Computation of tax liability of a firm and

partners (with special reference to

section 184 and 40b)
Chapter - 3
 Meaning of Firm, Partner and
Partnership

• (i)         “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
Partnership Act, 2008;

• (ii)        “partner” shall have the meaning assigned to it in the

Indian Partnership Act, 1932, and shall include, — any person
who, being a minor, has been admitted to the benefits of
partnership; and — a partner of a limited liability partnership
as defined in the Limited Liability Partnership Act, 2008;
• (iii)       “partnership” 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 Partnership Act, 2008. 
Income Tax on Partnership Firms and
LLPs in India

• Although partnership firms don't have a legal entity for

the purpose of income tax, they are treated as
different from their partners. Partnership firms whether
registered or unregistered are therefore required to
register with the income tax department and obtain a
PAN CARD no. and Income tax on Partnership firms is
levied in a different manner
 Assessment as a Firm [Section 184(1)]
•  A firm shall be assessed as a firm for the purpose of this Act, if the
partnership is evidenced by an instrument i.e. partnership deed duly
stamped and the individual shares of the partners are specified in that
instrument.
• Genuineness of the firm — Division of profits is in accordance with the
terms of partnership is a test, if not the sole test of genuineness of the
firm. Where they are not so divided, the inference of the Tribunal, that
the firm is not genuine and therefore not entitled to registration is an
inference which cannot be lightly disregarded as held in — [Narain
Automobiles Vs CIT 12005) 278 ITR 516 (All)]
 First assessment as a firm [Section
184(2)]

• A firm is required to submit a certified copy of the partnership deed

along with its return of income for the first previous year relevant to
the assessment year commencing on or after 1-4-1993, to get it
assessed as a firm The copy of the partnership deed shall be
certified in writing
• (i)         by all the partners (not being minors) or
• (ii)        where the return l made after the dissolution of the firm by all
persons (not being minors) who were partners and the firm
immediately before its dissolution and by the legal representative of
any such partner who is deceased.
 Contd..
• Subsequent assessment as a firm [Sections 184(3) & 184(4)]—
• a)   If no change in Constitution and profit sharing ratio — Where a firm is assessed as firm for
any assessment year previously, it shall be assessed in the same capacity for every subsequent
year if there is no change in the Constitution of the firm and the shares of the partners as shown
in partnership deed, on the basis of which the assessment as a firm was first sought.
• b)   If any change in Constitution or profit sharing ratio — Where a firm is assessed as a firm for
any assessment year, and if there is any change in the Constitution of the firm or the shares of
the partners, during the previous year, the firm shall furnish a certified copy of the revised
partnership deed alongwith the return of income shall be accompanied by any document or copy
of any account or form or report of audit required to be attached with return of income under any
provisions of the Act for the assessment year relevant to such previous year. 
 Failure of conditions mentioned in
Section 144 [Section 184(5)]—

• Where a firm for any assessment year has fulfilled all the
conditions given in section 184 but there is on the part of the firm.
• Any failure mentioned in section 144 i.e. fails to make a return u/s
139(1) or(4) or (5); fails to comply with all the terms of a notice
issued u/s 142(1) or (2A) or u/s 143 (2).
• Limit of Interest or Remuneration — The firm shall be assessed in
the capacity of firm but no deduction by way of any payment of
interest, salary, bonus, commission or remuneration made to
partners of such firm shall be allowed in computing the income
chargeable under the head “Profit and gains of business or
profession” and such interest, salary, bonus, commission or
remuneration shall not be chargeable to tax under section 28(v) of
the firm.
 Section 144 in The Income- Tax Act,
1995
• This is an assessment carried out as per the best judgment of
the Assessing Officer on the basis of all relevant material he has
gathered. This assessment is carried out in cases where the
taxpayer fails to comply with the requirements specified in
section 144.
• Scope of assessment under section 144 As per section 144,
the Assessing Officer is under an obligation to make an
assessment to the best of his judgment in the following cases:-
• If the taxpayer fails to file the return required within the due date
prescribed under section 139(1) or a belated return under
section 139(4) or a revised return under section 139(5).
• If the taxpayer fails to comply with all the terms of a notice
issued under section 142(1).
 Section 144 Contd…
• Note: The Assessing Officer can issue notice under section
142(1) asking the taxpayer to file the return of income if he has
not filed the return of income or to produce or cause to be
produced such accounts or documents as he may require and
to furnish in writing and verified in the prescribed manner
information in such form and on such points or matters
(including a statement of all assets and liabilities of the
taxpayer, whether included in the accounts or not) as he may
require.
 Assessment when section 184 not
complied with [Section 185]—

• Where a firm does not comply with any of the provisions of

section 184 given below.—
• — the partnership is evidenced by an instrument. 
— the individual shares of the partners are specified in that
instrument. 
— the partnership deed is certified in writing by all the partners
other than minors. 
— the certified copy of the partnership deed is submitted
alongwith the return of income.
 Contd…
•    Partner’s property used for own business:— Where the
property is used for business, it is exempt from tax. Where a
partner permits the use of such property by the firm, there is
no reason, why the same principle should not apply so as to
spare liability on the income from such property, as held in
[CIT Vs. Mustafa Khan [2005] 276 ITR 601 (All)].

