Page 192 - DCOM508_CORPORATE_TAX_PLANNING

Unit 8: Tax Planning for Different Organisations

4. The fi rm will be assessed as a fi rm provided conditions mentioned under section 184 are Notes
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.
8.3.2 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 fi rst 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 fi rm satisfies the following conditions, it will be assessed as a partnership
firm, otherwise it will be assessed as an AOP:-

1. The firm is evidenced by an instrument i.e. there is a written partnership deed.
2. The individual shares of the partners are very clearly specified in the deed.

3. A certified copy of partnership deed must accompany the return of income of the fi rm of
the previous year in which the partnership was formed.
4. 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.

5. 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 fi rm.

It is more beneficial to be assessed as a partnership firm than as an AOP, since a partnership fi rm

can claim the following additional deductions which the AOP cannot claim:-
1. Interest paid to partners, provided such interest is authorised by the partnership deed.
2. Any salary, bonus, commission, or remuneration (by whatever name called) to a partner
will be allowed as a deduction if it is paid to a working partner who is an individual. The
remuneration paid to such a partner must be authorised by the partnership deed and the
amount of remuneration must not exceed the given limits.

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