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Assessment of Partnership Firm under the Income Tax Act

Swarit Advisors

| Updated: Mar 04, 2019 | Category: Income Tax, Partnership Firm Registration

Partnership firm is not a separate legal entity from the person it constitutes of; however, for income tax purpose, it is considered as a separate legal entity.  A partnership firm can be assessed either as Partnership Assessed as Such (PFAS) or Partnership firm Assessed as Association of Person (PFAOP). The registration is not mandatory for such type of firms. However,  they are liable for tax assessment.

In this article, we will give you a brief of the income tax assessment of partnerships firms. Let’s start with a basic understanding of the term “Partnership Firm.”

What is Partnership firm under the Income Tax Act?  

In the entire Income Tax Act, a “partnership firm” is not defined anywhere. However, according to section 2(23) (iii) of the Income Tax Act, 1961, the word “partnership” has the same meaning as described in the Indian Partnership Act, 1932. A Partnership also includes a limited liability partnership as defined in the Limited Liability Partnership Act, 2008.

In India, Partnership is one of the most common forms of business organization.  It’s a type of business entity which is created by two or more persons who have agreed to share the profits and losses.

As per the Income Tax Act,

“firm” shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall include a limited liability partnership as defined in the Limited Liability Partnersgip Act, 2008;

Applicability of Provision of Income Tax Act on Partnership Firm  

As already stated above, every partnership firm is liable for taxation under the Income Tax Act, 1961. Under Income Tax there are certain provisions which are applicable to a partnership firm.

The list of those provisions is given below:

  • Section 40 (ba) – Disallowance of salary and interest to a partner of the partnership
  • Section 67 – Method of Computing partner’s share in the income of the firm.
  • Section 67 A – Method of Computing a member’s share in the income of an association of persons or body of Individuals.
  • Section 86 – Taxability of Partner’s share of Income.

Tax Slab rate for Assessment year 2019-2020 for Partnership Firm

The income tax rate varies from year  to year, however,  below tax slab rate is applicable on partnership firm  for Assessment year 2019-2020:

Tax rate SurchargeHealth and Education Cess
30%12%4%

Conditions for assessment of Partnership Firm to be assessed as (PFAS)

As per rules and regulations of the Income Tax Act, 1961, a partnership firm may be assessed as  (PFAS), if the partnership satisfies the following requirements:

  • The firm must be evidenced by an instrument ( written partnership deed);
  • The share of every partner must be specified in the partnership deed;
  • Every member have to certify the partnership deed;
  • A certified copy of the partnership deed must be filed along with the return of income;
  • There shall be no failure no part of the firm to comply with a notice given for assessment.

Assessment of Partnership firm In India

In case of partnership firm, interest, Salary bonus, and remuneration given to partners are deductible under the Income Tax Act, 1961.

Assessment of Interest paid to partners

If any firm pays interest to any partner, then the firm can claim the deduction of interest at a rate of 12% per annum. Interest paid in excess of the rate as discussed must be disallowed in hands of the firm.

Remuneration given to partners

According to section 40 (b) of Income Tax Act, any salary, bonus, remuneration given to any partner will be allowed as deduction. However, for deduction,  the firm needs to fulfill the following conditions :

  1. a) payment of remuneration made to a working partner.
  2. b) payment of remuneration is made as per terms of partnership deed.
  3. c) payment relates to a period that falls after the date of partnership deed.

Assessment of partners

Interest amount, remuneration received by a partner shall be taxed in the hands of partner as “business or professional income”.

Assessment of Losses of the Partnership Firm

Loss, unabsorbed loss of the firm for the assessment year 1993-93 shall not be apportioned amongst the partners. Only the Firm will carry forward the loss.

Due date of filing a tax return for partnership firm

As per Provisions of the Income Tax Act, every partnership firm before July 31 of the assessment year requires to file an income tax return.

Where the partnership firm does not audit its account, then the firm requires to file an income tax return before 30th September.

Conclusion

Partnership firm isn’t defined under the Income Tax Act. However, it has defined the term ‘partnership’ under the umbrella of which it has covered all the firms such as partnership firm, LLP, any association, etc. The main intent behind the assessment of partnership firm is to uncover the hidden profits of the firm which they usually hide. Every partnership firms and their members avail numerous benefit in the corporate sector. As per the Government of India, it’s mandatory for every person who falls under the taxable category to pay tax. Therefore, we advise you to file your returns before the due date to avoid any penalty.

Swarit Advisors provides various services relating to taxation matter. If you want to know more about Assessment of Partnership Firm then you can put a mail at [email protected].

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