax payable | 1,32,600 |
Question 3.
ABC & Co. Is a partnership firm consisting of four partners? The partnership deed provides for remuneration of 4,00,000 to partners and interest to partners at 12%. Profit for the year ended 31st March 2021 is 1,00,000 after arriving at the following adjustments:
| Particulars | Amount(₹) |
| Remuneration to partners | 4,00,000 |
| Interest to partners on capital account 12% | 20,000 |
| A municipal tax of house property | 5,000 |
| Rent received on house property | 50,000 |
Compute the book profit and remuneration deductible under section 40(b) of the Income-tax Act, 1961.
Answer:
Computation of Book Profits and allowable remuneration for the firm for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount(₹) | Amount(₹) |
| (a) Net Profit as per Profit and loss Account | 1,00,000 | |
| b. Add: Municipal Tax of House Property | 5,000 | |
| c. Less: Rent received from house property | (50,000) | |
| d. Add: Partners’ remuneration debited | 4,00,000 | |
| e. Therefore, Book Profits | 4,55,000 | |
| f. Allowable Remuneration | ||
| Lower of the following: | ||
| Actual Remuneration debited towards working partners | 4,00,000 | |
| Maximum allowable 90Q6 of ₹ 3,00,000 – ₹ 2,70,000
Add: On Balance Book Profits at 60% (₹ 1,55,000 × 60%) – ? 93,000 |
3,63,000 | |
| Therefore, ALLOWABLE REMUNERATION | 3,63,00 |
Question 4.
PQR, a partnership firm, has 3 partners namely Pankaj, Qureshi, and Robert. The firm has paid a salary of ₹ 1.5 lakh p.a. to each of its partners during the previous year 2020-21 and the same is authorized by Partnership Deed. The net profit of the firm as shown in the profit and loss account computed in the manner laid down in Chapter IV-D of Income Tax Act, 1961 is ₹ 6 lakh after providing for salary to the partners. Compute the amount of deduction of remuneration paid to partners assuming that Qureshi is a non-working partner.
Answer:
Computation of deduction of remuneration paid to partners for Assessment Year 2021-22 (Relevant to Previous Year 2020-21)
| Particulars | Amount(₹) | Amount(₹) |
| Net Profit as per Profit and Loss Account | 6,00,000 | |
| Add: Remuneration to partners (₹ 1,50,000 × 3) | 4,50,000 | |
| Book Profits | 10,50,000 | |
| Less: Remuneration allowable u/s 40(b) | ||
| Lower of the following:- | ||
| a. Actual Remuneration to working partners (Re-muneration paid to non-working partner is not allowed as deduction) ₹ 1,50,000 × 2 | 3,00,000 | |
| b. Maximum limit i.e. ₹ 3,00,000 × 90% + Balance Book Profits × 60% i.e. ₹ 2,70,000 + ₹ 4,50,000 | 7,20,000 | |
| Therefore, Allowable Remuneration | 3,00,000 | |
| Therefore, Profits and Gains from Business or Profession/Total Income | 7,50,000 |
Question 5.
An individual has a business income of ₹ 35,00,000 for the previous year 2020-21. He for the previous year 2019-20 was subject to Alternate Minimum Tax (AMT) because of claiming deduction under section 80-IE of Income Tax Act, 1961. He has an AMT credit of ₹ 5,00,000. Calculate the tax to be paid by him for the assessment year 2021-22. Also, work out the amount of balance of available AMT credit.
Answer: Computation of tax payable by the individual for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount(₹) | Amount(₹) |
| 1. Total Income as per provisions of the Act | 35,00,000 | |
| 2. Tax on above as per normal provisions: | ||
| On an income of ₹ 2,50,000 | – | |
| On ? 2,50,000 to ₹ 5,00,000, Tax @ 5% | 12,500 | |
| On ? 5,00,000 to ₹ 10,00,000, Tax @ 20% | 1,00,000 | |
| On income above ₹ 10,00,000, Tax @ 309o (₹ 25,00,000 × 30%) | 7,50,000 | |
| Sub-Total | 8,62,500 | |
| Add: Health & Education Cess @ 4% | 34,500 | 8,97,000 |
| 3. Adjusted Total Income | 35,00,000 | |
| 4. Alternate Minimum Tax @ 18.5% of ₹ 35,00,000 | 6,47,500 | |
| Add: Health and Education Cess @ 4% | 25,900 | 6,73,400 |
| 5. Therefore, Tax payable – higher of tax under steps 2 and 4 | 8,97,000 |
Question 6.
