BUSINESS TAXATION

Topic: assessment of partnership firms.

GROUP 2 - MEMBERS
◦ Nivedita. M • Sharath. J

• Shilpa. N
◦ Prathyusha. M
• Shruthi. M
◦ Rakshitha. G H
• Tejaswini . N

◦ Rashmi. M • Uma maheswari E

◦ Samson. S
Meaning
Partnership is a relationship between persons who have
agreed to share the profits of a business carried on by all
or any of them acting for all’. These persons are called
partners and collectively they are called firm.
Definition

◦ The Indian Partnership Act, 1932, Section 4, defined partnership as “the

relation between persons who have agreed to share the profits of business

carried on by all or any of them acting for all”

Features/ characteristics:
What is partnership deed?
It is the written legal documents that contains an agreement between two individuals who have

the intension of doing business with each other and share the profits and losses. It is called a

partnership deed otherwise it is partnership agreement.

Partnership deed contains the following:
◦ Name of the firm
◦ Nature of the business
◦ Name of partners
◦ Place of the business
◦ Amount of the capital contributed by the each partner
◦ Profit sharing ratio between the partners
◦ Loans and advances from the partners and the rate of interest thereon
◦ Drawings allowed to the partners and the rate of interest thereon
◦ Amount of salary and commission, if any payable to the partners
◦ Duties, powers and obligations of partners

◦ Maintenance of accounts and arrangements for their audit

◦ Mode of valuation of goodwill in the event of admission, retirement and death of a partner

◦ Settlements of accounts in the case of dissolution of the firm

◦ Arbitration in case of disputes among the partners

◦ Arrangements in case a partner becomes insolvent

Types of partners
1. Active partner/Managing partner.

The one who takes active participation in the firm and the running of the business.

2. Dormant/sleeping partner

The one who does not take active part in daily activities of the firm.

3. Nominal partner

The one who does not take any significant interest in the partnership.
4. Partners by Estoppel

The one who becomes a partner by estoppel or partner by holding out.

5. Partner in profits only

The one who will share only profits and will not be liable for any liabilities.

6. Minor partner

The one who is a partner by the consent of all other partners.

Advantages of partnership firm
1. Easy to Start

2. Decision Making

3. Raising of Funds

4. Sense of Ownership
Disadvantages of partnership firm
1. Unlimited Liability

2. Number of Members

3. Lack of a Central Figure

4. Trust of the General Public

5. Abrupt Dissolution
Schemes of Taxations of firms :

1. The firm is taxed as a separate entity.

2. Limited Liability Partnership.

3. The share of partners in the income of the firm is exempted.

4. Salary, Bonus, Commission/Remuneration paid to partners is allowed as deduction.

5. The interest to partners paid by the firm is deductible subject to maximum rate of
interest @ 12%.

6. The firm is taxable at flat 30% plus 4% Cess plus Surcharge at 12% of taxable income.
Conditions to be fulfilled section 184 ,
assessment as a firm
◦ A firm should be evidenced by an instrument.

◦ Individual shares of partners must be specified in the instruments.

◦ A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return
of income of the firm .

◦ The application shall be made before the end of the previous year for the assessment year in respect of
which registration is sought.

◦ The application should be made in the prescribed form and shall contain the prescribed particulars.

◦ Revised instrument should be submitted whenever there is change in the constitution of firm .
Conditions to Remuneration of Partners

1. Remuneration should be paid only to the working partner:-

◦ section 40(b) defines working partner as one who is actively engaged in conducting the
affairs of the business or profession of the firm of which he is a partner.

◦ 2. It should be authorized by the Partnership Deed :-

◦ Any payment of salary, bonus, commission, or remuneration by whatever name called to a

working partner is not allowed as deduction if the payment is not authorized by partnership
deed.
3. It should not pertain to a period prior to Partnership Deed:-

The remuneration paid to the working partners will be allowed as deduction to the firm from the
date of such partnership deed and not from any period prior thereto.

4. It should not exceed the permissible limit:-

The maximum amount of salary, bonus, commission or other remuneration to all the partners
during the previous year should not exceed the limits given below:

On first 3 lakhs of book profit or in case of loss – ₹ 1, 50,000 or 90% of book profits (whichever is
higher).

On the balance book profit 60% of book profit.

 Meaning of interest on capital

◦ Interest on capital refers to the certain amount to be paid by the firm to the partners for the investment of
capital made by them.

• Points to remember: the rate of interest on capital is to be provided as mentioned in the partnership
deed

• No interest on capital is to be given in the absence of partnership deed but, In the absence of partnership
deed, interest on drawings need not to be paid by the partners

• Interest on capital is paid at the end of the year out of the profits earned by the firm

• Interest on capital is always calculated on the opening capital and additional capital (if any)

• In the absence of partnership deed, interest on drawings need not to be paid by the partners
Interest to partners

◦ Section 40(b)

◦ Provision related to interest to partners u/s 40b of income tax act 1961

◦ 1) Interest paid to the partner of firm must be a working partner

◦ 2) Interest to partners must be authorized by the partnership deed

◦ 3) No interest to be allowed which relates to any period falling prior to the date of such
partnership deed

◦ 4) Any interest to any partners exceeding 12% disallowed

Conditions for claiming deduction in respect of interest
to partners in case of firm ( section 184)

1) A firm must be evidenced by an instrument (section 184)

2) Individual share of partners must be specified in instrument

3) Certified copy of the instrument should be submitted

4) Revised instrument should be submitted whenever there is change in the constitution of

firm/profit-sharing ratio