SECTION 40(B): Disallowance of Interest and Remuneration to Partners

In the case of any partnership firm including LLP the following amounts shall disallowed in computing the business income –

(1) Interest to any partner authorised by the deed-

Any interest payment authorised by the partnership deed in excess of 12% simple interest p.a.

(2) Remuneration to a working partner authorized by deed –

Any remuneration paid to a working partner authorised by a partnership deed in excess of the following limits

Book Profits Quantum of deduction
On the first Rs. 3 lakh of book profit or in case of loss Rs. 1,50,000 or 90% of book profit, whichever is higher
On the balance of book profit 60% of book profit

⇒ The term ‘remuneration’ is applied to denote payments in the nature of salary, bonus, commission.

⇒ Book Profit – The net profit as shown in the profit and loss account computed in accordance with the provisions for computing income from profits and gains. This amount should be increased by the remuneration paid or payable to all the partners of the firm if the same has been deducted while computing the net profit.

Working partner – An individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.

(3) Remuneration to non-working partner –

Any salary, bonus, commission, remuneration by whatever name called, to any partner who is not a working partner.

(4) Remuneration to a working partner not authorized by deed –

Any remuneration paid to the working partner or interest to any partner which is not authorised by  partnership deed.

(5) Remuneration or interest to a partner authorized by deed but relates to an earlier period –

It is possible that the current partnership deed may authorise payments of remuneration to any working partner or interest to any partner for a period which is prior to the date of the current partnership deed. The approval by the current partnership deed might have been necessitated due to the fact that such payment was not authorised by or was inconsistent with the earlier partnership deed. Such payments of remuneration or interest will also be disallowed.

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