Unit V : Assessment of Firm

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5.1 Introduction to Partnership in India
5.2 Computation of Gross Total Income of Partnership Firm
5.3 Calculation of Interest and Remuneration payable to partners
5.4 Assessment of partners
5.5 Due date for filling of return of Firm and Partners
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Introduction to Partnership in India :
‘Partnership is a relationship between persons who have agreed to share the profits of
a business carried on by all or any of them acting for all’. These persons are called partners and
collectively they are called firm.

Partnership Firms

Limited Liability Partnerships Unlimited Liability Partnerships

Difference between Limited Liability Partnership and Unlimited Liability Partnership Firms
Particulars Limited Liability Partnership Firm Unlimited Liability Partnership
Firms
Registration It is registered under LLP Act, 2008 It is registered under Partnership Act,
under 1932
Registered to Registration is done with to Ministry of Registration is done with to Registrar of
Corporate Affairs firms.
Liability The partner and the firm is considered as Since the partner and the firm is not
a separate legal entity. Hence, the liability considered as a separate legal entity.
of the partners is limited to the amount Hence, Partners are personally liable for
invested in the company. the unlimited amount of liabilities of
the partnership
A number of Minimum 2 and no upper limit for Minimum 2 and maximum 20 partners
partners and maximum number of partners in LLP. can be the member of the partnership
requirements firm.
Minor Partner No minor can be partner. Minor can be a partner, but at least two
adults to form a legal partnership.
Transferability Shares can be easily transferred to Shares can be transferred to another
another person. person after obtaining the required
consent from all the Partners in a
Partnership.
The limited liability partnership and unlimited liability partnership can be divided in to two groups–
i) Firms fulfils the conditions of Section 184 of the Income Tax Act : In this case, in
computing the income chargeable under the head PGBP the interest and remuneration payable to partners
are deductible subject to the provisions of Section 40(b).
ii) Firms does not fulfils the condition of Section 184 of the Income Tax Act : In such a case
provisions of Section 185 apply and in computing the income chargeable under the head PGBP the interest
and remuneration payable to partners are not deductible.
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Section 184 : Assessment as a firm
This section is not application to LLP.
1. A firm shall be assessed as a firm, if –
a) The partnership is evidenced by an instrument and
b) The individual shares of the partners are specified in that instrument.
2. A certified copy of the instrument of partnership deed shall accompany the return of
income of the firm for the previous year relevant to the assessment year in respect of which
assessment as a firm is first sought.
3. If once a firm is assessed as a firm for any assessment year, it shall continue to be assessed as a
firm for every subsequent year if there is no change in the constitution of the firm.
4. If any change occurs in the previous year, the firm shall furnish a certified copy of the revised
partnership deed along with the return of income for the relevant previous year.
5. If there is, on the part of the firm, any failure to comply with the provisions of section 144 [Failure to
file the return of income, failure to comply with the terms of a notice issued u/s 142(1) or 143(2)], the
firm shall be assessed as a firm. In such a case the following provisions shall apply –
a) No deduction by way of payment of interest, salary, bonus, commission or remuneration, by
whatever name called, made by the firm to its partners shall be allowed in computing the income
chargeable under the head PGBP.
b) Such interest, salary, bonus, commission or remuneration shall not be chargeable to tax in the
hands of partners under the head PGBP.
Section 185 : Assessment when Section 184 not complied :
1. Where a firm does not comply with the provision of Section 184 for any assessment year, the firm
shall be assessed for the assessment year as a firm.
2. No deduction by way of payment of interest, salary, bonus, commission or remuneration, by
whatever name called, made by the firm to its partners shall be allowed in computing the income
chargeable under the head PGBP.
3. Such interest, salary, bonus, commission or remuneration shall not be chargeable to tax in the
hands of partners under the head PGBP.
Section 40(b) :
Section 40(b)
Interest to partner Remuneration to Partners
1) Interest is allowed to working or non working 1) Remuneration is allowed to working partners only.
partners.
2) Must be authorized by partnership deed. 2) Must be authorized by partnership deed.
3) Interest must be on or after the deed. 3) Remuneration must be on or after the deed.
4) Maximum rate of interest is 12% (Simple Interest) 4) Maximum Limit :
On the first Rs. 3,00,000 of book profit or in case of
loss : Rs. 1,50,000 or 90% of book profits, whichever
is more and
On the balance of the book profit : @ 60%.
Note : If clearly not indicated as ‘working partner’ in the question, then it is assumed that the partners are
‘working partners’.

