Taxation of Partnership Firms and LLPs

 Article explains about Taxation of Partnership Firms and LLPs and includes discussion on Computation of Income of Partnership Firms and LLP’s, Income Tax Rates for Partnership Firms and LLP’s, Tax Payment method for Partnership Firms and LLP’s, Return Filing Provisions for Partnership Firms and LLP’s, Due dates for filing of return for Partnership Firms and LLP’s and Taxation of Partners of Partnership Firms and LLP’s.

Income Tax –

A charge imposed by government on the annual earnings (either earned* or unearned^** Income) of a Person (Section 2(31)).

* Money, we earn from working (like wages, salaries, tips & net earnings from self-employment income & So on…)

**Like annuity payments, pension income, distributions from retirement accounts, capital gains, interest income, dividends & son on…

Firm is also included in the definition of Person as defined under Section 2(31) of The Income Tax Act, 1961.

In this article, we look at the procedure of taxation of a Partnership Firm and LLPs.

1. Introduction

Partnership Firm:

Partnership Firms can be divided into two categories namely,

a) registered partnership (those having a registration certificates from the registrar of firms) or

b) unregistered partnership.

Under Income Tax Act, a partnership firm is defined under Section 2(23) (i) which takes the meaning of the “Firm” from the Indian Partnership Act, 1932.

Section 4 of Indian Partnership Act, 1932 defines – Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”

Limited Liability Partnership (LLP):

The firm shall include a limited liability partnership as defined in the Limited Partnership Act, 2008.

“Section 2(1) (n) of the Limited Liability Partnership Act, 2008 defines “limited liability partnership” as a partnership formed and registered under the Act”

A Limited liability partnership (LLP) is a body corporate formed and incorporated under the Limited Liability Partnership Act, 2008. It is a legally separated entity from that of its partner.

A LLP is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.

“Since the liability of the partners is limited to their agreed contribution in the LLP, it contains elements of both a corporate structure as well as a partnership firm structure”

2. Computation of Income of Partnership Firms and LLP’s

While computing income tax for a partnership firm and LLPs, we should consider the income from House Property (if any property owned by firm or LLP & received rent from that), Capital Gains (at the time of dissolution of asset of firm or LLP as case may be) & Other Sources (like interest on investments held by the firm or LLP) also in addition to the income earned from Business or Profession.

√ At the time of calculating the total Business Income –

Deduct all the allowable expenses for business “Expenses which are allowed for deduction under section of head Profit and Loss from Business or Profession” reduce allowable partner’s salary and interest from that profit.

Provisions for partner’s interest in case of Partnership Firm-

Allowed for deduction if the following conditions are satisfied:

1. Payment of interest is authorized by the partnership deed

2. Rate shouldn’t exceed 12 %

3. Payment should be for the period after the partnership deed constitution.

Partner’s salary / remuneration (Section 40b) in case of Partnership Firm –

Allowed to reduce net profit if following conditions are satisfied:

1. Remuneration should be paid to working partners

2. It is authorized by the partnership deed

3. It shouldn’t related to period prior to partnership deed

4. Remuneration should be within permissible limit.

Permissible Limit for deduction of remuneration of partner in case of Partnership Firm –

Book Profit – Net profit less other income and don’t adjust brought forward losses and deduction u/s 80C to 80U plus add partner’s remuneration.

√ Other income say house property, capital gains and others sources– to be calculated similarly as calculated for Individual.

Aggregate all the income and need to deduct the allowable deductions under Section 80G, 80GGA, 80IA, 80IC, 80ID, 80IE, 80JJA & brought forward losses or unabsorbed depreciation as case may be, if any from the Income.

Finally we will get Net Taxable Income & hence tax is to be computed on this income.

Other Points to be kept in mind-

1. The share of the partners in the total income of the firm is exempt in the hands of the partners as the same has already been taxed in the hands of the partnership

2. Losses of the firm should be carried forward and not allowed to allocate

3. LLP’s can’t claim benefits of section 44AD by using presumptive taxation but partnership firm can claim the same benefit while filing return

3. Tax Rates (For AY 2020-21) for Partnership Firms and LLP’s

• Surcharge – 12 % (where taxable income including capital gain exceeds Rs. 1 crore). It is subject to Marginal relief.
• Health and Education Cess – 4 % (on the amount of income tax and surcharge)
• Alternative Minimum Tax – Tax payable by firm can’t be less than 9% (Plus Cess) of adjusted total income as per Sec. 115 JC.

4. Tax Payment method for Partnership Firms and LLP’s

Tax can be paid in any of the following mode – Physical Mode (payment by furnishing the hard copy of the challan at the designated bank) & E Payment Mode (making payment by using the electronic mode)

Note – E Payment mode is mandatory for a firm who is liable to get its accounts audited under Section 44AB of the Income Tax Act, 1961.

Advance Tax – to be calculated on the basis of expected tax liability of the year. Advance tax is to be paid in installments as given below –

* Any tax paid till 31^st March is treated as Advance Tax.

5. Return Filing Provisions for Partnership Firms and LLP’s

• It’s mandatory for every partnership firm and LLP to file the return of income irrespective of amount of income or loss.
• E filing is mandatory for a Partnership Firms and LLP’s with or without digital signature.
• A partnership firm may also file return of income under Electronic Verification Code (EVC), but please note that this option is not available for LLPs
• A firm liable to get its account audited under section 44AB shall furnish return electronically under digital signature.
• Signing of IT Return – by Managing partner (in case of LLP – Designated Partner – however if for any unavoidable reason designated partner can’t sign or where there is not designated partner, any partner may sign the return)
• Form to be filed is (ITR 4 or ITR 5 – As per the case)

6. Due dates for filing of return for Partnership Firms and LLP’s

# As per LLP Act, 2008 provides every LLP having turnover exceeds Rs. 40 Lakhs or whose Capital contribution exceeds Rs. 25 Lakhs are required to annually get their accounts audited by a chartered accountant. As per Income Tax Act, 1961 provides every LLP having turnover exceeds Rs. 100 Lakhs are required to annually get their accounts audited by a chartered accountant

7. Taxation of Partners of Partnership Firms and LLP’s

1) Interest on capital, remuneration received from firm or LLPs is taxable in the hands of partner or designated partner as Profits & Gains of Business or Profession.

However in case any amount is disallowed in the hands of firm, such amount would not be taxable in the hands of the partners.

2) Due date for filing of returns of partners in case of Firm:

i. In case of working partner – 30^th September of the Asst. Year (where due date for filing the return for firm is 30^th September)

ii. Other partners – 31^st July of the Asst. Year

3) Tax liability of Firm or LLPs and their partners or designated partners –

8. Conclusion –

The partners/ designated partners in a partnership or in LLPs can make several elections that can impact the amount of taxable income recognized by the partnership or LLPs, because they alter the timing of either revenue or expense recognition.

These elections are –

• Recording transactions under either the cash, accrual method of accounting and
• Select the type of depreciation method.

(Author Abhinava Bhavani Prasad is a CA-Final Student, currently serving as an Article Trainee at Ganesh Prasad Chartered Accountants, Chennai & serving as an executive committee member of Chennai SICASA.)

(Republished with Amendments)