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Unit 10: Tax Planning for Different Organisations

shall be taxable in the hands of the partners in their individual assessment under the head Notes
‘profits and gains of business or profession’.
4. The firm will be assessed as a firm provided conditions mentioned under section 184 are
satisfied. In case these conditions are not satisfied in a particular assessment year, although
the firm will be assessed as firm, but no deduction by way of payment of interest, salary,
bonus, commission or remuneration, by whatever name called, made to the partner, shall
be allowed in computing the income chargeable under the head “profits and gains of
business or profession” and such interest, salary, bonus, commission or remuneration
shall not be chargeable to income-tax in the hands of the partner.

10.3.2 Provisions Relating to Taxation of Partnership Firms

The partnership firm is taxed as a separate entity, with no distinction as registered and
unregistered firms. A partnership firm is or required to submit a copy of the partnership deed in
the first year of assessment and later on only if there is a change in the terms/constitution of
partnership. In computing the total income of the firm, any salary bonus, commission or
remuneration, to a partner, shall be deductible subject to certain restrictions Partnership firm is
subjected to taxation under the Income Tax Act, 1961. It is the umbrella Act for all the matters
relating to income tax and empowers the Central Board of Direct Taxes (CBDT) to formulate
rules (The Income Tax Rules, 1962) for implementing the provisions of the Act. The CBDT is a
part of Department of Revenue in the Ministry of Finance. It has been charged with all the
matters relating to various direct taxes in India and is responsible for administration of direct
tax laws through the Income Tax Department. The Income Tax Act is subjected to annual
amendments by the Finance Act, which mentions the ‘rates’ of income tax and other taxes for the
corresponding year.

Under the Income Tax Act, the Partnership firm is taxed as a separate entity, distinct from the
partners. In the Act, there is no distinction between assessment of a registered and unregistered
firms. However, the partnership must be evidenced by a partnership deed. The partnership deed
is a blue print of the rights and liabilities of partners as to their capital, profit sharing ratio,
drawings, interest on capital, commission, salary, etc., terms and conditions as to working,
functioning and dissolution of the partnership business.
Under the Act, a partnership firm may be assessed either as a partnership firm or as an association
of persons (AOP). If the firm satisfies the following conditions, it will be assessed as a partnership
firm, otherwise it will be assessed as an AOP:
The firm is evidenced by an instrument i.e. there is a written partnership deed.
The individual shares of the partners are very clearly specified in the deed.
A certified copy of partnership deed must accompany the return of income of the firm of
the previous year in which the partnership was formed.
If during a previous year, a change takes place in the constitution of the firm or in the
profit sharing ratio of the partners, a certified copy of the revised partnership deed shall
be submitted along with the return of income of the previous years in question.

There should not be any failure on the part of the firm while attending to notices given by
the Income Tax Officer for completion of the assessment of the firm.
It is more beneficial to be assessed as a partnership firm than as an AOP, since a partnership firm
can claim the following additional deductions which the AOP cannot claim:

Interest paid to partners, provided such interest is authorised by the partnership deed.

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