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Salient Features of Assessment of a Firm including LLP (Limited Liability Partnership)

1. Firm to be Assessed as Firm

Essential conditions prescribed under section 184 of the Income-tax Act, 1961:

  1. Partnership should be evidenced by an instrument i.e. there should be a written document giving the terms of partnership.

  2. The individual share of the partners should be specified in that instrument.

  3. A certified copy signed by all partners of the said instrument of partnership should accompany the return of income in respect of the assessment year for which the assessment as a firm is first sought.
    Where any change takes place in the partnership in any previous year, the firm should furnish a certified copy of the revised instrument of partnership alongwith the return of income for the assessment year relevant to such previous year.

  4. There should not be, on the part of the firm, any such failure as is mentioned in section 144.

2. The firm, if it so decides, can give remuneration to its partners (working partners only) and interest on loan and capital of all the partners.

However, no such remuneration/interest can be given unless it is specifically provided in the partnership deed. The interest and remuneration so provided shall be allowed as deduction while computing the total income of the firm subject to the maximum of the following limits.

  1. interest on loan and capital: 12% p.a.

  2. Remuneration to working partner: The payment of remuneration to working partner, should relate to a period after the date of the partnership deed and authorised by the partnership deed and it shall be allowed as a deduction only to the extent of the following limits:

(a) On the first Rs. 3,00,000 of the book-profit or in case of a loss Rs. 1,50,000 or at the rate of 90% of the book-profit, whichever is more;
(b) On the balance of the book-profit At the rate of 60%.

Assessment of 'Firm' under Income Tax Act.-CONTENT
It is clarified that for the assessment years subsequent to the assessment year 1996-97, no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.

3. Assessment when Section 184 not complied with [Section 185]

If the firm does not comply with the provisions of section 184 (See para 1 above) it shall not be allowed any deduction by way of interest, salary, bonus, commission or remuneration and such amount of interest, bonus, salary, commission or remuneration shall not be charged to tax in the hands of partners.

4. Taxation of Limited Liability Partnership (LLP)

The Limited Liability Partnership Act, 2008 has come into effect in 2009. Taxation of Limited Liability Partnership (LLP) shall be on the same lines as the taxation scheme currently prevalent for general partnerships, i.e. taxation in the hands of the entity and exemption from tax in the hands of its partners

Section 2(23) of the Income-tax Act, 1961 provides as under:

  1. "firm" shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008;

  2. "partner" shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall include,—

    1. (a) any person who, being a minor, has been admitted to the benefits of partnership; and

    2. (b) a partner of a limited liability partnership as defined in the Limited Liability Partnership Act, 2008;

  3. "partnership" shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008.

Thus, a "limited liability partnership" and a general partnership will be accorded the same tax treatment.

Signing of Income-Tax Return of LLP [Section 140]:

The LLP Act provides for nomination of "designated partners" who have been given greater responsibility. The designated partner shall sign the income tax return of an LLP, or, where, for any unavoidable reason such designated partner is not able to sign and verify the return or where there is no designated partner as such, any partner shall sign the return.

Recovery of Tax of LLP [Section 167C]:

Like section 179 which is applicable for a private limited company, section 167C provides that notwithstanding anything contained in the Limited Liability Partnership Act, 2008, where any tax due from a limited liability partnership in respect of any income of any previous year or from any other person in respect of any income of any previous year during which such other person was a limited liability partnership cannot be recovered, in such case, every person who was a partner of the limited liability partnership at any time during the relevant previous year, shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the limited liability partnership.

Remuneration to partners shall be the same as for partners of other firms.

5. Alternate Minimum Tax (AMT) on all persons other than companies [Section 115JC to 115JF Chapter XII-BA]

AMT, which was hitherto applicable to LLP only, has been made applicable to all assessees other than a company.

Where the regular income-tax payable for a previous year by a person (other than a company) is less than the alternate minimum tax payable for such previous year, the adjusted total income shall be deemed to be the total income of such person and he shall be liable to pay income-tax on such total income at the rate of 18.5%. [Section 115JC(1)]

Report from an accountant [Section 115JC(3)]:

Every person to whom this section applies shall obtain a report, in such form as may be prescribed, from an accountant, certifying that the adjusted total income and the alternate minimum tax have been computed in accordance with the provisions of this Chapter and furnish such report on or before the due date of furnishing of return of income under section 139(1).

To whom AMT shall be applicable [Section 115JEE(1)]

The provisions of AMT shall apply to a person who has claimed any deduction under:

(a) under sections 80-IA to 80RRB other than section 80P; or

(b) section 10AA;

(c) section 35AD.

Tax credit for AMT: Section 115JD provides the credit for tax (tax credit) paid by a person on account of AMT under Chapter XII-BA shall be allowed to the extent of the excess of the AMT paid over the regular income-tax. This tax credit shall be allowed to be carried forward up to the fifteenth assessment year immediately succeeding the assessment year for which such credit becomes allowable. It shall be allowed to be set off for an assessment year in which the regular income-tax exceeds the AMT to the extent of the excess of the regular income-tax over the AMT.

No interest shall be payable on tax credit allowed under section 115JD.

 

More Topics...on Assessment of 'Firm'

What is Firm & 'Partnership Firm'
Conditions for Claiming Deduction in respect of Remuneration and Interest to Partner in case of Firm (Section 184)
Conditions to obtain Deduction of Interest Paid to Partners in case of Firm [Section 40(b)]
Conditions to obtain Deduction of Remuneration Paid to Partners in case of Firm [Section 40(b)]
Limited Liability Partnership (LLP)
How to find out Income and Tax Liability of a Firm
Alternate Minimum Tax (AMT) on all Persons other than Companies [Section 115JC to 115JF]
 




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