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Taxation of Partnership Firms
Taxation of Firms
The partnership firm is taxed as a separate entity, with no distinction as
registered and unregistered firms. A partnership firm is or required to submit a
copy of the partnership deed in the first year of . assessment and later on only
if there is a change in the terms/constitution of partnership. In computing the
total income of the firm, any salary bonus, commission or remuneration, to a
partner, shall be deductible subject to certain restrictions, discussed later in
this chapter.
Share Income from Firm
The share of the partner in the income of the firm will be fully
exempt from income-tax. [Sec. 10(2A)]
In case such share is a loss the same can not be set off against
partner's other business income. It is simply ignored.
Interest to Partners
Where a firm pays interest to any partner, the firm can claim deduction of such
interest at a maximum rate of 12% p.a. according to the partnership deed. It cannot
be claimed with retrospective effect. Interest paid in excess of the above will
be disallowed in the hands of
the firm. [Sec. 40(b)(iv)]
Partner's Salary/Remuneration
Any payment of salary, bonus, commission or remuneration, by whatever name
called, to any partner will be allowed as deduction in he hands of the firm
subject to following conditions:
(i) The salary is paid to a working partner. [Sec. 40(b)(i)]
For this purpose, a 'working partner'· means an individual partner who is
actively engaged in conducting the business/ profession of the firm. [Expl. 4 to
Sec. 4O{b)] Sleeping partners or financing partners can't be allowed any
remuneration etc. by the firm.
Whether a partner can be considered to be a working-partner or not is a question
of fact, and in cases where a dispute could arise on this question, it would be
advisable to keep evidence at hand that would indicate allocation of work in a
firm, or otherwise show clearly what work has been done by a partner.
(ii) The payment is authorized by, and is in accordance with, the terms
of the partnership deed. [Sec. 40(b)(ii)]
(iii) The payment relates to a period which falls after to the date of
the partnership deed. In other. words, the deduction for salary to partners
cannot be claimed with retrospective date. [Sec. 40(b)(iii)]
Note: The terms of the partnership deed providing for such payment may
be changed at any time during the previous year. It however cannot be claimed
with retrospective effect.
(iv) The amount of remuneration has been specified or a limit for total
remuneration has been specified in the partnership deed. .
Note: The deduction shall not be allowed, where neither the amount of
remuneration has been quantified nor even the limit of total remuneration has
been specified in the partnership deed but the same as been left to be
determined by the partners at the end of the accounting period. However, for the
A.Y.'s 1993-94 to 1996-97, deduction for remuneration shall: be allowed in such
cases.
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