Page 191 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes There is no restriction on a company’s participation in a partnership, but this is rate in practice.
Under the general law a partnership is not a separate entity distinct from the partners, but for tax
purposes a partnership is an entity. Partnership firm arises from a contract between two or more

persons who contribute some tangible and some intangible assets together with an objective of

earning profit there from which will be shared between them in predefined portion. Therefore,

1. The firm should be evidenced by an instrument [Section 184(1i)].
2. The individual shares of the partners in the asset of the firm and the profits (or losses)

should be specified in the instrument [Section 184(1ii)].

3. A certified copy of the instrument of partnership shall a company the return of income

of the previous year in respect of which assessment of the fi rm is first sought [Section
184(2)].
4. Whenever changes takes place in the constitution of the firm due to death or resignation

of the partner or in the profit sharing ratio of the existing partners, a certified copy of the
revised instrument of partner shall be submitted along with return of income of the related

year. Where a minor is admitted to the benefit of the firm and the shares of the partners are
unequal, it is necessary to specify how the shares of loss of the minor will be borne by the
major partner.

The provisions related to the taxation of partnership firms are included in Chapter XVI of the
Income Tax Act, 1961. U/s 184(1) of the Act, with effect from April 1, 1993 a firm shall be assessed

as a partnership firm (PFAS), if the given conditions are satisfied as follows:
1. Partnership is evidenced by a partnership deed and a certified copy thereof, which is duly

signed by all partners, and is filed along with the Return of Income (ROI).

2. Individual shares (profit/loss) of all the partners are also specified in the instrument i.e. in

the partnership deed
3. Whenever there is some change in the constitution of the firm, then the fi rm requires

furnishing along with the ROI, the certified copy of the partnership deed that is duly signed
by all the partners.

4. A change in constitution of the firm has been defined under section 187 of the Act which

includes admission of new partner(s), retirement of existing partner(s) as well as any

change in the profit/loss-sharing-ratio and excludes dissolution of the firm in case of death

of any of its partners.
8.3.1 Position of Firm under the Income Tax Act

Legally, a partnership firm does not have a separate entity from that of the partners constituting

the firm as the partners are the owners of the firm. However, a firm is treated as a separate

tax-entity under the Income-tax Act. Salient features of the assessment of a firm are as under:

1. A firm is treated as a separate tax entity.

2. While computing the income of the firm under the head ‘Profits and gains of business or
profession’, besides the deductions which are allowed u/s 30 to 37, special deduction is

allowed to the firm on account of remuneration to working partners and interest paid to
the partners. However, it is subject to certain limits laid down u/s 40(b).
3. Share of profit which a partner receives from the firm (after deduction of remuneration and

interest allowable) shall be fully exempt in the hands of the partner. However, only that

part of the interest and remuneration which was allowed as a deduction to the firm shall be
taxable in the hands of the partners in their individual assessment under the head ‘profi ts
and gains of business or profession’.
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