Effects of Section 40 B
INTRODUCTION
The concept of taxation is as old as civilization. The principal of " Welfare state" extend the role of Government as unlimited. The scope of functioning of Government is not restricted any particular area and widens from time to time. For meeting this type of expenditures the Government has one of the important tools or sources is known as tax.
Taxes are direct and indirect. Income Tax are the one of the important direct tax in India.
Tax introduce in India in the year 1860 by James Wilson for compensating military mutiny of 1857.The period during 1860-1886 was the experiment context of Income Tax in India. First Income Tax Act passed in the year 1886.The Income Tax Act second passed in the year1918 it is short basis and it was replayed by another Act on 1922.The Income Tax Act 1922 in operation still 31 march 1962.On the recommendation of law Commission and Direct Tax Enquiry Committee and in consultation with the law Ministry a Bill was framed. This Bill was referred to select Committee and finally passed in September 1961.1961 act came into effect from 1st April 1962 and it applies the whole of India and it has 298 sections, XII schedules, Thousands of sub sections rules and sub rules. The government uses Tax Policy in pursuits of its several economic and social objectives and it also important instrument for ensuring for social justice, equal distribution of wealth and mobilization of savings. Under section 2(43) of the Income Tax Act1961 define tax means income tax chargeable under the provision of Act. The scheme of the Income Tax Act explained every person who is an assesses and whose total income exceeds the maximum exempted limit, shall be chargeable to income tax at the rates prescribed in Finance Act. The person total income shall be determined on the basis of his residential status. The tax rate different from person to person to person Such Income Tax shall have to be paid on the total income of the previous year in the relevant assessment year. The payment of taxes are in the following modes:
1 Deduction of tax at source, at the payment to the assessee
2 Advance tax to be paid at quarterly intervals by the assessee on his estimated income.
3 Self assessment tax to be paid by the assessee when filing his return of income.
4 Tax payable on demand.
Tax on income is a necessary evil. Reduction in the tax by rupee one is much more than the one rupee coin of income earned by a person. According to economic theory of Multiplier, if we save one rupee tax and tax rate is 33.33 percent than it is equal to increase in income by rupees three.
Increase in income= Saving in Tax / Tax rate =1 / 33.33% =3
Taxes and death are the two things are certain in human life. Reduction in tax payment improve cash flow of an assessee and the magnitude of disposable income of an individual can increased by reducing the tax burden. Thus tax is a burden or a cost or a contribution to a nations governance depending upon what one thinks of a tax .Every person like to pay less amount as tax because the magnitude of disposable income can increased by paying less tax. Various devices, methods and techniques have been adopted by tax payer for minimizing the incidence of tax. These are mainly classified into three, ie, tax evasion, tax avoidance and tax planning
Tax planning
Tax planning is personal necessity , social and national requirement , because it is the only way to achieve the objectives envisaged by a person or country. Tax planning is legal, ethical and moral because tax planning deserves all respect from the tax payer as well as tax collector. Tax planning is absolute necessity for saving and building capital in our country. Tax planning is sound law and certainly not bad morality to arrange ones affairs relating to taxation and income so reduce tax liabilities to a minimum. Therefore in tax planning activities assessee take maximum benefits of tax incentives,reliefs, rebates and other similar allowances for minimizing tax burden. According to prof. L R Khatri "Tax planning aims at reducing the tax liabilities through legal means. It is planning and arranging the affairs of an assessee whether he is an individual ,HUF, firm company etc.. in such a manner tax is attracted .It is different from tax evasion and tax avoidance by dubious means. Thus tax planning is availing of relief's deductions and One of the important restriction in the case of partnership regarding payment of remuneration clearly mentioned u/s 40b of income tax act
The deduction on account of remuneration and interest to the partners can be claimed subject the following condition
1 Remuneration should be to working partner
Any payment of salary, bonus, commission or remuneration to any partner who is not a working partner is not allowed as a deduction
2 Remuneration must be authorized by partners deed
3 Any payment of salary, bonus, commission or remuneration by what ever name called to a working partner if not allowed deduction the following cases :
If the payment is not authorized by partnership deed OR
It is not in according to the partnership deed
Remuneration should not be exceed maximum permissible limit. The limits on different from profession partnership firm to ordinary partnership firm
Book profit remuneration
Professional firms:
(i)Upto Rs. 1,00,000 of book profit or if there is a 90% of book profit (or) Rs. 50,000
Business loss. Whichever is higher
(ii)Next Rs. 1,00,000 of book profit. 60%of book profit.