From the following information provided for the previous year 2020 21, compute the total income and tax liability considering provisions of , Alternate Minimum Tax assuming the assessee is an individual:
| Particulars | Amount(₹) |
| Net Profit as per Profit & Loss A/c | 19,05,000 |
| Depreciation as per Profit & Loss A/c | 3,50,000 |
| Depreciation as per Income Tax Rules | 3,60,000 |
| Inadmissible expenses | 1,40,000 |
| Deduction u/s 10AA (computed) | 12,00,000 |
| Deduction u/s 80-IA | 35,000 |
Answer:
Computation of Total Income and Tax liability for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount(₹) | Amount(₹) |
| Net Profit as per Profit and Loss Account | 19,05,000 | |
| Add: Inadmissible Expenses | 1,40,000 | |
| Add: Depreciation as per P&L Account | 3,50,000 | |
| Less: Depreciation as per Income Tax Rules | (3,60,000) | |
| Total | 20,35,000 | |
| Less: Deduction u/s 10AA of Income Tax Act | (12,00,000) | |
| Therefore, Profits and Gains from Business or Profession | 8,35,000 | |
| Less: Deduction under section 80-IA of Income Tax Act | (35,000) | |
| Total Income | 8,00,000 | |
| Tax liability | ||
| On ₹ 2,50,000 | – | |
| ₹ 2,50,000 to ₹ 5,00,000, Tax @ 5% | 12,500 | |
| On ₹ 5,00,000 to ₹ 10,00,000, Tax @ 20% (₹ 3,00,000 × 20%) | 60,000 | |
| Sub-Total | 72,500 | |
| Add: Health and Education Cess @ 4% | 2,900 | |
| Total Tax | 75,400 | |
| Adjusted Total Income | ||
| Total Income | 8,00,000 | |
| Add: Deduction u/s 10AA | 12,00,000 | |
| Add: Deduction u/s 80-IA | 35,000 | |
| Therefore, Adjusted Total Income | 20,35,000 | |
| Alternate Minimum Tax @ 18.5% of ₹ 20,35,000 | 3,76,475 | |
| Add: Health and Education Cess @ 4% | 15,059 | 3,91,534 |
| Therefore, Tax payable shall be higher than a tax as per normal provisions or AMT | 3,91,534 | |
| Rounded off to nearest of ₹ 10 u/s 288B | 3,91,530 |
Note:
Since AMT is payable, there shall be AMT Credit. It shall be to the extent of excess of AMT over normal tax liability i.e. ₹ 3,91,530 – 75,400 = ? 3,16,130.
Question 7.
Does XYZ LLP have an income of ₹ 72,00,000 under the head ‘profits and gains of business or profession’? One of its businesses is eligible for deduction @ 100% of profits under section 80-IB for the assessment year 2021-22. The profit from such business included in the business income is ₹ 58,00,000. Compute the tax payable by the LLP, assuming that it has no other income during the previous year 2020-21.
Answer:
Computation of tax payable by XYZ LLP for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount(₹) | Amount(₹) |
| 1. Total Income as per normal provisions of the Act | ||
| Profits and Gains from Business or Profession Gross Total Income | 72,00,000 | |
| Less: Deduction under section 80-IB | (58,00,000) | 14,00,000 |
| 2. Tax on above at 30% | 4,20,000 | |
| Add: Health and Education Cess @ 4% | 16,800 | 4,36,800 |
| 3. Adjusted Total Income | ||
| Total Income as per provisions of the Act | 14,00,000 | |
| Add Deduction under section 80-IB | 58,00,000 | 72,00,000 |
| 4. Alternate Minimum Tax (AMT) @ 18.5% | 13,32,000 | |
| Add: Health and Education Cess @ 4% | 53,280 | 13,85,280 |
| 5. Tax liability, Higher of tax under steps 2 and 4 | 13,85,280 |
Note:
The LLP would be eligible for credit in 15 subsequent years to the extent of the difference between the AMT and Normal Tax i.e. ₹ 9,48,480 (₹ 13,85,280 s – ₹ 4,36,800), in the year in which the tax payable under regular provisions exceeds the AMT.
