ASSESSMENT OF PARTNERS OF A FIRM

A research submission submitted in fulfilment for the course (Taxation Law I) for
attaining the degree B.A., LL.B (Hons.) during the Academic year 2020-21.

A Submission made by Shubham Kumar

Roll-1765
B.A., LL.B (Hons.)

A Submission submitted to Dr. G.P. Pandey

Chanakya National Law University, Nyaya nagar, Mithapur Patna-800001

November, 2020

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 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.A., LL.B. (Hons.) Project Report
entitle “ASSESSMENT OF PARTNERS OF A FIRM”

Submitted at Chanakya National Law University, Patna is an authentic record

of my work carried out under the supervision of Dr. G.P. PANDEY. I have not
submitted this work elsewhere for any other degree or diploma. I am fully
responsible for the contents of my Project Report.

(Signature of the Candidate)

SHUBHAM KUMAR
ROLL NO- 1765
B.A., LL.B. (Hons.), 7th SEMESTER
Chanakya National Law University, Patna

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 ACKNOWLEDGEMENT

Any project completed or done in isolation is unthinkable. This project, although prepared by
me, is a culmination of efforts of a lot of people. Firstly, I would like to thank our Professor Dr.
G.P. PANDEY for, helping me in making the project on “ASSESSMENT OF PARTNERS OF
A FIRM” for his valuable suggestions towards the making of this project.

Further to that, I would also like to express my gratitude towards our seniors who did a lot of
help for the completion of this project. The contributions made by my classmates and friends are,
definitely, worth mentioning.

I would like to express my gratitude towards the library staff for their help also. I would also like
to thank the persons asked for help by me without whose support this project would not have
been completed.

I would like to express my gratitude towards the Almighty for obvious reasons. Moreover,
thanks to all those who helped me in any way be it words, presence, Encouragement or blessings.

SHUBHAM KUMAR

ROLL NO- 1765

B.A., LL.B. (Hons.), 7th SEMESTER

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 TABLE OF CONTENTS

SERIAL PAGE
NAME OF CHAPTERS
NO. NO.

1. OBJECTIVE OF THE STUDY 6

2. HYPOTHESIS 6

3. RESEARCH QUESTIONS 6

4. RESEARCH METHODOLOGY 6

CHAPTERISATION
1. INTRODUCTION……………….5
2. PARTNERSHIP FIRM IN INDIA AND ITS
ASSESSMENT……………………7-10
5. 3. ASSESSMENT OF PARTNERS OF A
FIRM……………………………..11-13
4. CONCLUSION…………………..14

BIBLIOGRAPHY……..15

1. INTRODUCTION

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Firm is an association of two or more than two persons, who came together to do a business and
share profits thereof. Section 4 of the Partnership Act, 1932 defines Partnership as “relationship
between persons who have agreed to share the profits of business carried on by all or any of them
acting for all.”

The persons who have agreed to do business together are personally called “Partners” and
collectively called a “Firm”. They are abiding by a deed called “Partnership Deed”. A
Partnership Deed for partnership is same as Articles of Association, Trust Deed for companies
and Trust respectively.

It is only for the sake of convenience that in commercial usage terms like “firm’s property”,
“employee of the firm”, “suit against the firm” and so on are used, but in the eyes of the law that
simply means “property of the partners”, “employees of the partners” and “a suit against the
partners of that firm”.

A partnership firm is not a separate legal entity distinct from its members. It is merely a
collective name given to the individuals composing it. Hence, unlike a company which has a
separate legal entity distinct from its members, a firm cannot possess property or employ
servants, neither it can be a debtor or a creditor. It cannot sue or be sued by others. Under the
income tax law, the total income of the firm will be determined as a separate entity and it will be
computed under various heads of income. However while computing taxable profits under head
“profits and gains of business or profession” a deduction is allowable to the firm on account of
interest and remuneration payable to the partners.1

OBJECTIVES OF THE STUDY:

1
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The researcher aims to do a critical analysis on the assessment of partners of a firm with the help
of various provisions mentioned in Partnership Act, 1932 & Income Tax Act, 1961 and analysis
of case laws/acts.
HYPOTHESIS:
The Researcher presumes that the income earned by two firms having common partners and
identical shares to be accessed collectively.

RESEARCH QUESTIONS
1. What is Partnership firm and its assessment through Income Tax Act, 1961?
2. How Partnership as a form of business organisation evolved in India?
3. What is the assessment procedure of partners of a firm?

