1. Meaning of Firm, Partner and Partnership—
(i) “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;
(ii) “partner” shall have the meaning assigned to it in the Indian Partnership Act, 1932, and shall include, — any person who, being a minor, has been admitted to the benefits of partnership; and — a partner of a limited liability partnership as defined in the Limited Liability Partnership Act, 2008;
(iii) “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.
2. Liability of Partners of limited liability partnership in liquidation [Section 167C] —
Where any tax due (includes penalty, interest or any other sum payable under the Act, included by the Finance Bill, 2013, w.e.f. 1-06-2013) 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.
3. Assessment as a Firm [Section 184(1)]—
A firm shall be assessed as a firm for the purpose of this Act, if the partnership is evidenced by an instrument i.e. partnership deed duly stamped and the individual shares of the partners are specified in that instrument.
Genuineness of the firm — Division of profits is in accordance with the terms of partnership is a test, if not the sole test of genuineness of the firm. Where they are not so divided, the inference of the Tribunal, that the firm is not genuine and therefore not entitled to registration is an inference which cannot be lightly disregarded as held in — [Narain Automobiles Vs CIT 12005) 278 ITR 516 (All)]
4. First assessment as a firm [Section 184(2)]—
A firm is required to submit a certified copy of the partnership deed along with its return of income for the first previous year relevant to the assessment year commencing on or after 1-4-1993, to get it assessed as a firm The copy of the partnership deed shall be certified in writing
(i) by all the partners (not being minors) or
(ii) where the return l made after the dissolution of the firm by all persons (not being minors) who were partners n the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.
5. Subsequent assessment as a firm [Sections 184(3) & 184(4)]—
a) If no change in Constitution and profit sharing ratio — Where a firm is assessed as firm for any assessment year previously, it shall be assessed in the same capacity for every subsequent year if there is no change in the Constitution of the firm and the shares of the partners as shown in partnership deed, on the basis of which the assessment as a firm was first sought.
b) If any change in Constitution or profit sharing ratio — Where a firm is assessed as a firm for any assessment year, and if there is any change in the Constitution of the firm or the shares of the partners, during the previous year, the firm shall furnish a certified copy of the revised partnership deed alongwith the return of income shall be accompanied by any document or copy of any account or form or report of audit required to be attached with return of income under any provisions of the Act for the assessment year relevant to such previous year.
6. Failure of conditions mentioned in Section 144 [Section 184(5)]—
Where a firm for any assessment year has fulfilled all the conditions given in section 184 but there is on the part of the firm.
- Any failure mentioned in section 144 i.e. fails to make a return u/s 139(1) or(4) or (5); fails to comply with all the terms of a notice issued u/s 142(1) or (2A) or u/s 143 (2).
- Limit of Interest or Remuneration — The firm shall be assessed in the capacity of firm but no deduction by way of any payment of interest, salary, bonus, commission or remuneration made to partners of such firm shall be allowed in computing the income chargeable under the head “Profit and gains of business or profession” and such interest, salary, bonus, commission or remuneration shall not be chargeable to tax under section 28(v) of the firm.
7. Assessment when section 184 not complied with [Section 185]—
Where a firm does not comply with any of the provisions of section 184 given below.—
— the partnership is evidenced by an instrument.
— the individual shares of the partners are specified in that instrument.
— the partnership deed is certified in writing by all the partners other than minors.
— the certified copy of the partnership deed is submitted alongwith the return of income.
# Partner’s property used for own business:— Where the property is used for business, it is exempt from tax. Where a partner permits the use of such property by the firm, there is no reason, why the same principle should not apply so as to spare liability on the income from such property, as held in [CIT Vs. Mustafa Khan  276 ITR 601 (All)].
# Expenses or payments not deductible in certain circumstances (Section 40A (2) 1— If remuneration to partners is deductible U/s 37(10, read with Section 40(b), it may be disallowed by the Assessing Officer (for details see chapter Profit & Gains of Business or profession’.
8. Uls 40(b). Amounts deductable subject to limits.
(a) Interest payable — Prescribed interest paid to partners at the maximum rate of 12% S.l.(p.a.) will be allowable as a deduction.
(b) Remuneration to partner— In case of working partners, payment of salary, bonus, commission or remuneration, by whatever name called as given hereunder will be allowed as a deduction subject to the following limits.—
In case of a firm referred to in section 44 AA which is notified for the purposes of that section or any other firm.
Limits of Payment of Remuneration to any partner
On the first of Rs. 3,00,000 of the book profit or in case of loss
Rs. 1,50,000 or 90% of the book profit, whichever is more.
On the balance of the book profit
9. Special Provisions For Computation Of Income Of Certain Types Of Business.
The Income-tax Act lays down an alternative and optional method of computing income from the following businesses which may be carried out under a partnership firm
- Income of Public Financial Institutional, Public Companies, etc. [section 43D].
- Insurance Business [section 44].
- Trade, professional or similar association [section 44A].
- business of civil contract or ship (section 44AD].
- business of plying, hiring or leasing goods carriages [section 44AE].
- business of retail trade in any goods or merchandise (section 44AF].
- business of exploration, etc. of mineral oil [section 448B].
- business of civil construction, etc. of foreign companies (section 44BBB].
- Income by way of royalties [section 44DA].
10. Rates of Income-tax of Partnership Firms
(i) From A.Y. 2006-2007 onwards on the whole of the total income. 30%
(ii) Education cess @2% of income-tax and surcharge thereon shall also be levied from A.Y.2005-06.
(iii) Additional secondary & higher education cess of 1% of tax levied on all assessee from A.Y. 2008- 09.
(iv) From A.Y. 2010-2011, Surcharge of 10% on Partnership Firms was eliminated by the Finance (No. 2) Act, 2009.
(v) For A.Y 2014-2015, Surcharge of 10% of IT., if total income exceeds 1 crore.
(vi) From A.Y. 2012-2013, a limited liability partnership is subject to alternate minimum tax @18.5% (plus ed:cess+ SHE-cess) of total income.