CS Deepak Pratap Singh
Firm is an association of two or more than two persons, who came together to do a business and share profits thereof. Section 4 of the Partnership Act, 1932 defines Partnership as “relationship between persons who have agreed to share the profits of business carried on by all or any of them acting for all.”
The persons who have agreed to do business together are personally called “Partners” and collectively called a “Firm”. They are abiding by a deed called “Partnership Deed”. A Partnership Deed for partnership is same as Articles of Association, Trust Deed for companies and Trust respectively.
From Assessment Year 1993-94 the Partnership Firms are classified as;
Scheme of Taxation of Firms;
CONDITIONS TO BE FULFILLED BY A FIRM TO BE ASSESSED AS SUCH (PFAS);
Section 184; of the Income Tax Act, 1961 governs the taxation and assessment of Firm. A firm has to satisfy these conditions to be assessed as a firm;
Section 184(1) (i): The Firm should be evidenced by an instrument called “Partnership Deed” and;
Note: Individual Share of partners must be specified in the Partnership Deed. The loss will be shared by partners according to their profit sharing ratios. But in case of a minor, how the loss of the firm will be shared among major partners should be clearly specified in the Deed.
A certified true copy of the Partnership Deed will be submitted with the first return of the Firm. The Deed would be signed by all partners (major partners). The deed may be submitted by Authorised Representative along with their Authorisation Letter.
In case of any change in the constitution of the firm or profit sharing ratio, remuneration/payment of interest to partners etc., a revised copy of the Deed should be submitted with the return.
CLAIMING DEDUCTION OF REMUNERATION PAID TO PARTNERS;
Section 40(b); claiming deduction of remuneration to partners;
Note: above conditions are applicable in all cases if remuneration paid in representative capacity also.
Working Partner; Section 40(b) explanation defines as;
Note: to claim deduction of remuneration, it should be sanctioned, approved or directed by Partnership Deed or Partnership Deed should provide power for payment of remuneration to working partners
Circular No. 739, dated March 25, 1996, CBDT lays down two conditions;
Sood Brij & Associates V CIT 203 Taxman 188 Delhi; it was decided that Quantum of remuneration or the manner of computation of quantum of remuneration should be stated in the Partnership Deed and should not be left undetermined , undecided or to be determined or decided on future date.
Maximum Amount as Permitted by Section 40(b); the amount actually deductible is;
|Book Profit||Amount deductible under Section 40(b)|
|· If book profit is negative||Rs. 1,50,000|
|· In case of profit|
-on first 3 lakhs of book profit
-on balance of book profit
Rs. 1,50,000 or 90% of book profit whichever is more
60% of book profit
BOOK PROFIT; – how to calculate;
CLAIMING DEDUCTION OF INTEREST PAID/PAYABLE TO PARTNERS
The interest to partners will be deductible after complying provisions of Section 184 and 40(b) of the Income Tax Act, 1961.
Section 40(b); following conditions should be complied;
Note: if rate of interest exceeds @12pa, then excess amount paid @12% will not be allowed to be deductible. The above provision is not applicable if interest is paid to a person, acting otherwise than in a representative capacity.
Example: lets us consider Mr. X is a partner of a Firm and representing his HUF. Not he has given Rs. 1 Lakh loan to Firm and HUS has also given Rs. 5 Lakhs to the Firm. Now firm has paid Rs. 14000 as interst to Mr. X and Rs. 70000 interest to HUF. In this case provisions of Section 40(b) will be applicable in case of Rs. 70000 and Rs. 60000 (@12%) will be allowed as deduction to the firm. The amount paid to Mr. X as interest in his personal capacity will not be governed by provisions of Section 40(b) and Rs. 14000 will be deductible.
CARRY FORWARD AND SET OFF OF LOSS IN CASE OF CHANGE IN THE CONSTITUTION OF FIRM;
Section 78 contains provisions relating to carry forward and set off of loss in case of change in constitution of a partnership firm due to death or retirement of a partner (i.e. when a partner goes out of firm by retirement or death). In such a case, the share of loss attributable to the outgoing partner cannot be carried forward by the firm. Restriction of section 78 is applicable only in case of loss and is not applicable in case of adjustment of unabsorbed depreciation, unabsorbed capital expenditure on scientific research or family planning expenditure.
CALCULATION OF TAX;
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