Question 8.
Mr. X, carrying on the business of operating a warehousing facility for the storage of sugar, has a total income of ₹ 80 lakhs. In computing the total income, he had claimed deduction under section 35AD to the tune of ₹ 70 lakhs on investment in building (on 1.4.2020) for operating the warehousing facility for storage of sugar. Compute his tax liability for A.Y. 2021-22. Show the calculations of Alternate Minimum Tax also.
Answer:
Computation of tax liability of Mr. X for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount(₹) | Amount(₹) |
| 1. Total Income as per normal provisions of the Act | 80,00,000 | |
| 2. Tax on above: | ||
| On ₹ 2,50,000 | – | |
| On ₹ 2,50,000 to ₹ 5,00,000, Tax @ 5% | 12,500 | |
| On ₹ 5,00,000 to ₹ 10,00,000, Tax @ 20% | 1,00,000 | |
| On income above ₹ 10,00,000, Tax @ 30% (₹ 70,00,000 × 30%) | 21,00,000 | |
| Sub-Total | 22,12,500 | |
| Add: Surcharge @ 10% | 2,21,250 | |
| Sub-Total | 24,33,750 | |
| Add: Health and Education Cess @ 4% | 97,350 | 25,31,100 |
| 3. Adjusted Total Income | ||
| Total Income as per provisions of the Act | 80,00,000 | |
| Add: Deduction claimed under section 35AD | 70,00,000 | |
| Less: Depreciation under section 32 on building (₹ 70,00,000 × 10%) | (7,00,000) | 1,43,00,000 |
| 4. Alternate Minimum Tax @ 18.5% | 26,45,500 | |
| Add: Surcharge @15% as ATI exceeds ₹ 1 crore | 3,96,825 | |
| Sub-Total | 30,42,325 | |
| Add: Health and Education Cess @ 4% | 1,21,693 | 31,64,018 |
| 5. Therefore, Tax payable (Higher tax under step 2 and step 4) | 31,64,018 | |
| Rounded off to nearest of ₹ 10 under section 288B | 31,64,020 |
Note:
Mr. X would be eligible for AMT credit of the difference between the AMT and Normal Tax i.e. ₹ 6,32,920 (₹ 31,64,020 – ₹ 25,31,100). Such AMT credit can be carried forward for the subsequent 15 assessment years.
Author’s Note:
In all the above cases, computation of tax liability in the case of individuals is done as per normal slabs i.e. it is presumed that such individuals did not opt for provisions of alternate tax regime u/s 115BAC.
Question 9.
Explain the provisions of the Income-tax Act, 1961 relating to applicability of Alternative Minimum Tax (AMT), a tax credit for AMT, set off and carry forward of AMT.
Answer:
Applicability of Alternate Minimum Tax ‘AMT’ As per the provision of Section 115JC of the Income-tax Act, 1961, where the regular income-tax payable for a previous year by a person, other than a company, is less than the alternate minimum tax payable for such previous year, the adjusted total income shall be deemed to be the total income of that person for such previous year and he shall be liable to pay income-tax on such total income at the rate of @ 18.50% (+ applicable surcharge + health and education cess) on adjusted total income Thus, ‘Alternate Minimum Tax’ shall be applicable to all non-corporate assessees i.e. Individual, HUF, AOP/BOI, an artificial juridical person, Partnership, Limited Liability Partnership, etc.
However, AMT provisions are not applicable to an Individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI) and the artificial juridical person whose adjusted total income does not exceed ₹ 20,00,000.
Tax Credit for Alternate Minimum Tax u/s 115JD
(1) The credit for tax paid by a person under section 115JC shall be allowed to him in accordance with the provisions of this section.
