Vatsal, Vihaan & Vayu are equal partners of VSK & Co., which was formed w.e.f. 01.06.2024. The firm is an authorized dealer of shoes…

CA Final · Direct Tax Laws and International Taxation · RTP · May 2025
Vatsal, Vihaan & Vayu are equal partners of VSK & Co., which was formed w.e.f. 01.06.2024. The firm is an authorized dealer of shoes manufactured by a reputed company. It reported Net Profit as per profit and loss account of 4,50,000 after debit / credit of the following items: (i) Depreciation on generator and computers - 1,10,000. (ii) Working partners' salary - 82,000 per month for each partner. (iii) Interest on capital to partners @ 18% per annum. The total interest on capital of the firm debited to profit and loss account being - 3,60,000. (iv) Donation to registered political parties - 80,000 by cash and - 70,000 by electronic transfer. (v) Monthly rent paid to partner Vatsal for use of his premises as godown - 36,000 per month and it is occupied from 01.10.2024. The market rent for the premises is ascertained at 15,000 per month. No tax was deducted at source on the rent paid. (vi) The firm incurred 5 lakhs by way of expenditure towards the cost of gold coins awarded to customers on the first day of their showroom inauguration. The cost of each gold coin was less than - 10,000 and one coin was given to each buyer on that day selected through lucky draw. No tax was deducted at source on such gold coins given to the customers. Additional information: (i) Depreciation on tangible assets allowable u/s 322,43,000. (ii) One registered trademark was acquired on 10.07.2024 for 3,00,000. The firm used the trademark w.e.f. 01.12.2024 since there was some dispute in title of the previous owner and was cleared through court decree only in November 2024. (iii) All the partners are working partners, and the salary and interest are authorized by the partnership deed. You are required to compute the total income of the firm for the A.Y. 2025-26.

Suggested Answer and Working Notes:

Computation of total income of the firm, VSK & Co. for the A.Y. 2025-26 applying the regular provisions of the Income-tax Act, 1961 Particulars Particulars ₹ Net profit as per profit & loss account 4,50,000 Add: Expenditure debited to profit & loss account but not allowable as deduction or to be considered separately Depreciation as per books of accounts 1,10,000 Salary paid to working partners considered separately [₹ 82,000 x 3 partners x 10 months] 24,60,000 Interest on capital paid to partners in excess of 12% disallowed. Accordingly,1,20,000 [₹ 3,60,000 -2,40,000 (₹ 3,60,000 x 12/18)], is disallowed 1,20,000 Donation to registered political party 1,50,000 [Donation paid to a political party is not an allowable expenditure under section 37 since it is not laid out wholly or exclusively for the purposes of business or profession] Excess rent paid to a partner would be disallowed under section 40A(2), since partner is a related person of the firm [(₹ 36,000 -15,000) x 6] 1,26,000 [No disallowance would be attracted for non-deduction of tax at source, since the amount of rent does not exceed - 2,40,000] Expenditure on gold coins awarded to customers Nil [Allowed as expenditure u/s 37. TDS u/s 194R is not attracted since the value of gold coin awarded to each customer does not exceed - 20,000, consequently, no disallowance would be attracted for non-deduction of tax at source,] 29,66,000 34,16,000 Less: Depreciation as per Income-tax Act, 1961 Tangible assets 2,43,000 Intangible asset—registered trademark [₹ 3,00,000 x 12.5%] 37,500 [50% of 25%, being the depreciation allowable as deduction, since the asset is put to use for less than 180 days during the year of acquisition] 2,80,500 Book Profit 31,35,500 Less: Salary to working partners: (i) As per prescribed limits On first - 6,00,000 @ 90% or - 3,00,000, whichever is more 5,40,000 On the balance of 25,35,500 @ 60% 15,21,300 20,61,300 (ii) Salary actually paid 24,60,000 Deduction allowed being (i) or (ii) whichever is less 20,61,300 Profits and gains from business or profession 10,74,200

Topics: Assessment of Various Entities

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