(iii) Balance of book profit. 40%of book profit
Other firm:
(i)Upto Rs. 75000 of book profit or if there is a 90% of book profit (or) Rs. 50,000
Business loss. Whichever is higher
(ii)Next Rs. 75000 of book profit. 60%of book profit.
(iii) Balance of book profit. 40%of book profit
Effects of section 40b
For understanding the effect of 40b we can take an example. Mr A and B started the organization (not professional firm)
by contributing 500000 rupees as a capital and their profits and loss sharing ratio equal. They are entitled simple interest at the rate of 6 percentage. They earn business profit regularly find out tax liabilities of organization under different assumptions and different level of incomes.
Assumptions:
1 Organization as a partnership firm.
2 Organization as a private limited company.
Business profit : 200000,300000, 500000
Solution:
1 Organization as a partnership firm:
Computation of tax liabilities for the assessment year 2007-2008
particulars Amount Amount Amount
Business profit 200000 300000 500000
Less Interest 30000 30000 30000
Less Remuneration 132500 172500 272500
Total income 37500 97500 197500
Tax liabilities 11880 30887 62565
2 Organization as a private company:
particulars Amount Amount Amount
Business profit 200000 300000 500000
Less Remuneration 132500 172500 272500
Total income 67500 127500 227500
Tax liabilities 21383 40390 72069
From the above table clear that tax liabilities in the case private company more than partnership firm .Here one question arising, how to reduce tax liabilities in company ?
Answer is increasing the number of directors and total remuneration payable to them.
Ie, in the case of company there is no maximum limit on remuneration payable to directors. The private company decided to increase directors salary to 90 percentage of total income of the company.
What is the results after modification of directors salary?
Solution:
1 Organization as a partnership firm:
Computation of tax liabilities for the assessment year 2007-2008
particulars Amount Amount Amount
Business profit 200000 300000 500000
Less Interest 30000 30000 30000
Less Remuneration 132500 172500 272500
Total income 37500 97500 197500
Tax liabilities 11880 30887 62565
2 Organization as a private company:
Computation of tax liabilities for the assessment year 2007-2008
particulars Amount Amount Amount
Business profit 200000 300000 500000
Less Remuneration 180000 270000 450000
Total income 20000 30000 50000
Tax liabilities 6336 9504 15840
After modification of remuneration of private company directors the tax liabilities of the company less than the tax liabilities of the partnership.
Conclusion
The tax planning is availing of relief's deductions and other benefits offered by tax law. Tax payers identifying the loophole of the law and enjoying the benefits offered by the authorities. The most of the private company key and top post are occupied by the company family members or the relatives of the company. There is no maximum limit in the case of remuneration in private company is one of the benefits in the case of private company and that create huge loss in government. Section 40 b of income tax Act 1961
express maximum limit in the case of remuneration to the partners is creating pain in the development of partnership firm. Restriction is always creating pain not a gain.
References
1 Bhagawati Prasad Direct Taxes:Law and Practice Wishwa Prakaashan, Publication Delhi
2 Ahuja G K and Rvi Gupta: Systematic Approach to Income Tax and Central Sales Tax Bharat Law House , New Delhi.
3 Income Tax Act 1961.
4 Lakhotia , R N Corporate Tax Planning, Vision Publications ,Delhi.
5 Singhania V K and K Singhania Direct Taxes:Law and Practice, Taxman Publication Delhi.
6 Singhania V K and K Singhania Direct Taxe Planning and Management, Taxman Publication Delhi.
7 B B Lal Direct Taxes Konark publishers Publication Delhi
8 Dinkar pagare Direct Taxes Sultan Chand &Sons , Publication Delhi
9 Sarita Sharma and N K Sharma Tax Planning
The concept of taxation is as old as civilization. The principal of " Welfare state" extend the role of Government as unlimited. The scope of functioning of Government is not restricted any particular area and widens from time to time. For meeting this type of expenditures the Government has one of the important tools or sources is known as tax.
