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CA Intermediate · Taxation · Profits and Gains of Business or Profession

M/s Shah & Partners, a firm, has a net profit of Rs 5,00,000 as per its profit and loss account for tax year 2026-27, after debiting remuneration of Rs 7,00,000 paid to working partners (as authorised by the partnership deed) and book depreciation of Rs 1,00,000. Depreciation as per income-tax rules is Rs 1,40,000. There are no other adjustments. The book profit limits for remuneration are 90% of the first Rs 6,00,000 and 60% of the balance. What is the firm's business income for tax year 2026-27?

The firm's business income is Rs 4,60,000. Adding back the Rs 7,00,000 remuneration to the book profit gives Rs 12,00,000, and the extra tax depreciation of Rs 40,000 reduces it. The remuneration limit is Rs 8,76,000, so the Rs 7,00,000 paid is fully allowed.

  1. ARs 5,00,000
  2. BRs 4,60,000Correct
  3. CRs 5,40,000
  4. DRs 11,60,000

Explanation

Book profit = 5,00,000 + 7,00,000 remuneration + 1,00,000 book depreciation - 1,40,000 tax depreciation = Rs 11,60,000 after the adjustment (profit before remuneration is 12,00,000, less extra depreciation 40,000). The maximum remuneration is 90% x 6,00,000 + 60% x 5,60,000 = 5,40,000 + 3,36,000 = Rs 8,76,000. Actual remuneration of Rs 7,00,000 is below this, so it is fully allowed. Business income = 12,00,000 - 7,00,000 - 40,000 = Rs 4,60,000. Rs 5,00,000 ignores the depreciation difference, and Rs 5,40,000 adds the difference instead of deducting it.

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