Circular No. 516-Income Tax dated 15/6/1988 [Merely of academic interest as amendments had been withdrawn]

920. New scheme relating to assessment of partnership firms to come into effect from 1-4-1990 instead of 1-4-1989 – Clarifica­tion of certain issues arising from change of date of ccommencementof new provisions

1. A new scheme relating to assessment of partnership firms has been introduced by the Direct Tax Laws (Amendment) Act, 1987 [hereinafter referred to as the DTL(A) Act, 1987] to be effective from 1-4-1989, i.e., from the assessment year 1989-90.

2. After the DTL(A) Act, 1987 was enacted, a number of represen­tations from various quarters were received regarding the new scheme of taxation. On 30-3-1988, the Minister of State in the Ministry of Finance made a statement in the Parliament to the effect that suitable amendments will be moved by the Government to provide that the new scheme relating to assessment of partner­ship firms will come into effect from 1-4-1990 instead of 1-4-1989, i.e., from the assessment year 1990-91. Before that date, the provisions that existed, before these were amended by the DTL(A) Act, 1987 continue to operate. Because of the change relating to date of commencement of the new provisions relating to assessment of partnership, doubts have been raised regarding some other aspects concerning the assessment of firms. Hence, the following clarifications are being issued to set at rest any controversy in this regard.

3. For the assessment years 1988-89 and 1989-90 the old provi­sions in the Income-tax Act regarding assessment of firms, before these were amended by the DTL(A) Act, 1987, will continue to apply. The important sections containing the old provisions for taxation of firms and their partners, which will continue to operate for the assessment years 1988-89 and 1989-90 are listed below :

–    Section 40(b) relating to disallowance of interest and salary, etc., paid by a firm to its partner

–    Section 64(1) relating to inclusion of shares of spouse and minor children in the income of the other spouse or parent

–    Section 67 relating to computation of a partner’s share in the income of the firm

–    Sections 75 to 77 relating to carry forward of losses of registered and unregistered firms

–    Section 86(iii) relating to rebate on the share income of a partner of an unregistered firm included in his total income

–    Section 182 relating to assessment of a registered firm and its partners

–    Section 183 relating to assessment of an unregistered firm

–    Section 184 to 186 relating to application for registration, procedure for registration and cancellation of registration of a firm under the Income-tax Act

–    Section 187 relating to change in constitution of a firm

4. Although the new provisions relating to assessment of partnership firms are to come into force with effect from 1-4-1990, there are other amendments made by the DTL(A) Act, 1987 which are operative with effect from 1-4-1989 in case of all the assessee including partnership firms. The important ones are discussed below :

1. Introduction of financial year as the uniform previous year—A new section 3 substituted in the Income-tax Act for the old sec­tion by the DTL(A) Act, 1987 provides for the financial year (year ending on 31st March) as the uniform previous year for all the assessees. The provisions of the new section 3 and those of the Tenth Schedule, which provide relief during the transitional previous year for the assessment year 1989-90, will be applicable in the case of the partnership firms also, like other assessees. This means that a partnership firm, which has been having a previous year different from that ending on 31st March, will have to extend its previous year for the assessment year 1989-90 up to 31-3-1989. Thus, for example, in the case of partnership firm, which closes its accounts on 30th June every year, the previous year for the assessment year 1989-90 will consist of 21 months [1-7-1987 to 31-3-1989].

2. The new provisions relating to filing of return of income, assessment procedure and charging of mandatory interest under sections 234A to 234C will also be applicable in the case of partnership firms with effect from 1-4-1989, like other asses­sees.

5. Deduction of tax at source – The provisions of the new section 194E relating to deduction of tax at source from interest and salary, etc., paid by a firm to the partners and also consequent amendment of section 194A will not be effective from 1-4-1988, as provided in the DTL(A) Act, 1987. These will now be made effec­tive, if not changed, from 1-4-1989.

6. The new advance tax provisions are effective from 1-4-1988 and are applicable to all assessees, including the partnership firms and their partner. Thus advance tax during the current financial year (for the assessment year 1989-90) is to be paid as follows :

Circular : No. 516, dated 15-6-1988.