During the previous year 2019-20 the book profits of a firm stood at Rs.…

Concept: Under Section 40(b) of the Income Tax Act, the deduction allowed for remuneration paid to working partners of a firm is capped by slabs based on book profit. On the first Rs. 3,00,000 of book profit (or in case of a loss), the maximum allowable remuneration is the higher of Rs. 1,50,000 or 90% of book profit; on the book profit in excess of Rs. 3,00,000, the cap is 60% of that excess.

1. The book profit of the firm is Rs. 3,00,000, which falls entirely within the first slab (there is no balance beyond Rs. 3,00,000).

2. Compute 90% of the book profit: 90% of Rs. 3,00,000 = Rs. 2,70,000.

3. Compare this with the flat threshold of Rs. 1,50,000 and take the higher value: the higher of Rs. 1,50,000 and Rs. 2,70,000 is Rs. 2,70,000.

4. Since the book profit does not exceed Rs. 3,00,000, no additional 60% slab applies — the maximum remuneration allowable u/s 40(b) is Rs. 2,70,000.

Cross-check: "Maximum amount of remuneration allowable u/s 40(b)" asks for the statutory ceiling itself, which Section 40(b) computes purely from book profit (here, the higher of Rs. 1,50,000 or 90% of book profit = Rs. 2,70,000) — it is not capped by the amount actually paid. The amount actually paid matters only separately, when computing the deduction actually claimed (the lower of the amount paid and this ceiling) — a different question from the one asked here.