LunawatLunawat & Co.& Co.
Taxation of Partnership Taxation of Partnership FirmsFirms
Presented by
PRAMOD JAINFCA, ACS, AICWA, ISA(ICAI), AMIMA
LUNAWAT & COLUNAWAT & COChartered Accountants
LunawatLunawat & Co.& Co.
Definition of Partnership
Section 2(23) of Income Tax Act,1961
Section 4 of The Indian Partnership Act,1932- Partnership is the relationship between persons
- Who have agreed to share the profits of a business
- Carried on by all or any of them
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Case Laws
All the three elements are essential
Firm cannot be a partner
Dulichand Laxminarayan v. CIT (1956) 29 ITR 535 (SC)
Charitable Trust can be a partner
J.K. Hosiery Factory v. CIT (1971) 81 ITR 557 (All.)
Wakf cannot be a partner
Hoosen Kasam Dada (a firm) v. CIT (1937) 5 ITR 182 (Cal.)
LunawatLunawat & Co.& Co.
Case Laws
•Karta & member can form partnershipChandrakant Manilal Shah v. CIT (1992) 193 ITR 1 (SC)
•Firm is not a distinct legal entity from its partnersMalabar Fisheries Co. v. CIT (1979) 120 ITR 49 (SC)
•Non- payment of dues to retiring partner is not ‘lending’
CIT v. Nachimuthu Industrial Association (1982) 138 ITR 585 (Mad.)
LunawatLunawat & Co.& Co.
FormationFormation
• Partnership deed• Stamp paper value• Contents as per Income Tax Act,1961
– Remuneration– Interest– Share of Profit
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Accounts - Normal I.T. Provisions
TDS provisions applicable
Audit – Tax Audit u/s 44AB
Audit for claiming deductions under chapter IVA
–80HHB, 80HHBA, 80HHC, 80HHD, 80HHE, 80HHF
–80I, 80IA, 80IB
Accounts and Audit
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Partner’s Salary u/s 40b allowable after fixed percentage / amount of deemed profit
Partner’s interest u/s 40b allowable after fixed percentage / amount of deemed profit
Accounts and Audit (44AD, 44AE & 44AF)
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AS 1,2,4,5,6,7,8,9,10,11,12,13,15,16 & 19 are mandatory since notified.
AS 3,17,18 are mandatory since notified, AS 26 from 1.4.2003 & AS 24 & 28 from 1.4.2004 if turnover for the accounting period exceeds Rs. 50 Cr.
AS 22 is mandatory from 1.4.2003.
AS 24, 26 & 28 mandatory from 1.4.2004.
Applicability of Accounting Standards
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Firm Assessed as Firm (FAF) Firm Assessed as Firm (FAF) (Section 184)(Section 184)
• It should be evidenced by an instrument• Individual shares of the partners should be
specified in the instrument• Certified copy of such instrument to be
furnished along with I. T. Return• Certified copy of instrument to be filed in
case of change in constitution of the firm• No failure as mentioned u/s 144.
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Remuneration (Section 40(b))Remuneration (Section 40(b))
• Should not be disallowed u/s 37(1) or 40A(2)• Should be paid only to a working Partner• Such remuneration is authorised by and is in
accordance with partnership deed• It is related to period falling on or after the
date of such partnership deed • It should be within the limits specified in sub-
clause (v) of clause (b) of section 40
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40% of Book Profit
Balance B.P.Balance B. P.
60% of B. P.Next Rs. 75000Next Rs. 100000
Higher of Rs.50000/- or 90% of B.P.
Loss or first Rs. 75000/-
Loss or firstRs. 100000/-
Remuneration Allowable
Business FirmProfessional Firm
Remuneration (Section 40(b)(v))
Lunawat & CoLunawat & CoLunawatLunawat & Co.& Co.
Book Profit means
Net profit as per Profit & Loss Account after all adjustments u/s 28 to 44D
+ Aggregate remuneration paid or payable to all working partners if it has been deducted while computing net profit.
Remuneration (Book Profit)
LunawatLunawat & Co.& Co.
Interest (Section 40(b))Interest (Section 40(b))
• Should not be disallowed u/s 36(1)(iii), 40(a)(i) or 40A(2)
• Such interest is authorised by and is in accordance with partnership deed
• It is related to period falling on or after the date of such partnership deed
• It should be within the limits specified in clause (iv) of section 40 b (12% p.a. simple interest)
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Carry forward and setCarry forward and set--off lossesoff losses
• From A.Y. 1993-94 – as applicable to other assesses.
