Yash Shah

Yash ShahFrom the Assessment Year 1993-94 partnership firm has been classified for the purpose of computation of income and its assessment as under:

(a) Partnership Firm assessed as such (PFAS)

(b) Partnership Firm assessed as an Association of Person (PFAOP).

Provisions relating to assessment of firms and partners are analyzed as under :

Specific provisions to firm assessed as an AOP

Particulars Sections
Disallowance of salary and interest to partner 40(ba)
Method of computing partner’s share in the income of PFAOP 67A
Rate of tax in respect of income of AOP/BOI 167B
Taxability of partner’s share of income 86, 110

Assessment of firms and conditions to be fulfilled to avail the status of PFAS [Sec. 184]

Where a firm wants to avail the status of PFAS, it has to satisfy the following conditions:-

(i) The firm shall be evidenced by an instrument and the individual shares of the partner shall be specified therein. [Sec. 184(1)]

(ii) A certified copy of the instrument of partnership shall accompany the return of income of the Previous Year relevant to the Assessment Year 1993-94 or subsequent year in respect of which assessment of the firm is first sought. [Sec.184(2)]

(iii) Wherever during a Previous Year a change takes place in the constitution of the firm or in the sharing ratio of partners, a certified copy of the revised instrument of partnership be submitted along with the return of income of the concerned year of assessment. [Sec. 184(4)]

(iv) There should not be any failure on the part of the firm as is specified in Sec. 144 [Sec. 184(5)]

It may be mentioned that once a firm is assessed as PFAS after fulfillment of the above conditions, it will be assessed as PFAS, for every subsequent year provided there is no change in either firm’s constitution or partner’s profit sharing ratio. However, there should not be any failure mentioned in Sec. 144. [Sec. 184(3)]

A partnership deed shall be certified in writing by all the major partners. Where, however, the firm is dissolved and the return is filed after its dissolution, then the copy of deed may be certified by all the major partners in the firm immediately before its dissolution. Where a partner is dead, then it will have to be certified by his legal representative. [Sec. 184(2) Expl.]

Computation of Income

The following provisions should be given due consideration while computing income of a firm-

(i) Provision relating to deductibility of remuneration paid to partners by firm.

(ii) Provision relating to deductibility of interest paid to partners by firm.

Taxable income shall be computed as follows :

Step 1 – Income under the different heads of income – First find out income under the five heads of income

Step 2 – Adjustment of losses of the current year and earlier years – Losses should be set off according to the provisions of sections 70 to 78. The income after adjustment of losses is the gross total income.

Step 3 – Deduction from gross total income – Deductions specified under Chapter VI A should be considered while calculating the gross total income.

Step 4 – Rounding off – The balance should be rounded off to the nearest Rs 10. It is called as net income or taxable income or total income.

Calculation of Tax Liability:

Step 1 – Determine Net Income and tax payable thereon at a normal rate of 30%.

Step 2 – Add surcharge @ 10% if the total income exceeds Rs 1 crore.

Step 3 – Add education cess and secondary and higher secondary education cess

Step 4 – Deduct rebate u/s 86, 90, 90A and 91

Step 5 – Add interest payable (if any)

Step 6 – Deduct amount of prepaid taxes paid (Advance Tax, Tax Deducted at Source, etc.)

The Balance so arrived is the amount of tax to be paid.


(i) From the Assessment Year 2013-14, tax payable (i.e. amount arrived at Step 3) cannot be less than 18.5 percent of “Adjusted Total Income” in some Specified Cases.

(ii) The total amount payable as income-tax and surcharge on total income exceeding Rs 1 crore shall not exceed the total amount payable as income tax on a total income of Rs 1 crore by more than the amount of income that exceeds Rs 1 crore.

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