Breaking Partnerships- Partnerships, Politics & its Taxation

Arjuna (Fictional Character): Krishna, what is going on? Currently we are observing the discussion of breaking of partnerships by political parties. However, if the same thing happens in business Partnerships then, what are the legal consequences as per Income tax act and other acts?

Krishna (Fictional Character): Arjuna, Partnership means more than one person come and work together. Business partnerships are carried out with the intention of earning Profits. But in Political partnerships there is no objective of earning profits, however nowadays it seems that they are made for profits only. In politics rules are not followed. If business Partnerships dissolves then every partner has to follow various laws.

Arjuna: Krishna, how Partnership firms come in existence?

Krishna: Arjuna, Partners have to prepare Partnership deed to bring Partnership firm into existence. In this deed Name of Partnership firm, Address, details of each partner, type of business, Profit sharing ratio, Capital, rights of operation of bank Accounts, etc. have to be mentioned. Every Partnership firm is required to be registered under Indian Partnership Act 1932. Also the Limited Liability Partnership is to be formed according to Limited Liability Partnership Act 2008.

Arjuna: Krishna, which special provisions in Income tax act are applicable to partnership firm?

Krishna: Arjuna, Partnership firm should obtain Permanent account number (PAN). Interest on Partners capital and salary are allowable to partners as per section 40(b) of Income Tax Act. If expenditure incurred is more than prescribed in provision then the deduction of excess expenditure will be disallowed. Partnership firm has to pay tax @ 30% on net profit and the same profit is tax free in the hands of partners. If partnership deed is not in written form, then u/s 184 of Income tax act the said partnership firm is considered as Association of Person and not as Partnership firm and income tax liability is calculated. The partners of Partnership firm are responsible for following the provision of income tax and maintaining the books of accounts. In Political partnership there is no guarantee that every partner will be benefited.

Arjuna: Krishna, when new partner can be admitted in Partnership firm?

Krishna: Arjuna, in partnership firm the new partner can be admitted with the consent of all partners. The Partnership deed has to be amended and the condition on which the new partner is admitted should be mentioned. E.g. Capital brought by the partner, interest given on the capital and the share of profit or loss etc. The new partners are introduced to expand business in Partnership firm but in politics for getting power and becoming strong partners are introduced. In business partnership the character of the partner is checked, however in politics how one gets benefitted is only seen, character of partners are meaningless in such cases.

Arjuna: Krishna, What are the provisions related to retirement of partners?

Krishna: Arjuna, Partner retires as per partnership deed or by his own will. After retirement of partner partnership deed will have to be amended. Further retiring partners accounts needs to be finalized by calculation of capital A/c, receivable and payables if any and needs to be squared off. Remaining partners can carry on the business of partnership. In business rarely partner gets retires but in politics during election period partner switch over their partnerships or leave the political parties.

Arjuna: Krishna, How Partnership Firm dissolves?

Krishna: Arjuna, If partnership firm is formed for achieving or performing a object then after completion of the same partnership dissolves. Further partnership firm dissolves with the consent of all the partners. For dissolution of partnership “dissolution deed” will have to be prepared. The assets and liabilities of the partnership firm should be transferred to the partners as per partnership deed or it can be sold out and payables should be paid off. Please note that, If immovable property of the partnership firm is transferred to the partner, then as per section 45 (4) market value of the property will be considered as selling value and profit will be calculated and the same will be included in the income of the partnership firm. For e.g. if book value of the immovable property of the firm is Rs. 10 lakh and the same is transferred to the partner and market value of the property is Rs. 30 lakhs, then Rs. 20 lakhs will be considered as income of the partnership firm and tax will have to be paid on the same. Further partnership should be dissolved after completing all legal formalities so that it would not create problem in future. There may be several reasons for dissolution of partnership in business. However in the politics greed and ego are major reasons for dissolution of partnership, in this process, whatever may happen to country and citizens. “Need and Greed of power” is the only intention in Politics.

Arjuna: What one should learn from Partnership?

Krishna: Arjuna, partnership may be of any type, trust, patience, understanding between the partners, etc. are roots of partnership. If any of these things lack anytime then partnership of years may dissolve. The same can be seen during this election period. Sometimes one has to sacrifice for other. In life all things are not measured in money. Business may collapse but relation should not. Keep in mind if there is clarity in partnership then it will not dissolve. It is difficult to carry on big business with single person, so partnerships are made and if broad view is kept then it remains. In Navratri while playing Dandiya, partner is important same is the case of partners in partnership firms.

Click here to Read Other Articles from CA Umesh Sharma

Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)