RESEARCH METHODOLOGY:
The researcher will be relying on Doctrinal method of research to complete the project. These
involve various primary and secondary sources of literature and insights.
METHOD OF WRITING

The method of writing followed in the course of this research paper is primarily analytical.

SOURCES OF DATA
PRIMARY SOURCES

 CASE LAWS
 INCOME TAX ACT, 1961
 PARTNERSHIP ACT, 1931

SECONDARY SOURCES

 BLOGS AND ARTICLES/JOURNALS.

 BOOKS
 CASE COMMENATRIES

LIMITATIONS OF THE STUDY:

 The researcher has territorial and time limitations in completing the project.

2. PARTNERSHIP FIRM IN INDIA AND ITS ASSESSMENT

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“Partnership” is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.2

Persons who have entered into partnership with one another are called individually “partners”
and collectively “a firm”, and the name under which their business is carried on is called the
“firm name”.

According to Section 4, the following essentials are necessary to constitute a ‘Partnership’:-

1. There should be an agreement between the persons who wants to be partners.

2. The purpose of creating partnership should be carrying on of business

[Link] motive for the creation partnership should be earning and sharing profits.
4. The business of the firm should be carried on by all of them or any of them acting for all, i.e.,
in mutual agency.

The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October,
[Link] act came into force on the 1st day of October, 1932 except Section 69, which came
into force on the 1st day of October, 1933.

The present Act superseded the earlier law relating to Partnership, which was contained in
Chapter XI of the Indian Contract Act, 1872. The Act is not exhaustive.

It purports to define and amend the law relating to partnership. A Partnership arises from a
contract, and therefore, such a contract is governed not only by the provisions of the Partnership
Act in that regard, but also by the general law of contract in such matters, where the Partnership
Act does not specifically make any provision. It has been expressly provided in the Partnership
Act that unrepealed provisions of the Indian Contract Act, 1872, save in so far as they are
inconsistent with the express provisions of this act, shall continue to apply. 3Thus, the rules
relating to offer and acceptance, consideration, free consent, legality of object etc. as contained
in the Indian Contract Act are applicable to a contract of Partnership also. On the other hand,
regarding the position of minor, since there is specific provision contained in Section 30 of the
Indian Partnership Act, the minor’s position is governed by the provision of the Partnership Act.

Partnership Firms can be divided into two types:

1. Limited Liability Partnerships

2
Section 4 of Partnership Act
3
Section 3 of Partnership Act.

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 2. Unlimited Liability Partnerships

Difference between Limited Liability Partnership Firm and Unlimited Liability

Partnership Firms:4

Particulars Limited Liability Unlimited Liability

Partnership Firm Partnership Firms
Registration It is registered under LLP Act, It is registered under
under 2008 Partnership Act, 1932
Registered to Registration is done with to Registration is done with to
Ministry of Corporate Affairs Registrar of firms.
Liability The partner and the firm is Since the partner and the firm
considered as a separate legal is not considered as a separate
entity. Hence, the liability of legal entity. Hence, Partners
the partners is limited to the are personally liable for the
amount invested in the unlimited amount of liabilities
company. of the partnership
A number of Minimum 2 and no upper limit Minimum 2 and maximum 20
partners and for maximum number of partners can be the member of
requirements partners in LLP. the partnership firm.
Minor Partner No minor can be partner. Minor can be a partner, but at
least two adults to form a legal
partnership.
Transferability Shares can be easily Shares can be transferred to
transferred to another person. another person after obtaining
the required consent from all
the Partners in a Partnership.

Assessment of a firm:

Firms are assessed as a separate entity, as per section 2(31) of the Income Tax Act, 1961
definition of the person includes firm. Therefore assessment of the same is done separately.

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Secondly, there are certain conditions which are required to be satisfied by partnership firm to be
assessed as a firm and for claiming deductions of interest, salary to the partners. Conditions are
mentioned in Section 184 Income Tax Act, 1961:

A) In case where firm is assessed for the first time,

The following conditions are required to be fulfilled by partnership firm to be assessed as a firm,

1) Partnership should be evidenced by a registered deed: Partnership deed should be

registered clearly explaining all the terms and conditions mutually decided between the partners
of the said firm.

2) Share of each partner must be specified in the deed: This is the essential condition as to
how the profits of the firm to be shared between the partners. Profit sharing ratio must be clearly
specified.

Profits include losses also. For fulfilling the condition as mentioned in section 184, ratio of losses
should also be stated clearly.