• Expenses or payments not deductible in certain

circumstances (Section 40A (2) 1— If remuneration to
partners is deductible U/s 37(10, read with Section 40(b), it
may be disallowed by the Assessing Officer (for details see
chapter Profit & Gains of Business or profession’.
 u/s 40(b). Amounts deductible subject
(a)
to limits.
       Interest payable — Prescribed interest paid to partners at the
maximum rate of 12% S.l.(p.a.) will be allowable as a deduction.

(b)       Remuneration to partner— In case of working partners, payment

of salary, bonus, commission or remuneration, by whatever name
called
as given hereunder will be allowed as a deduction subject to the
following limits.—

https://incometaxindia.gov.in/Pages/tools/partners-remuneration.aspx
S. In case of a firm referred to in section 44 AA Limits of Payment of
No. which is notified for the purposes of that Remuneration to
section or any other firm. any partner

(a) On the first of Rs. 3,00,000 of the book profit or in Rs. 1,50,000 or 90% of the
case of loss book profit, whichever is
more.

(b) On the balance of the book profit 60%

 Special Provisions For Computation Of
Income Of Certain Types Of Business.

• The Income-tax Act lays down an alternative and optional method of

computing income from the following businesses which may be carried out
under a partnership firm
• Income of Public Financial Institutional, Public Companies, etc. [section
43D].
• Insurance Business [section 44].
• Trade, professional or similar association [section 44A].
• business of civil contract or ship (section 44AD].
• business of plying, hiring or leasing goods carriages [section 44AE].
• business of retail trade in any goods or merchandise (section 44AF].
•  business of exploration, etc. of mineral oil [section 448B].
• business of civil construction, etc. of foreign companies (section 44BBB].
• Income by way of royalties [section 44DA].
 Rates of Income-tax of Partnership
Firms

• (i)               From A.Y. 2006-2007 onwards on the whole of the total

income. 30%
• (ii)              Education cess @2% of income-tax and surcharge thereon
shall also be levied from A.Y.2005-06.
• (iii)             Additional secondary & higher education cess of 1% of tax
levied on all assessee from A.Y. 2008- 09.
• (iv)             From A.Y. 2010-2011, Surcharge of 10% on Partnership Firms
was eliminated by the Finance Ministry (No. 2) Act, 2009.
• (v)              For A.Y 2014-2015, Surcharge of 10% of IT., if total income
exceeds 1 crore.
• (vi)             From A.Y. 2012-2013, a limited liability partnership is subject
to alternate minimum tax @18.5% (plus ed:cess+ SHE-cess) of total
income.
 Assessment Of Firm U/S 184 [Which Fulfils
Conditions of Section 184]" 

• Computation of firm’s business income :

• Adjustment of Net Profit as per Profit & Loss Account of the
firm:
•  
• (a)       While calculating firms business profit the provisions as
given u/s 28 to 44 are applicable.
•  
• (b)       Section 40(b) lays down following rules regarding payment of
salary, commission, or remuneration to working partners and
interest on capital to all partners. These rules are
• (i)        Any payment of salary, commission or remuneration paid to
a partner who is not a working partner, is disallowed.
• (ii)       Any remuneration paid to a working partner, who is not authorised by
or which is not in accordance with terms of partnership deed (instrument of
partnership) is disallowed.
• (iii)      Any interest paid to partners according to terms of partnership deed is
allowed provided rate of interest does not exceed 12%. Excess is disallowed.
• (iv)       Any interest paid to partner, who is not authorised by or is not in
accordance with partnership deed is disallowed.
• (v)        In case interest or remuneration is paid to a partner and is authorised
by partnership deed but relates to the period prior to the date of such deed
and it was also not authorised by any earlier deed, it shall be disallowed.