(2) The tax credit of an assessment year to be allowed under sub-section (1) shall be the excess of alternate minimum tax paid over the regular income-tax payable of that year: However where the amount of tax credit in respect of any income-tax paid in any country or specified territory outside India under section 90 or section 90A or section 91, allowed against the alternate minimum tax payable, exceeds the amount of the tax credit admissible against the regular income-tax payable by the assessee, then, while computing the amount of credit under this sub-section, such excess amount shall be ignored.
(3) No interest shall be payable on tax credit allowed under sub-section (1). Amount of tax credit of AMT carried forward and set off
The amount of tax credit determined under subsection (2) shall be carried forward and set off in accordance with the provisions of sub-sections (5) and (6) but such carry forward shall not be allowed beyond the 15 assessment years immediately succeeding the assessment year for which tax credit becomes allowable under sub-section (1).
In any assessment year in which the regular income tax exceeds the alter¬nate minimum tax, the tax credit shall be allowed to be set off to the extent of the excess of regular income-tax over the alternate minimum tax and the balance of the tax credit, if any, shall be carried forward.
If the amount of regular income tax or the alternate minimum tax is reduced or increased as a result of any order passed under this Act, the amount of tax credit allowed under this section shall also be varied accordingly.
Question 10.
What is an LLP? How is it different from a partnership firm?
Answer:
A limited liability partnership (LLP) is a body corporate formed and incorporated under the Limited Liability Partnership Act, 2008. It is a legally separated entity from that of its partner.
Difference between LLP & Partnership Firm
Under “traditional partnership firm”, every partner is liable, jointly with all the other partners, and also severally for all acts of the firm done while he is a partner. However, under the LLP structure, the liability of the partner is limited to his agreed contribution. Further, no partner is liable on account of the independent or unauthorized acts of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful acts or misconduct.
Question 11.
XYZ LLP is being liquidated. Examine the liability of its partners in respect of its tax dues?
Answer:
Section 167C of the Income Tax Act, 1961 provides for the liability of partners of LLP in the event of its liquidation. In case of liquidation of an LLP, where tax due from the LLP cannot be recovered, every person who was a partner of the LLP at any time during the relevant previous year will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP. This provision would also apply where tax is due from any other person in respect of any income of any previous year during which such other person was an LLP.
Taxation Of Firms Including Llp And Provisions Of Alternate Minimum Tax U/S115jc Of Income Tax Act Notes
- Firm is taxable at 30%. The surcharge is 12% if the total income exceeds ₹ 1 crore. And; Health and Education Cess @ 4% on Tax + Surcharge, if any.
- Allowable Partner’s Remuneration considering provisions of section 40(b) of Income Tax Act:
Lower of the following: –
a. Remuneration debited/to be debited towards working partners; or;
b. Ceiling Limit computed as follows:
If Book Profit is negative: ₹ 1,50,000
If Book Profit is positive:
On Book Profits* up to ₹ 3,00,000: 90% of Book Profits or ₹ 1,50,000, whichever is higher
Add: On Book Profits above ₹ 3,00,000:60% of balance Book Profits*.
(‘Book Profits means Net Profit of firm after all adjustments of PGBP but before Partner’s Remuneration)
- Allowable Interest on Partner’s Capital: 12% p.a. of Partner’s Capital.
- Alternate Minimum Tax under section 115JC of Income Tax Act:
- Applicability: Any non-corporate assessee except individuals and HUF.
It is applicable to those individuals and HUFs also whose Adjusted Total Income** exceeds ₹ 20,00,000 during the year.
– AMT is at 18.5% of Adjusted Total Income** + Surcharge, if applicable based on Adjusted Total Income** + Health and Education Cess @ 4%.
- Consequently, considering the provisions of AMT, tax payable shall be taxable as per normal provisions of the Act OR; AMT, whichever is higher.
- Adjusted Total Income is to be computed as follows: –
a. Total Income as per provisions of Act
b. Add:
- Deductions under sections 80-LA to 80RRB (Except section 80P)
- Deductions under section 10AA
- Deductions under section 3 5AD
c. Less:
- Depreciation on assets used in specified business for which deduction under section 3 5AD is claimed.
ASSESSMENT OF PARTNERSHIP FIRMS INVOLVING COMPUTATION OF ALLOWABLE PARTNERS REMUNERATION AND INTEREST ON PART¬NER’S CAPITAL: