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How to Compute Book Profit of Partnership Firm?



compute Book Profit of Partnership FirmPartnership is not a separate entity distinct from the partners, but for tax purposes a partnership is an entity. Total income of the Partnership firm is taxed as a separate entity. But while computing business income a deduction shall be allowed to the firm on account of interest or remuneration payable to partner. While taxability of Partnership firm there is no distinction between registered and unregistered firms.

Book Profit simply means profit as computed in accordance with the provisions but before remuneration paid to partner.

Computation of Book Profits would be calculated as under –

Step-I. Find out the net profit of the firm as per the Profit & Loss A/c.

Step-II. Make adjustments as provided below-

a)      Income chargeable to tax under the heads “Income from House Property”, “Capital gains” and “Income from Other Sources” will not be a part of “book profit”;

b)     Brought forward business losses will not be deducted from “book profit”;

c)      Permissible deductions from gross total income under sections 80C to 80U shall be ignored from computing “book profit”.

Step-III. Add remuneration to partners if debited to the Profit & Loss A/c

The resulting figure would be “Book Profit”.

Relevant point regarding Book Profit-

  • The amount of remuneration to be paid to the partners should not exceed limit as prescribed by the Income Tax Act, 1961 –

Book Profit

Amount deductible in respect of remuneration of partners under section 40(b) with effect from the A.Y. 2010-2011
   If book Profit is negative   Rs. 1,50,000
   If Book Profit is positive

  • On first 3lakhs of Book Profit
  • On the balance of the Book Profit
  Rs. 1,50,000 or 90% of Book Profit, whichever is more

 

60% of Book Profit

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About: 

Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.

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