B.COM (H) SEMESTER V SECTION G & I (SEPT.

18) [10]
PERSONAL COPY/ NOT FOR SALE OR CIRCULATION (Session 2014-15)
SETTING UP OF BUSINESS
Among other considerations like requirement of finance, resources, personal liability of
owner, level of operation, quantum of profit, specified requirement of technical expertise, tax
incentives play an important role while selecting a suitable form of organization for a new
business.
Individuals/ Sole Proprietary Concern:
1. In computing the business income, an individual is not entitled to a deduction of any
remuneration for work done by him and interest on own capital or loan invested in
the business.
2. Salary and interest paid to other members are allowed as deduction to the owner
member and these salaries and interest are taxable in the hands of other members
under the head Salaries and Income from other sources respectively.
Hindu Undivided Family (HUF):
In computing the business income, interest on capital contributed by the family for the
business is not deductible. However, remuneration to the karta and other family members
for their services to the business is allowed as deduction and this remuneration is taxable in
their individual hands under the head Salaries.
Firm:
In computing business income, the following payments to the partners are deductible:
a. Interest on capital or loan given to the firm at the rate mentioned in the partnership
deed but not exceeding 12% per annum.
b. Remuneration to the working partners as mentioned in the partnership deed but not
exceeding the following limits:
i.
On first ` 3,00,000 of the book profits or in case of loss, @ 90% of book
profits or ` 1,50,000 whichever is more;
ii.
On the remaining balance of book profits, 60% of book profits.
OR
In simple terms, we can say that remuneration as per the deed or remuneration as
per the above rule, whichever is less should be deducted.
Points to be noted:
1. Remuneration and interest received from the firm by the partners is taxable under
the head Profits and gains of business or profession in their individual hands.
However, the share of a partner in the total income of the firm is exempt under
section 10(2A).
2. Remuneration should be deducted only in case of working partners.
3. No limit of 12% interest rate is applied in case of deposits/ loans taken from
outside.
4. The amount of remuneration which is allowed as deduction to the firm is taxable
in the hands of partners in the ratio of remuneration of partnership deed.
5. Estimated profits (if not separately mentioned) means profits before interest and
remuneration.
6. Where the assessee-partner borrows money for investing as capital in partnership,
interest paid by the assessee on borrowed money is an allowable deduction.

Naveen Mittal, SRCC

https://sites.google.com/site/srmeenav/

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PERSONAL COPY/ NOT FOR SALE OR CIRCULATION (Session 2014-15)

Company:
1. The company can deduct the whole amount of interest paid on loan taken for business
purposes and also the remuneration paid to the managing director, directors and other
staff.
2. A company cannot pay interest on capital. It can pay dividend on capital.
3. A company has to pay dividend tax @ 16.995% [15% + 10% (surcharge) + 3% (cess)]
for the assessment year 2014-15 and upto September 30, 2014 in assessment year
2015-16. With effect from October 1, 2014, CDT rate is 19.994% [17.647% + 10%
(surcharge) + 3% (cess)].
Limited Liability Partnership (LLP):
A limited partnership is governed by the Limited Liability Partnership Act, 2008. A LLP is a
body corporate formed and incorporated under the Limited Liability Partnership Act, 2008
and it is a legally separate entity from that of its partners. A LLP has perpetual succession.
Any change in the partners of a LLP will not have any impact on its existence or rights and
limited liability of a company and the flexibility of a partnership. LLP is liable to the
outsiders to the extent of its assets. However, liability of the partners is limited to their agreed
contribution in the LLP. LLP contains elements of both a corporate structure as well as a
partnership firm structure.
LLP pays tax on its taxable income @ 30% + Surcharge (if any) + Cess @ 3% for assessment
year 2014-15 and assessment year 2015-16.

Naveen Mittal, SRCC

https://sites.google.com/site/srmeenav/

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