Assessment of Firm under Income Tax Act,1961

A firm shall be assessed as a firm for the purposes of this Act, if—

(i) the partnership is evidenced by an instrument ; and

(ii) the individual shares of the partners are specified in that instrument.

‒      Where any change in constitution had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.

‒      If after recognition as firm, there is a subsequent failure then it will be assessed as firm but interest, salary, bonus, commission or remuneration etc shall not be allowed as deduction.

where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm 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 under clause (v) of section 28.

(1)   Where at the time of making an assessment under section 143 or section 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment.

(2)    Change in constitution means:

• Admission or retirement (but one partner should be same otherwise succession.
• Change in shares.

–      Death is not a change in constitution but succession unless written in deed that remaining partner will continue the business.

Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of section 170.

Every person who was, during the previous year, a partner of a firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the assessment year to which such previous year is relevant, and all the provisions of this Act, so far as may be, shall apply to the assessment of such tax or imposition or levy of such penalty or other sum.

–   Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Assessing Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment.

–   Every person who was at the time of such discontinuance or dissolution a partner of the firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum

–   Where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against the person referred to in sub-section (3) from the stage at which the proceedings stood at the time of such discontinuance or dissolution, and all the provisions of this Act shall, so far as may be, apply accordingly.

2.     In business & profession only trading expenses relating to business or trading loss is allowed.

3.     If Firm or AOP is dissolved, notice to any partner can be served by AO.

4.     Interest can be paid up to 12% if authorized by deed on loan advanced by the partner or on capital.

5.     Limit of Remuneration u/s 40(a)

• Up to 3,00,000 or in case of Loss-90% of book profit(as per PGBP) or, 1,50,000 whichever is higher
•  On balance -60% of book profit

6.     Section 40A(2), [ excessive expenditure disallow] can be invoked by the AO

7.     Only individual can be a partner in the partnership firm.

8.     Interest paid to partner in representative Capacity (loan by Karta of HUF) is allowed in full.

9.     Interest paid to partner on behalf of any other person –allowed (interest received by partner on loan given by his minor son).

10.   In case of conversion of firm into companies in accordance with the chapter (ix) of the companies Act, closing stock of firm is to be valued at cost price because there is no capital gain on transfer i.e transfer is exempt.