TAXATION OF FIRMS
1 Rate of tax
. Flat rate of 30% on the total income after deduction of interest and
remuneration to partners at the specified rates. (To be increased
by surcharge @ 10% w.e.f A. Y. 2006-07 and further by education
cess @ 2% on Income Tax inclusive of surcharge.)
2 Interest to (Simple interest) Not exceeding 12% p.a. from 1-6-2002 (18%
. Partners p.a. up to 31-5-2002)
3 Remuneration 1. Payment to a non-working partner will not be allowed as a
. to Partners deduction.
2. A ‘working partner’ is an individual who is actively engaged in
conducting the affairs of the business or profession of the firm.
3.
Quantum of allowance is to be determined with reference to
‘book profit’ which is defined to mean an amount computed in
accordance with the provisions of Section 28 to 44D of the
Income-tax Act, as increased by the amount of remuneration to
partners if deducted in determining book profit.
4. Maximum permissible deduction for payment of remuneration to
working partners.
Professional firms Business firms
Book % or Book % or amount
Profit/Loss amount of Profit/Loss of deduction
deduction
i. Loss Rs. 50,000 Loss Rs. 50,000
ii. Profit Profit
a) up to Rs. Rs. 50,000 a) up to Rs. Rs. 50,000
50,000 50,000
b) up to Rs. 90% b) up to Rs. 90%
1,00,000* 75,000*
c) next Rs. 60% c) next Rs. 60%
1,00,000 75,000
d) Balance 40% d) Balance 40%
profit profit
* (higher of Rs. 50,000 or prescribed percentage)
4 Conditions for 1.
. allowance of Remuneration should be to a working partner.
remuneration
and interest to 2.
partners Payment of remuneration and interest should be authorised by
and should be in accordance with the terms of the partnership
deed and should relate to any period falling after the date of
such partnership deed.
3.
No deduction u/s. 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 — Circular No. 739
dt. 25.3.1996.
5 Conditions for 1.
. assessment as The partnership should be evidenced by an instrument in
a firm writing specifying individual shares of the partners.
2.
A certified copy of the instrument signed by all the partners
(not being minors) shall accompany the return of the firm for
the first assessment as a 'firm'.
3.
In case of any change in the constitution of the firm or shares
of the partners in any previous year, the firm shall furnish a
certified copy of the revised instrument of partnership signed
by all the partners (not minors) along with the return of income
for that A.Y.
4.
If any default is made in compliance with the above provisions,
the firm will be assessed as a firm without deducting interest
and salary to partners from A.Y. 2004-05 onwards and as an
AOP up to A.Y. 2003-04.
5.
If any failure is made as mentioned in S. 144 (ex parte
assessment) the firm shall be assessed as a Firm from A. Y.
2004-05 without deducting interest and salary to partners and
as an AOP up to A.Y. 2003-04.
6 Partners' 1.
. assessments Once tax is paid by firm, no tax will be payable by the partners
on share of income from the firm.
2.
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 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.
7 Losses of the
. firm Unabsorbed loss including depreciation in respect of A.Y. 1993-
94 onwards of the firm will not be apportioned amongst the
partners and will be carried forward by the firm only.
8 Allowability of Remuneration and interest will be allowed from the
. remuneration presumptive income computed at prescribed rate u/ss. 44AD,
and interest 44AE & 44AF.
vis-a-vis
presumptive
taxation
9 Due dates for (a
. filing of returns ) 31st October in case of a working partner of a firm (whether or
of partners not he is entitled to remuneration) and due date for the firm is
31st October.
(b
) 31st July for other partners.
