Section 13 - Amendment of section 40 - Direct Tax Laws (Amendment) Act, 1987

13. Amendment of section 40. In section 40 of the Income-tax Act,- (i) in the opening portion, for the words and figures sections 30 to 39 , the words and figures sections 30 to 38 shall be substituted; (ii) for clause (b), the following clauses shall be substituted, namely: -- (b) in the case of any firm assessable as such,- (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as remuneration) to any partner who is not a whole-time working partner; or (ii) any payment of remuneration to any partner who is a whole-time working partner, or of interest to any partner, which, in either case, is and authorised by, or is not in accordance with, the terms of the partnership deed; or (iii) any payment of remuneration to any partner who is a whole-time working partner, or of interest to any partner, which, in either case is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or (iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at such rate of interest as may be prescribed having regard to the maximum rate of interest payable by a scheduled bank on its deposits; or (v) any payment of remuneration to any partner who . is a whole-time working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :- (1) in case of a firm carrying on a profession referred to in section 44AA on which is notified for the purpose of that section,- (a) on the first Rs. 50,000 of the hook-profit at the rate of 90 per cent.; (b) on the next Rs 50,000 of the book-profit at the rate of 65 per cent.; (c) on the balance of the book-profit at the rate of 40 per cent .; (2) in the case of any other firm - (a) on the first Rs. 50,000 of the book-profit at the rate of 75 per cent.; (b) on the next Rs. 50,000 of the book-profit at the rate of 50 per cent.; (c) on the balance of the book-profit at the rate of 25 per cent. Explanation 1 .- In this clause, - (a) whole-time working partner means a partner of the firm who is in receipt of any remuneration from the firm for services rendered to that firm and who is not in receipt of any similar remuneration from any other person; (b) book-profit means the profit which would have been computed in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956 (1 of 1956) it those provisions had been applicable to a firm and before making any deduction of any loss brought forward or any unabsorbed depreciation allowance or any other allowance or deduction brought forward from any earlier previous year and without making any deduction under section 32AB or section 33AB or under Chapter VI-A as increased by the following amounts if they have been taken into account in arriving at such profits - (1) the aggregate amount of the remuneration and the interest to all the partners of the firm; (2) income-tax; (3) reserves or provisions of any kind; (4) depreciation; and as reduced by the depreciation computed in accordance with the provisions of sub-section (1) of section 32 and the aggregate amount of interest allowed to all the partners of the firm under this clause; (c) scheduled bank shall have the same meaning as is assigned to it in the Explanation to clause (viia) of sub- section (1) of section 36. Explanation 2.- Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as partner in a representative capacity and person so represented , respectively),- (i) interest paid by the firm to such individual otherwise than as partner in a representative capacity. shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause, Explanation 3.- Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person; (ba) in the case of an association of persons or body of individuals [other than a company or a co-operative society or a society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India], any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such association or body to a member of such association or body. Explanation 1.- Where interest is paid by an association or body to any member thereof who has also paid interest to the association or body, the amount of interest to be disallowed under this clause shall be limited to the amount by which the payment of interest by the association or body to the member exceeds the payment of interest by the member to the association or body. Explanation 2.- Where an individual is a member of an association or body on behalf, or for the benefit, of any other person (such member and the other person being hereinafter referred to as member in a representative capacity and person so represented , respectively),- (i) interest paid by the association or body to such individual or by such individual to the association or body otherwise than as member in a representative capacity, shall not be taken into account for the purposes of this clause; - (ii) interest paid by the association or body to such individual or by such individual to the association or body as member in a representative capacity and interest paid by the association or body to the person so represented or by the person so represented to the association or body, shall be taken into account for the purposes of this clause. Explanation 3.- Where an individual is a member of an association or body otherwise than as member in a representative capacity, interest paid by the association or body to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person; ; (iii) clause (c) shall be omitted.