• Separate provisions in case of change in constitution (Section 78).– Unabsorbed depreciation and investment
allowance– Business loss, capital loss and losses from
activity of owning and maintaining race horses.
Lunawat & CoLunawat & CoLunawatLunawat & Co.& Co.
Partnership Vs. Sole Proprietorship
Not ApplicableApplicableFBT
No instrument required
Deed on Stamp paper
Instrument Requirements
NA to proprietorSalary & Intt to partners
Expenses
Applicable after 44AB turnover.
ApplicableTDS Provisions
Slab System after Rs.50000
35% from Rs. 5/-I. T. RatesProprietorPartnership
Lunawat & CoLunawat & CoLunawatLunawat & Co.& Co.
Partnership Vs. Company
MA to be reg. at ROC, Fees for filing all doc.
Deed on Stamp paper, even if there is change in Const.
Instrument Requirements
Pvt-Min2 Max 50Pub-Min3 Max NA
Min. 2 Max. 20No. of members
No Lt./ S.D. available (upto 5-6)
Limit u/s 40b/ S.D. Not available
Salary/ Std. deduction
SeparateNot SeparateLegal EntityCompanyPartnership
Lunawat & CoLunawat & CoLunawatLunawat & Co.& Co.
Partnership Vs. Company
1 Lac for Pvt. & 5 Lacs for Public Ltd. Cos.
Nil, However Stamp paper as per capital
Capital requirements
Tax free for shareholders but dist. [email protected]%
Tax free in hands of Partners
Distribution of Income
ApplicableNot ApplicableMAT u/s 115JBCompanyPartnership
Lunawat & CoLunawat & CoLunawatLunawat & Co.& Co.
Conversion of Partnership to Company
• Slump sale to Company.
• Conversion under Part IX of the Companies Act, 1956.
• Transfer u/s 47(xiii) of the Income Tax Act, 1961.
• Admission as Partner, then dissolution.
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Tax Liability (section 188A)Tax Liability (section 188A)
• Following persons are jointly & severally liable for any tax, penalty or any other sum payable by the firm– The Firm– All persons who were partners in the P.Y.
to which such tax, etc. relates– Legal representative of any partner who is
deceased.
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Taxability of PartnersTaxability of Partners
• Salary, bonus, interest, commission, etc received by partners taxable u/s 28(v) under the head ‘Profits and Gains of Business or Profession’
• Share of Profit / Loss is exempt u/s 10(2A)
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Rate of Tax & ReturnsRate of Tax & Returns• Rate of Income Tax applicable is 35% with
no basic exemption.• Agriculture income is not to be included.• IT Return to be filed compulsorily• In case the firm has Income under the head
business – Form 2 or Form 2D• In case the firm do not have Income under
the head business – Form 3 or Form 2D.
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Computation of IncomeComputation of Income
• Aggregate of– Income under the head House Property– Profits and gains from business & profession– Income from capital gains– Income from other sources
• Less: deduction under chapter VIA i.e., 80G, 80GGA, 80HHB, 80HHBA, 80HHC, 80HHD, 80HHE, 80HHF, 80I, 80IA, 80IB & 80O.
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Computation of IncomeComputation of Income
• Calculate Tax on Total Income @ 35%• Less: rebate u/s 88E• Add: surcharge & cess.• Less: relief u/s 90 & 91 (Double taxation)• Add: Interest u/s 234A, B & C • Less: TDS & Advance Tax• Less: Self Assessment Tax• Balance Tax payable / Refund due
LunawatLunawat & Co.& Co.
I. T. Assessment when there is I. T. Assessment when there is Change in ConstitutionChange in Constitution
• Change in constitution (Section 187)– Addition / deletion of partners– All partners continue but profit sharing ratio
changes• Succession of Firm (section 188)
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C. A. FirmsC. A. Firms
• Partnership amendments • Service Tax requirements• Method of Accounting• Interest• Salary – as per 40(b) vs. fixed• Taxability of salary in hands of partners• Presentation in IT computation of partners
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For any clarifications please contact
PRAMOD JAIN9811073867
E-mail: [email protected]
