Changes In Taxation Of Partnership Firms

Posted: 2003-03-31 00:00:00+05:30 IST
Updated: Mar 31, 2003 at 0000 hrs IST

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: The provisions relating to the taxation of partnership firms are contained in Chapter XVI of the Income Tax Act, 1961 (the Act). Under section 184(1) of the Act, with effect from April 1, 1993 a firm shall be assessed as a firm (PFAS), if the following conditions are fulfilled: The partnership is evidenced by an instrument (partnership deed) and a certified copy thereof, duly signed by all the partners, is filed along with the Return of Income (ROI). The individual shares (profit/loss) of the partners are also specified in the instrument. Further, whenever there is any change in the constitution of the firm, the firm is required to furnish along with the ROI a certified copy of the partnership deed, duly signed by all the partners. A change in constitution of the firm is defined under section 187 of the Act to include the admission of new partner(s), retirement of existing partner(s) and change in the profit/loss-sharing-ratio and exclude dissolution of the firm on death of any of its partners.

However, where a firm does not comply with either of the above conditions under section 184 or fails to comply with the provisions of section 144 of the Act, then, the firm shall not be assessed as a PFAS but shall be assessed as an Association of Persons (PFAOP), and all the other provisions of the Act relating to an AOP shall apply accordingly. The taxation of PFAS and PFAOP differs as under: Payment of Interest, Salary, Bonus, Commission or Remuneration to working Partners: In the case of a PFAS, these payments made to working partners, duly authorized by the partnership deed, are an allowable expense to the PFAS subject to the limits stated in section 40(b)(iv) and (v) of the Act. However, in the case of a PFAOP, such payments are not an allowable expense under section 40(ba) of the Act. Tax liability of a PFAS/PFAOP and the Partners: The PFAS will have to pay tax at 36.75 per cent (35 per cent plus 5 per cent surcharge thereon) for assessment year 2003-2004. The share of income/loss of the partners from the PFAS is exempt under section 10(2A) of the Act. But, the above mentioned payments made to partners will be taxable in the respective partners’ hands. In contrast, in the case of PFAOP, the provisions are hereunder: Where no partner has income exceeding the maximum amount chargeable to tax:...