• In case any payment for remuneration is made to one or more working

partners during the previous year, it is allowed up to limits given below.
Excess is disallowed.
• Limits on payment of remuneration to partners [Section 40(b)]
• 1. In case of professional firms (as defined u/s 44AA)                        Amt. allowed
• (a) On the first Rs. 1,00,000 of the book profit                                        90% of book
profit 
(b) On the next Rs. 1,00,000 of the book profits                                     60% of book
profit 
(c) On the balance of the book profits                                                      40% of book
profit
• 2. In case of any other firms (not defined u/s 44AA) :
• (a) On the first Rs. 75,000 of the book profits                                         90% of book
profit 
(b) On the next Rs. 75,000 of the book profits                            `           60% of book
profit 
(c) On the balance of the hook profits                                                      40% of book
profit
• https://www.incometaxindia.gov.in/Acts/Finance%20Acts/
1992/102120000000037555.htm
 The exemptions limits can he expressed
in following manner :
• (a)       In case a firm (Whether professional or non professional) has loss or it
has profit but total remuneration paid to working partners as per instrument of
partnership does not exceed Rs. 50,000. Actual remuneration or Rs. 50,000
whichever is less is allowed.
• (b)       In case total remuneration is more than Rs. 50,000 and firm is carrying
on profession it is allowed up to
• (i)         Actual remuneration to all working partners as per instrument of
partnership.
• OR
• (ii)        An amount equal to [90% of first Rs. 1,00,000 + 60% of next Rs.
1,00,000 + 40% of Balance Book Profits] whichever is less.
• (c)        In case firm is non-professional firm and total remuneration paid is more
than Rs. 50,000, it is allowed up to 
• (i)         Actual remuneration to all working partners as per deed.
• OR
• (ii)        An amount equal to [90% of first Rs. 75,000 + 60% of next Rs. 75,000 +
40% of balance book profits] whichever is less.
 Amounts Expressively Allowed as Deduction
[Section 30 to 37]
• Section-30] : Rent, Rates, Taxes, Repairs and Insurance
of Building used for the purpose of the business.
[Section 31] : Repairs & Insurance Of Plant, Machinery
& Furniture
[Section 32] : Depreciation
[Section 36(1)(i) to Section 36(1)(ix)] : Other
Deductions
[Section 37(1)] General Deductions
Computation of Total Income of a FIRM

• 1.         Income is computed headwise. Firm cannot have salary

income.
• 2.         It cannot have self-occupied house. Income from let out
house property is computed in same manner as already studied
under the head ‘house property’.
• 3.         Profits and gains—same as per above.
• 4.         Income under the head capital gains is computed in same
manner but with no exemption u/s 54, 54B and 54F.
• 5.         Income from other sources is computed in same manner.
• 6.         Carry forward and set off of losses is done in the same
manner.
 Contd…
7. Deductions out of Gross total income : A firm can claim
following deductions
•u/s 80 G                     for donations
•u/s 80 GGA               for contribution to certain funds
•u/s 80 GGC               for donation to political parties
•u/s 80 IA                    for infrastructure projects
•u/s 80 lAB                  for setting up Special Economic Zones
•u/s 80 lB                    for new industrial undertaking
•u/s 80 IC                    for setting up industry in backward states
•u/s 80 JJA                 for use of bio waste, and
•Firm is not allowed any other deduction.
 Computation of firm’s Tax

• (a)       It pays tax at flat rate of 30% with no exemption limit.
• (b)       On long term capital gain—rate of tax is 20%.
• (c)        On short term capital gain on securities covered under
STT—rate of tax is 15%
• (d)       On winnings from lotteries, crossword puzzle, races,
card games, gambling and betting— rate of tax is 30%.
• (e)       Surcharge is added @ 10% of tax (as calculated
above) provided total income of the firm exceeds Rs. I crore.
So no surcharge if total income does not exceed Rs. 1 crore.
• (f)         It is further increased by education cess @ 2% of tax
and surcharge plus Secondary and Higher education cess @
1% of tax and surcharge, if any.
 Treatment of remuneration and
interest received from firm

• Following amounts shall be added in the individual income of

partners under the head Profits and gains

(a)       Interest paid by firm to partners shall not he added in

individual income of partners if it has been disallowed to firm
as it was paid without its being mentioned in deed. Interest
paid by firm to partners shall be fully added in individual
income of partners if it has been fully allowed to firm and it
was paid as it was mentioned in deed and rate of interest was
up to 12%. Interest paid by firm to partners shall be added in
individual income of partners up to 12% p.a. if it has been
allowed to firm @ 12% p.a. if mentioned in deed.
• This means that if partnership deed allows interest to partners
@ 12% or less, then it is allowed to be debited to P & L A/c of
the firm and while calculating individual income of the partners
it is added in the individual income of partners. So by debiting
this amount of interest to P & L A/c, the profit of the firm is
reduced whereas the same amount of interest is added in the
individual income of partners and thus partners would pay tax
on such interest.

• In case partnership deed allows interest which is more than

12%, then only 12% is allowed and excess will be added back
in the profit of the firm if already debited to the P&L A/c. This
simply means that only 12% is allowed to be debited to P&L
A/c of the firm and only the same amount is treated as
individual income of partners.
• Remuneration paid to partners and allowed to firm shall be added in
individual income of partners in following manner

• (i)        If it is fully allowed it shall be fully added in partner’s

individual income.

• (ii)       If it was allowed up to restricted amount as per above,

amount to be added shall be
• Losses of the firm
Unabsorbed loss including depreciation in respect of A.Y.
1993-94 onwards of the firm will not be apportioned amongst
the partners and will be carried forward by the firm only.

Allow ability of remuneration and interest vis-a-vis

presumptive taxation
Remuneration and interest will be allowed as deduction from
the presumptive income computed at prescribed rate u/ss.
44AD, 44AE & 44AF.
• Due dates for filing return of firm
a. 30th September, where accounts of the partnership firm are
required to be audited under Income- tax Act or under any
other law for the time being in force.
b. 31st July in any other cases.

Due dates for filing of returns of partners

a. 30th September in case of a working partner of a firm
(whether or not he is entitled to remuneration) where due date
for filing return of firm is 30th September.
b. 31st July for other partners.