3) Self attested and certified copy of the deed must be filed: The first return of the firm should
be accompanied with the certified copy of partnership deed. As per explanation to Section
184(2), the certified Copy means that the copy of the deed is to be certified in writing by all the
partners except minors.

B) In the subsequent assessment years:

The firm shall be assessed in the same capacity for every subsequent year if there is no change in
the constitution of the firm or the share of the partners. In case any change 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. In failure to do so, the firm shall not be eligible for deduction on
account of salary, interest, bonus, etc. Nevertheless, such amount of interest, salary, bonus etc.
shall not be charged to tax in the hands of the partner.

Certified copy of the partnership deed can be submitted along with the revised return provided
the asst. has not been completed based on the original return filed by the firm. The section speaks
of the filing of the certified copy of the partnership deed along with the return. Therefore, return
includes the original return as well as the return submitted u/s 139(5). Kullu velly (77 ITR 124),

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Balish Singh & Co. vs. CIT 5, CIT vs. Shrivastava6. It must however be borne in mind that
revised return has to be a valid return in terms of the conditions specified in Sec.139(5). Further
according to the decision of the Apex Court in Kumar Jagdishchandra Sinha vs. CIT 7
Sec.139(5) can be invoked only if the original return is filed within the time specified u/s 139(1).

Also filing of certified copy of the partnership deed is procedural / technical requirement and as
such the deed can be submitted after the filing of the original return. This view is supported by
the Hon’ble Supreme Court in the case of Manglore Chemicals and Fertilizers Ltd. vs. Dy.
Commissioner & Ors.8, Wherein it is held that the stringency and the mandatory nature of a
provision for exemption must be justified by the purpose intended to be served. The mere fact
that it is a statutory condition does not matter one way or the other. The conditions which belong
to the area of procedure have got to be constructed liberally. The Delhi Tribunal has considered
the issue after the commencement of the new scheme and held that filing the certified copy of the
partnership deed before completion of the asst. is sufficient compliance with the provision of
Sec.184 [ITO vs. D. M. Enterprise (67 ITD 123) and Ishardas Sahani (77 ITD 256)].

If the required conditions are satisfied as mentioned in section 184 then the firm is eligible to
claim deduction as specified in section 40(b).

3. ASSESSMENT OF PARTNERS OF A FIRM

5
(165 ITR 575) (Cal)
6
(170 ITR 556)(M.P.)
7
(220 ITR 67)
8
(21 Tax Gazette 193)

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A partner is a member in a partnership, an entity in which both the profits or losses of a business
or other venture are shared between all members. Corporations favor partnerships because of a
taxation structure that eliminates dividend taxes upon the profits of owners.

According to Section 4 of the Indian Partnership Act, 1932, a partnership is defined as a

relationship between two persons who mutually agreed to share the profits and losses in the
business. Therefore, persons who have entered into an agreement with one another are
individually known as “partners”.

Assessment of Partners of an Unlimited Partnership Firm:

1. Once tax is paid by firm, no tax will be payable by the partners on share of income from
the firm.
2. Amount of interest and/or remuneration etc received by a partner will be taxed in his
hands as ‘Business of Professional Income’, excluding the amount disallowed in the
hands of the firm being in excess of limits laid down in Section 40(b) of the Income Tax
Act, 1961 and from assessment year 2004-05 amount disallowed in the event of any
failure as mentioned in Section 144 of the Act or non-compliance of Section 184 of the
Act.

Taxable Income of Partners of a Firm:

The provisions are given below:-

1. Share of Profit exempt from Tax:

Section 10(2A) of the Act provides that in the case of a partner (including a minor
admitted for the benefit of the firm) of a firm, his share in the total income of the firm
shall be exempt from tax.
2. Remuneration or Interest is taxable:
If condition of Section 184 and Section 40(b) of the Act are satisfied then interest, salary,
bonus, commission or remuneration paid/payable by the firm to partners is taxable in the
hands of partners (to the extent these are allowed as deduction in the hands of the firm).

