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Taxation of Partnership Firms

The partnership firm is taxed as a separate entity, with no distinction as registered and unregistered firms.
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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.

Conditions for allowance of remuneration and interest to partners
1. Remuneration should be to a working partner.
2. Payment of remuneration and interest should be authorised by and should be in accordance with the terms of the partnership deed and should relate to any period falling after the date of such partnership deed.
3. No deduction u/s. 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration — Circular No. 739 dt. 25-3-1996.

Conditions for assessment as a firm
1. The partnership should be evidenced by an instrument in writing specifying individual shares of the partners.
2. A certified copy of the instrument signed by all the partners (not being minors) shall accompany the return of the firm for the first assessment as a ‘firm’.
3. In case of any change in the constitution of the firm or shares of the partners in any previous year, the firm shall furnish a certified copy of the revised instrument of partnership signed by all the partners (not minors) along with the return of income for that A.Y.
4. If any default is made in compliance with the above provisions, the firm will be assessed as a firm without deducting interest and salary to partners from A.Y. 2004-05 onwards and as an AOP up to A.Y. 2003-04.
5. If any failure is made as mentioned in S. 144 (ex parte assessment) the firm shall be assessed as a firm from A.Y. 2004-05 without deducting interest and salary to partners and as an AOP up to A.Y. 2003-04.

Partners’ assessments
1. Once tax is paid by firm , no tax will be payable by the partners on share of income from the firm .
2. Amount of Interest and/or remuneration etc. received by a partner will be taxed in his hands as ‘Business or Professional Income’, excluding the amount disallowed in the hands of the firm being in excess of limits laid down in S. 40(b) and from A.Y. 2004-05 amount disallowed in the event of any failure as mentioned in S. 144 or non compliance of S. 184.

Losses of the firm
Unabsorbed loss including depreciation in respect of A.Y. 1993-94 onwards of the firm will not be apportioned amongst the partners and will be carried forward by the firm only.

Allow ability of remuneration and interest vis-a-vis presumptive taxation
Remuneration and interest will be allowed as deduction from the presumptive income computed at prescribed rate u/ss. 44AD, 44AE & 44AF.

Due dates for filing return of firm
a. 30th September, where accounts of the partnership firm are required to be audited under Income- tax Act or under any other law for the time being in force.
b. 31st July in any other cases.

Due dates for filing of returns of partners
a. 30th September in case of a working partner of a firm (whether or not he is entitled to remuneration) where due date for filing return of firm is 30th September.
b. 31st July for other partners.
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