High School

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------------------------------------------------ From the profit and loss account of Mishra Traders, partner-firm, for the year ending 31st March 2020, compute taxable income and tax liability for the assessment year 2020-21:

**Profit and Loss Account**

| Particulars | Rs. | Particulars | Rs. |
|------------------------------|------|------------------------------|------|
| Salaries | 36,000 | By Gross Profit | 96,000 |
| Rent | 12,000 | By Commission | 5,000 |
| Electricity and Water | 2,200 | By Scrap Sales | 5,000 |
| Rent, Rates and Taxes | 2,500 | By Refunds Received | 2,500 |
| Motor Car Expenses | 9,000 | On Excess Penalty | 2,500 |
| Entertainment Expenses | 3,000 | By Income-tax Refund | 7,700 |
| Repairs | 6,000 | By Surplus on Sale of Plot | 15,000 |
| Depreciation | 8,000 | | |
| Trade Expenses | 6,500 | | |
| Legal Expenses | 4,100 | | |
| Net Profit | 41,900 | | |
| | 1,31,200 | | 1,31,200 |

**Other Particulars:**

a) Salaries include Rs. 12,000 paid to managing partner X.

b) Rent includes Rs. 6,000 paid to a partner for the premises occupied by the firm.

c) Rent, rates, and taxes include municipal taxes of Rs. 1,000 paid on the premises of the partner, to be borne by him.

d) Motor car expenses include Rs. 3,600 conveyance allowance paid to the managing partner. He claims to have spent the whole of such amount in performance of his duties.

e) Repairs represent the cost of two electric motors replaced at a cost of Rs. 3,000 each.

**Trade Expenses include:**

i) Donation to approved Charitable Institution Rs. 1,500

ii) Diwali Pooja Expenses Rs. 1,000

f) Legal expenses include Rs. 500 paid to an advocate in connection with the litigation of the partner's property.

g) Excise penalty was disallowed when debited in the earlier year, i.e., assessment year 2019-20.

h) The plot was held by the firm for more than 36 months.

Answer :

To compute the taxable income and tax liability for Mishra Traders, we need to adjust the Profit and Loss Account as per the provisions of the Income Tax Act, and then calculate the tax liability.

Step 1: Adjust Net Profit

Given Net Profit: Rs. 41,900

Let's adjust the Net Profit by adding back the disallowed expenses and subtracting the allowable expenses.

  1. Add back disallowed expenses:

  • Salaries to managing partner X: Rs. 12,000 (since partner salary is not an allowable deduction)
  • Rent paid to partner: Rs. 6,000
  • Municipal taxes paid on partner’s premises: Rs. 1,000
  • Legal Expenses on partner's property: Rs. 500
  • Donation to charitable institution: Rs. 1,500 (Donation is not fully allowable as a deduction under P&L)
  • Diwali Pooja Expenses: Rs. 1,000 (considered personal)

  1. Subtract refundable and allowable items:

  • Refund for excise penalty: Rs. 2,500 (add back this item as it is a recovery)
  • Income-tax refund: Rs. 7,700 (not taxable as it is not a business income)
  • Surplus on sale of plot: Rs. 15,000 is considered a capital gain (taxed separately), not included in business income calculation.

Step 2: Calculate Adjusted Net Profit

The adjusted net profit would be:

  • Adjusted Net Profit = Present Net Profit + (Salaries + Rent + Municipal Tax + Legal Expenses + Donations + Pooja Expenses) - Refunds for penalty - Surplus on sale of plot

= Rs. 41,900 + (Rs. 12,000 + Rs. 6,000 + Rs. 1,000 + Rs. 500 + Rs. 1,500 + Rs. 1,000) - Rs. 2,500

= Rs. 41,900 + Rs. 22,000 - Rs. 2,500

= Rs. 61,400

Step 3: Calculate Taxable Income

  • Since Donations of Rs. 1,500 are to the approved charitable institution, they might be eligible for deductions under section 80G, but exact eligibility must be verified.
  • Taxable Income (preliminary) = Adjusted Net Profit = Rs. 61,400

Step 4: Calculate Tax Liability

This calculation varies based on the applicability of income slabs and any deductions like Section 80G for charity that might apply.

For simplicity, assuming there are no further deductions:

  • Assuming a standard partnership tax rate (based on appropriate laws), usually partnership firms have a flat tax rate of 30% + applicable surcharge and cess.

Concluding Remarks

Please note, tax rates and deductions need to be confirmed with current fiscal year laws as they may change. The deductions for donations, surcharges, and applicability of cess must be verified with the most recent tax provisions.

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