Taxes are direct and indirect. Income Tax are the one of the important direct tax in India.
Tax introduce in India in the year 1860 by James Wilson for compensating military mutiny of 1857.The period during 1860-1886 was the experiment context of Income Tax in India. First Income Tax Act passed in the year 1886.The Income Tax Act second passed in the year1918 it is short basis and it was replayed by another Act on 1922.The Income Tax Act 1922 in operation still 31 march 1962.On the recommendation of law Commission and Direct Tax Enquiry Committee and in consultation with the law Ministry a Bill was framed. This Bill was referred to select Committee and finally passed in September 1961.1961 act came into effect from 1st April 1962 and it applies the whole of India and it has 298 sections, XII schedules, Thousands of sub sections rules and sub rules. The government uses Tax Policy in pursuits of its several economic and social objectives and it also important instrument for ensuring for social justice, equal distribution of wealth and mobilization of savings. Under section 2(43) of the Income Tax Act1961 define tax means income tax chargeable under the provision of Act. The scheme of the Income Tax Act explained every person who is an assesses and whose total income exceeds the maximum exempted limit, shall be chargeable to income tax at the rates prescribed in Finance Act. The person total income shall be determined on the basis of his residential status. The tax rate different from person to person to person Such Income Tax shall have to be paid on the total income of the previous year in the relevant assessment year. The payment of taxes are in the following modes:
1 Deduction of tax at source, at the payment to the assessee
2 Advance tax to be paid at quarterly intervals by the assessee on his estimated income.
3 Self assessment tax to be paid by the assessee when filing his return of income.
4 Tax payable on demand.
Tax on income is a necessary evil. Reduction in the tax by rupee one is much more than the one rupee coin of income earned by a person. According to economic theory of Multiplier, if we save one rupee tax and tax rate is 33.33 percent than it is equal to increase in income by rupees three.
Increase in income= Saving in Tax / Tax rate =1 / 33.33% =3
Taxes and death are the two things are certain in human life. Reduction in tax payment improve cash flow of an assessee and the magnitude of disposable income of an individual can increased by reducing the tax burden. Thus tax is a burden or a cost or a contribution to a nations governance depending upon what one thinks of a tax .Every person like to pay less amount as tax because the magnitude of disposable income can increased by paying less tax. Various devices, methods and techniques have been adopted by tax payer for minimizing the incidence of tax. These are mainly classified into three, ie, tax evasion, tax avoidance and tax planning
Tax planning
Tax planning is personal necessity , social and national requirement , because it is the only way to achieve the objectives envisaged by a person or country. Tax planning is legal, ethical and moral because tax planning deserves all respect from the tax payer as well as tax collector. Tax planning is absolute necessity for saving and building capital in our country. Tax planning is sound law and certainly not bad morality to arrange ones affairs relating to taxation and income so reduce tax liabilities to a minimum. Therefore in tax planning activities assessee take maximum benefits of tax incentives,reliefs, rebates and other similar allowances for minimizing tax burden. According to prof. L R Khatri "Tax planning aims at reducing the tax liabilities through legal means. It is planning and arranging the affairs of an assessee whether he is an individual ,HUF, firm company etc.. in such a manner tax is attracted .It is different from tax evasion and tax avoidance by dubious means. Thus tax planning is availing of relief's deductions and One of the important restriction in the case of partnership regarding payment of remuneration clearly mentioned u/s 40b of income tax act
The deduction on account of remuneration and interest to the partners can be claimed subject the following condition
1 Remuneration should be to working partner
Any payment of salary, bonus, commission or remuneration to any partner who is not a working partner is not allowed as a deduction
2 Remuneration must be authorized by partners deed
3 Any payment of salary, bonus, commission or remuneration by what ever name called to a working partner if not allowed deduction the following cases :
If the payment is not authorized by partnership deed OR
It is not in according to the partnership deed
Remuneration should not be exceed maximum permissible limit. The limits on different from profession partnership firm to ordinary partnership firm
Book profit remuneration
Professional firms:
(i)Upto Rs. 1,00,000 of book profit or if there is a 90% of book profit (or) Rs. 50,000
Business loss. Whichever is higher
(ii)Next Rs. 1,00,000 of book profit. 60%of book profit.
