What items are disallowed as deduction in computation of firm’s income from business or profession under Section 40(b)?

Disallowance of Deductions Under Section 40(b) of the Income Tax Act:

1. Introduction:
Section 40(b) of the Income Tax Act specifies certain items that are disallowed as deductions while computing the income from business or profession of a firm. These disallowances are aimed at ensuring that firms do not claim inappropriate deductions that could reduce their taxable income.

2. Disallowed Items:

2.1. Remuneration to Partners:

• Any remuneration paid to partners that exceeds the limits specified under the Income Tax Act is disallowed.
• The limits are based on the partnership deed or the relevant provisions of the Income Tax Act, whichever is lower.
• If the remuneration exceeds the specified limits, the excess amount is disallowed as a deduction.

2.2. Interest on Capital:

• Any interest paid to partners on their capital that exceeds the limits specified under the Income Tax Act is disallowed.
• The limits are based on the partnership deed or the relevant provisions of the Income Tax Act, whichever is lower.
• If the interest exceeds the specified limits, the excess amount is disallowed as a deduction.

2.3. Interest on Borrowed Capital:

• Any interest paid to partners on their borrowed capital that exceeds the limits specified under the Income Tax Act is disallowed.
• The limits are based on the partnership deed or the relevant provisions of the Income Tax Act, whichever is lower.
• If the interest exceeds the specified limits, the excess amount is disallowed as a deduction.

2.4. Payment to a Partner Who is Not a Working Partner:

• Any payment made to a partner who is not actively involved in the conduct of the firm's business is disallowed as a deduction.
• This is to prevent firms from claiming deductions for payments made to partners who do not contribute to the firm's operations.

3. Exceptions and Special Cases:

3.1. Small Firms and Certain Professions:

• Small firms and certain professions may be exempt from the limits on remuneration, interest on capital, and interest on borrowed capital under certain conditions.
• These exemptions are intended to provide relief to smaller firms and certain professions that may not be able to meet the prescribed limits.

4. Conclusion:
Section 40(b) of the Income Tax Act specifies certain items that are disallowed as deductions while computing the income from business or profession of a firm. These disallowances are aimed at ensuring that firms do not claim inappropriate deductions that could reduce their taxable income. It is important for firms to comply with these provisions to avoid penalties and legal consequences.