Overview of the Taxation of Partnership Firm and Limited Liability Partnership Firm

Scheme of Taxation of firms:

The salient features of the scheme are as under:

  • A firm is taxed as a separate entity. There is no deduction between registered and unregistered firms.
  • The share of the partners in the income of the firm is not to be included in computing in his total income.
  • Any salary bonus, commission or remuneration by whatever name called, which is due to or received by partner is allowed as a deduction subject to certain restrictions.

Book Profit

Amount deductible in respect of remuneration to partners under section 40(b) with effect from the assessment year 2010-11

  • If the book profit is negative

Rs. 1,50,000

  • In case book profit is positive-

    On first Rs. 3 Lakhs of book profit

    On the balance of the book profit

 

Rs. 1,50,000 or 90% of book profit, whichever is more

60% of book profit

Partner’s share is not to be included in computing his total income.    

In the case of firm, its right to claim deduction in respect of expenditure, a special deduction in respect of remuneration and interest but it also need to satisfied sections 184 and 40(b).

  1. These are otherwise deductible under sections 36 and 37;
  2. Sec.184 and 40(b).

    These are four conditions which a firm has to fulfil-

    1. A firm must be evidenced in the form of instrument [Section 184(1)(i)] instrument means a legal document it does not mean any other formal document, letter would constitute” instrument” for the purpose of sec. 184(1) (i).
    2. The individual shares of partners in total profit must specify in the instrument of partnership.
    3. The copy of instrument shall be certified by all partners who are partners in the firm or before the dissolution.
    4. If there is any change in the constitution of firm/profit sharing ratio, a certified copy of the revised instrument of partnership along with return of income of the relevant year should be submitted [section 40(b)].

If section 40(b) and 184 is satisfied then partner’s remuneration is allowed for deduction, section 40(b) conditions are given bellow:-

  1. A partner who is not working in firm is not allowable to obtain any kind of deduction like salary, bonus, commission or remuneration.
  2. Any payment of salary, Bonus, commission, or remuneration must be authorised in partnership deed or accordance with the deed.
  3. If remuneration is made from a date prior to the date of deed, it would not be allowed as deduction.
  4. During the previous year any payment or remuneration to all the partners should not exceeds the limits are as follows –

Interest payable to partners:

  • After The fulfilment of conditions of section 184 and 40(b) is allowed to obtain deduction. The specific conditions in section 40(b), the payment of interest should be authorised and pertain to the period after the partnership deed and should not exceeds 12%
  • Interest paid to partners is disallowed under section 40A (2).
  • A firm pays Interest on drawings [sec-40(b)].

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