(iii) Balance of book profit. 40%of book profit
Other firm:
(i)Upto Rs. 75000 of book profit or if there is a 90% of book profit (or) Rs. 50,000
Business loss. Whichever is higher
(ii)Next Rs. 75000 of book profit. 60%of book profit.
(iii) Balance of book profit. 40%of book profit
Effects of section 40b
For understanding the effect of 40b we can take an example. Mr A and B started the organization (not professional firm)
by contributing 500000 rupees as a capital and their profits and loss sharing ratio equal. They are entitled simple interest at the rate of 6 percentage. They earn business profit regularly find out tax liabilities of organization under different assumptions and different level of incomes.
Assumptions:
1 Organization as a partnership firm.
2 Organization as a private limited company.
Business profit : 200000,300000, 500000
Solution:
1 Organization as a partnership firm:
Computation of tax liabilities for the assessment year 2007-2008
particulars Amount Amount Amount
Business profit 200000 300000 500000
Less Interest 30000 30000 30000
Less Remuneration 132500 172500 272500
Total income 37500 97500 197500
Tax liabilities 11880 30887 62565
2 Organization as a private company:
particulars Amount Amount Amount
Business profit 200000 300000 500000
Less Remuneration 132500 172500 272500
Total income 67500 127500 227500
Tax liabilities 21383 40390 72069
From the above table clear that tax liabilities in the case private company more than partnership firm .Here one question arising, how to reduce tax liabilities in company ?
Answer is increasing the number of directors and total remuneration payable to them.
Ie, in the case of company there is no maximum limit on remuneration payable to directors. The private company decided to increase directors salary to 90 percentage of total income of the company.
What is the results after modification of directors salary?
Solution:
1 Organization as a partnership firm:
Computation of tax liabilities for the assessment year 2007-2008
particulars Amount Amount Amount
Business profit 200000 300000 500000
Less Interest 30000 30000 30000
Less Remuneration 132500 172500 272500
Total income 37500 97500 197500
Tax liabilities 11880 30887 62565
2 Organization as a private company:
Computation of tax liabilities for the assessment year 2007-2008
particulars Amount Amount Amount
Business profit 200000 300000 500000
Less Remuneration 180000 270000 450000
Total income 20000 30000 50000
Tax liabilities 6336 9504 15840
After modification of remuneration of private company directors the tax liabilities of the company less than the tax liabilities of the partnership.
Conclusion
The tax planning is availing of relief's deductions and other benefits offered by tax law. Tax payers identifying the loophole of the law and enjoying the benefits offered by the authorities. The most of the private company key and top post are occupied by the company family members or the relatives of the company. There is no maximum limit in the case of remuneration in private company is one of the benefits in the case of private company and that create huge loss in government. Section 40 b of income tax Act 1961
express maximum limit in the case of remuneration to the partners is creating pain in the development of partnership firm. Restriction is always creating pain not a gain.
References
1 Bhagawati Prasad Direct Taxes:Law and Practice Wishwa Prakaashan, Publication Delhi
2 Ahuja G K and Rvi Gupta: Systematic Approach to Income Tax and Central Sales Tax Bharat Law House , New Delhi.
3 Income Tax Act 1961.
4 Lakhotia , R N Corporate Tax Planning, Vision Publications ,Delhi.
5 Singhania V K and K Singhania Direct Taxes:Law and Practice, Taxman Publication Delhi.
6 Singhania V K and K Singhania Direct Taxe Planning and Management, Taxman Publication Delhi.
7 B B Lal Direct Taxes Konark publishers Publication Delhi
8 Dinkar pagare Direct Taxes Sultan Chand &Sons , Publication Delhi
9 Sarita Sharma and N K Sharma Tax Planning
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