Conditions for Claiming Deduction in respect of Remuneration and Interest to Partner in case of Firm (Section 184)

There are five basic conditions which a firm has to satisfy—

1. A Firm must be Evidenced by an Instrument [Section 184(1)(i)]–

The firm should be evidenced by an “instrument”. The word “instrument” means a document of legal nature by which any right or liability is or purports to be created, transferred, limited, extended, extinguished or recorded.

“Instrument” does not mean only a regular partnership deed but it may constitute any other formal document. If the terms of a partnership are contained in a number of documents or in the correspondence between the parties, the documents or letters would constitute “instrument” for the purpose of section 184(1)(i).

Assessment of Firm ...

2. Individual Share of Partners must be Specified in Instrument –

The instrument of partnership (i.e., partnership deed) must specify the individual shares of partners in profits of the partnership. Evidence regarding the shares of the partners should be afforded within the four corners of the instrument and should not be made to depend on a reference and scrutiny of a number of documents. In other words, instrument of partnership must specify the individual shares of partners in the profits of the partnership.

3. Certified copy of the Instrument should be Submitted –

This condition requires that a certified copy of the instrument of partnership should accompany the first return of income‡ of a firm. The instrument for the purpose would include all documents and deeds if the arrangement is reflected in more than one deed or documents. Accordingly, certified copies of all documents/deeds will have to be submitted. For the purpose of section 184, the copy of the instrument (maybe xeroxed copy), shall be certified in writing by all partners (other than minors). If, however, the return is made after the dissolution of the firm, it should be certified by all partners (other than minors) who were partners in the firm immediately before the dissolution and by the legal representative of any such partner who is deceased.

4. Revised Instrument should be Submitted whenever there is change in the Constitution of Firm/ Profit-Sharing Ratio –

If there is any change in the constitution of the firm or the profit-sharing ratio during any previous year, a certified copy of the revised instrument of partnership should be filed‡ along with return of income of the relevant assessment year. Even if, there is a change in remuneration/payment of interest to partners but there is no change in profit-sharing ratio, a copy of the revised instrument of partnership should be submitted‡ along with return to comply with the provisions of section 40(b).

5. There should not be any Failure as is mentioned in Section 144 –

There should not be any failure as is mentioned in section 144. What is important is type of failure in section 144 and not an assessment under section 144. Filing of a return against notice (issued under section 148) itself is not the same as filing a return under section 139 and, so much so, a failures referred to in section 144(1) which attract disallowance of deductions under section 184(5) are absolute failures which cannot be remedied by filing returns based on notice under section 148.