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Computation of Total Income of the Firm :
Proforma of Computation of ‘Book Profit’
Particulars Rs. Rs.
Net Profit as per P & L Account xxx
Add Adjustment as per the provisions of Sec. 28 to 44D xxx
Remuneration to partners, if debited to P & L A/c xxx
Disallowance of interest in excess of 12% p.a. xxx xxx
xxx
Less Income from all other sources credited to P & L A/c xxx xxx
Book Profit xxx
Proforma of computation of ‘Total Income’ of the firm
Particulars Rs. Rs.
Book Profit of the firm xxx
Less Remuneration paid to working partners
Least of the following two :
(a) Actual Remuneration xxx
Statutory limit u/s 40(b) xxx xxx
Profit & Gains of business or profession of the firm xxx
Add : Income from other sources xxx
Gross Total Income xxx
Less : Deductions u/s 80C to 80U xxx
Total Income xxx
Less : Tax payable by the firm xxx
Distributable income to be distributed among the xxx
partners according to their profit sharing ratio
Computation of Income of Partners
Particulars Partner I Partner II
Remuneration from firm xxx xxx
(In the ratio of remuneration as per deed)
Interest from partnership firm xxx xxx
Share in the profit of firm (exempt u/s 10(2A) --- ---
Important Notes :
1. Brought forward Unabsorbed Business Loss is not deductible to arrive at the Book Profit.
2. Non-business incomes and their concerned non-business expenses are not included in computing
Book Profit.
Computation of Tax :
For the Assessment Year 2019-20 income tax will be levied at the following rates :
a. Short-term capital gains – 15% (u/s 111A)
Conditions for Sec. 111A :
i) Asset is equity shares of a company, units of an equity oriented funds or Units of a business
trust.

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 ii) Transaction is chargeable to Security Transaction Tax.
Otherwise normal rate of tax is applicable.
b. Long term capital gains - 10% / 20% (u/s 112)
Sec. 112A (w.e.f. AY 2019-20)
1) Applicable on Long Term Asset is equity shares of a company, units of an equity oriented
funds or Units of a business trust.
2) Transaction is chargeable to Security Transaction Tax.
3) Without indexing when gain exceeding Rs. 1 lakh @ 10%. [Upto 1 lakh exempt]
c. Winnings from lotteries, card games, crossword puzzles, horse race, etc. - 30%
d. Other Income - 30%
e. Surcharge : @ 12% if total income exceeds Rs. One crore.
f. Marginal relief : Where total income exceeds Rs. One crore the total amount payable as income
tax and surcharge on such income shall not exceed the total amount payable as income tax on a total
income of Rs. One crore by more than the amount of income that exceed Rs. One crore.
g. Education Cess and SHEC : @4% of the amount of income tax and surcharge.
Alternative Minimum Tax (AMT) :

Illustration 1 :
X, Y and Z are partners of a firm with equal shares. The profit and loss account for the year ended
31st March, 2018 shows a net profit of Rs. 2,80,000 after debiting Rs. 7,000 for interest paid to X at 20%, Rs.
60,000 for salary paid to Y and Rs. 44,000 for rent of the business premises paid to Z. Compute the book
profit of the firm. The firm fulfils the conditions of Sec. 184.
Solution :
Computation of Book Profit of the firm
(For the Assessment Year 2018-19)
Particulars Rs. Rs.
Net Profit as per P & L Account 2,80,000
Add Remuneration to partners, if debited to P & L A/c
Salary paid to Y 60,000
Interest paid to partners in excess of 12% (7,000 – 4,200) 2,800 62,800
Book Profit 2,17,200
Illustration 2 :
The total income of a firm XYZ in which X, Y and Z, the partners share profits and losses in the ratio
of 1:2:3, was as per P & L Ac Rs. 1,31,800 for the PY 2017-18. In computing the total income of Rs. 1,31,800,
the following have been debited to the P & L A/c.
Salaries of Rs. 1,30,000 and Rs. 1,20,000 to X and Y respectively. Interest on capital calculated @
20% of Rs. 3,500, Rs. 14,000 and Rs. 10,500 to X, Y and Z respectively. Bonus to Z Rs. 15,000. Commission
of Rs. 5,000, Rs. 12,500 and Rs. 17,500 to X, Y and Z respectively. Z had borrowed capital for his investment
in the firm and had paid interest of Rs. 7,500 separately to the lender.
Compute the total income of the firm and taxable income of the three partners in the firm. All are
working partners. The firm fulfils the conditions of Sec. 184.
Solution :

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 Computation of Book Profit of the firm
(For the Assessment Year 2018-19)
Particulars Rs. Rs.
Net Profit as per P & L A/c 1,31,800
Add Remuneration to partners, if debited to P & L A/c
i) Salary paid to X 1,30,000
Y 1,20,000 2,50,000
ii) Bonus to Z 15,000
iii) Commission to X 5,000
Y 12,500
Z 17,500 35,000
iv) Interest on capital X (3,500 – 2,100) 1,400
Y (14,000 – 8,400) 5,600
Z (10,500 – 6,300) 4,200 11,200
Book Profit 4,43,000