Central Board of Direct Taxes hereby direct that the value of a partner's right to share the profits of the firm without the right to share the assets - 0301 - Income Tax

Notification Number: 0301 20 July 1977 In exercise of the powers conferred by rule 10(4) of the Gift-tax Rules, 1958 [as amended by the Gift-tax (Second Amendment) Rules, 1976], the Central Board of Direct Taxes hereby direct that the value of a partner's right to share the profits of the firm without the right to share the assets shall be calculated in the manner specified in the annexure to this Circular. 2. This notification shall come into force with effect from 30th May, 1977, the date on which Circular No.219 (F.No.333/1/76-GT) See [1977] 109 ITR (St.) 77. was issued. Annexure Valuation of right to share the profits of the firm without a right to share the assets Step I: (a) The Gift-tax Officer shall, in the first instance, compute the average annual income of the business carried on by firm/or the proprietary business which is converted into partnership. In the case of a business or profession which has been in existence for five years or more, such average annual income shall be the average of the income of the five accountings years immediately preceding the date to which the valuation relates. In other cases, it shall be the average of incomes of the accounting years immediately preceding such date. (b) Subject to the adjustments mentioned in (c) and (d) below, the income of any accounting year shall be the income as assessed under the Income-tax Act, 1961, and, if no income-tax assessment has been made as on the valuation date for any accounting year, it shall be the income as per books of accounts of the firm/proprietary concern, after making such adjustments as are contemplated in section 143(1)(b) of the Income-tax Act, 1961. (c) Salaries and interest on capital paid to partners/proprietor shall, in the first instance, be added back to the income of the business. A deduction shall, thereafter, be allowed for a sum which, in the opinion of the Gift-tax Officer, is reasonable remuneration for the working partners/proprietor. A further deduction for a sum calculated at 12 per cent. per annum shall be allowed on the capital as standing to the credit of the partner/proprietor as on the last date of the accounting year. (d) Non-recurring items (both debits and credits) and capital items will be excluded be computation of the income of any particular accounting year. Step II: The figure arrived at in Step I shall be multiplied by 2 in the case of a mainly professional firm and by 3 in the case of any other firm. Step III: To arrive at the value of a partner's interest, the proportion of his share in the profits of the firm should be applied to the figure arrived at in Step II. File Number: 333/1/76-GT