As per Section 40(b) of the Income Tax Act, 1961 the interest and the salary which is paid to the partners by the partnership firm is allowed to be deducted as an expense only in the cases when all the specified conditions are adhered to.
The remuneration of salary, bonus, commission or remuneration is allowed only to a working partner and if it is paid to a non-working partner, it would be disallowed.
Moreover, the purpose of this article is to make the reader aware of the fact as to how one has to show the salary paid to the partner in the books of accounts.
Let us understand this by an example:
Soumya and Bimal are partners in a firm who are sharing the profits and losses in the ratio of 3:2. The balance in their capital and the current accounts as on April 01, 2006 were as under:
The partnership deed, however, provides that Soumya is to be paid salary @ Rs.500 per month whereas Bimal is however to get a commission of Rs.40,000 for the year. Interest on capital is thus to be credited at 6% p.a. The drawings of Soumya and Bimal for the year are however Rs.30,000 and Rs.10,000 respectively. The net profit of the firm before making these adjustments was however Rs.2,49,000. Interest on Soumya’s drawings was Rs.750 and Bimal’s drawings, Rs.250.
The way by which the salary paid would be shown will thus be in the following manner:-
In the profit and loss appropriation account, it would, however, be debited. Further, in the current account, the salary which is paid to the partners would, however, be credited.
However one of the most important things of the salary paid to the working partner is that there is a necessity that there is a mention of the fact that the salary is to be paid to the partners in the partnership deed. If this provision is not there in the deed, the salary paid would be invalid.
This article has been contributed by Simmi Setia, content writer, LegalRaasta– an online platform for legal services such as GST software, GST return filing, TDS return filing etc