JC & Co., a partnership firm, constituted by two partners Arun and Barun, reports a net profit of ₹10,00,000 before deduction of the following items for the previous year ended 31st March, 2019: (1) Salary of ₹30,000

Computation of Book Profit of M/s J.C. & Co. for the A.Y. 2019-20 Particulars Amount (₹) Amount (₹) Net Profit (before deduction of depreciation, salary and interest) 10,00,000 Less: Depreciation under section 32 of the Income Tax Act, 1961 2,50,000 Less: Interest @ 12% p.a. [being the maximum allowable as per section 40(b)] (₹5,00,000 × 12% × 2) 1,20,000 (3,70,000) Book Profits 6,30,000 Note: Salary paid to working partners has not been added for the computation of Book Profits in terms of Explanation III of Section 40(b) of the Act as it was initially not deducted for the computation of net profit reported by JC & Company. Allowable amount of salary to the working partners for the assessment year 2019-20 Salary actually paid to the working partners not charged is of ₹30,000 × 2 × 12 = ₹7,20,000. As per the provisions of section 40(b)(v) of the Income-tax Act, 1961, the salary paid to the working partners is allowed subject to the following limits: On the first ₹3,00,000 of book profits or in case of loss: ₹1,50,000 or 90% of book profits whichever is more. On the balance of book profits: 60% of the balance book profits. The maximum allowable salary to working partners for the A.Y. 2019-20 in this case would be: Particulars Amount (₹) On the first ₹3,00,000 of book profit [(₹1,50,000 or 90% of ₹3,00,000) whichever is more] 2,70,000 On the balance of book profit [60% of (₹6,30,000 - ₹3,00,000)] = 60% of ₹3,30,000 1,98,000 Maximum allowable partners salary 4,68,000 Since, the above is lower than the actual remuneration paid, allowable working partners salary for the A.Y. 2019-20 as per provisions of section 40(b)(v) of the Income-tax Act, 1961, is ₹4,68,000.