Understanding Disallowance Under Section 40B of the Income Tax Act

Learn about disallowance under Section 40B, covering expense limits for partnership firms and remuneration rules.

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Disallowance under Section 40B of the Income Tax Act pertains to the disallowance of certain expenses claimed by partnership firms. Specifically, it disallows excessive or unreasonable remuneration, interest, and salary paid to partners, ensuring that these expenses are kept within prescribed limits.

FAQs & Answers

  1. What expenses are disallowed under Section 40B? Under Section 40B of the Income Tax Act, excessive or unreasonable remuneration, interest, and salary paid to partners in a partnership firm are disallowed. This ensures that the firm's expenses align with prescribed limits.
  2. How does disallowance impact a partnership firm’s tax liability? Disallowance reduces the deductions a partnership firm can claim, thereby increasing its taxable income and tax liability.
  3. What criteria determine excessive remuneration under Section 40B? The criteria for determining excessive remuneration under Section 40B include industry standards, the individual partner's contribution to the firm, and prevailing market rates.
  4. Can a partnership firm appeal against disallowance under Section 40B? Yes, a partnership firm can appeal against the disallowance decision by providing sufficient evidence that the remuneration and expenses claimed were reasonable and justifiable.

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