Assessment of Partners of Limited Liability Partnership Firm:

1. Exemption of Partner’s Share Income from Limited Liability Partnership (LLP):

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 The share of the partner in the income of the Limited Liability Partnership (LLP) is not
included in computing his total income i.e. his share in the total income of the Limited
Liability Partnership (LLP) shall be exempt from tax.
Section 10(2A) of the Act exempts the share income from the LLP in the hands of the
partner. The share of a partner in the total income of LLP separately assessed as such,
shall be an amount which bears to the total income of the LLP the same proportion as the
amount of his share in the profits of the LLP in accordance with the LLP Agreement
bears to such profits.
If Conditions of Section 184 and 40(b) of the Act are satisfied, then any interest, salary,
bonus, commission or remuneration paid/payable by the LLP to the partners is taxable in
the hands of partners (to the extent these are allowed as deduction in the hands of the
LLP)
2. Treatment of Remuneration and Interest to a Partner as Business Income:
Section 28(v) of the Act provides that interest and remuneration received by a partner
from his LLP shall be chargeable to income tax as profits and gains of business. The
proviso clarifies that where the remuneration, interest, etc, is in excess of the ceiling fixed
under the new Section 40(b) and is disallowed in part for that reason then the income
under the head referred to in Section 28(v) shall be adjusted to the extent of the amount
not so allowed to be deducted.
Remuneration to Partner not to be treated as Salary Income (Explanation 2 to
Section 15):
This Explanation provides that the salary, bonus or commission received by a partner
from his LLP will not be treated as salary. This Explanation implies that the provision of
tax deduction at source for salary (Section 192) will not be attracted to the remuneration
received by the partner from the LLP.
No TDS is necessary:
No TDS is necessary from the LLP while making payment of interest and remuneration
payment to LLP partners.

3. Ceiling as to Remuneration Payable to Working Partners and Interest to Partners

[Section 40(b)]:

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 Section 40(b) is a disallowance provision and disallows remuneration, interest, etc,
received by the partners from the firm provided the same exceeds the ceiling prescribed
in the same provision. It also specifies as to how the matter of deductibility of interest
and remuneration is to be dealt with where a partner is a partner in representative
capacity.
The Explanation 3 defines the term “book profit” which is relevant for computing the
upper ceiling of remuneration payable to all the working partners put together. The
Explanation 4 defines “working partners” who alone are made entitled to remuneration if
the deductibility of the related amount in the hands of the LLP is not be barred by Section
40(b).

4. CONCLUSION

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Partnership is one of the oldest forms of business relationships. Though limited liability
companies have replaced partnership firms in complex businesses, partnerships are still preferred
by professionals and small trading and business enterprises in India and abroad.

The Indian partnership act of 1932 provides for a general form of partnership which is the most
prevalent form in India, but, over time the general form of partnership has lost its charm because
of the inherent disadvantages in it, the most important is the unlimited liability of all partners for
business debts and legal consequences, regardless of their holding, as the firm is not a legal
entity.

In my opinion Partnership is very important because in day to day activities we enter into
partnership agreements and by making partners big goals are achieved with the help of joint and
more number of people. The joint efforts of all the member results in successful accomplishment
of tasks and that task or job can be easily afforded. Division of work leads to increase in
efficiency at work among different partners.

Under the income tax law, the total income of the firm will be determined as a separate entity
and it will be computed under various heads of income. However while computing taxable
profits under head “profits and gains of business or profession” a deduction is allowable to the
firm on account of interest and remuneration payable to the partners.

If the firm satisfies the conditions laid down u/s 184, the firm shall be eligible for deduction on
account of interest, salary, etc. while computing its income under the head business and
profession. However, it will be subject to the maximum of the limit specified under Sec.40 (b).
On the other hand, if such conditions are not satisfied, no deduction shall be allowed to the firm
on account of such interest, salary, bonus, etc.

Once tax is paid by firm, no tax will be payable by the partners on share of income from the firm.
Amount of Interest and/or remuneration etc. received by a partner will be taxed in his hands as
“Business or Professional Income”, excluding the amount disallowed in the hands of the firm
being in excess of limits laid down in S. 40(b) and from A.Y. 2004-05 amount disallowed in the
event of any failure as mentioned in S. 144 or non compliance of S. 184.

BIBLIOGRAPHY

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BOOKS:

 Sharma, Ram Dutt, Understanding Taxes in India, Commercial Law Publishers (India)
Pvt. Ltd., 3rd Edition, 2020
 Dr. Singhania, Monica, Direct Taxes- Law & Practice, Taxmann Publications Pvt. Ltd.,
2017
 Dr. Ahuja, Girish and Dr. Gupta, Ravi, Simplified Approach to Income Tax, Flair
Publications Pvt. Ltd, 2020

WEBSITES:

 [Link]
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[Link]
 [Link]

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