Report No. 12

69. Method of computing a partner's share in the income of the firm.-

(1) In computing the total income of an assessee who is a partner of a firm whether the net result of the computation of total income of the firm is a profit or a loss, his share (whether a net profit or a net loss) shall be computed as follows-

(a) any interest, salary, commission or other remuneration paid to any partner in respect of the previous year shall be deducted from the total income of the firm, and the balance ascertained and apportioned among the partners;

(b) where the amount apportioned to the partner under clause (a) is a profit, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be added to that amount, and the result shall be treated as the partner's share in the income of the firm;

(c) where the amount apportioned to the partner under clause (a) is a loss, any salary, interest, commission or other remuneration paid to the partner by the firm in respect of the previous year shall be adjusted against that amount, and the result shall be treated as the partner's share in the income of the firm.

[Section 16(1)(b), main para.]

(2) A partner's share in the income of the firm, as computed under sub-section (1), shall, for the purposes of assessment, be apportioned under the various heads of income in the proportion which the income of the firm under each head bears to the total income of the firm.

(3) Any interest paid by a partner on capital borrowed for the purposes of investment as his capital in the firm shall, in computing his income chargeable under the head "Profits and gains of business, profession or vocation" in respect of his share in the income of the firm, be deducted from the share, but no other deduction shall be allowed in respect of the said share.

(4) If a partner's share in the income of the firm, as computed under this section, is a loss, such loss may be set off, or carried forward and set off, in accordance with the provisions of this Chapter.

[Section 16(1)(b), proviso]

Explanation.-In this section, "paid" has the same meaning as is assigned to it in section 42, clause (2) [section 10(5)].