Point to be consider while assessing tax of partnership firm
1) Some expenses in the hands are firm are taxable in the assessment of their partner. Such expenses are interest on capital of the partners, remuneration etc paid to partners etc. Hence it is important to note and cross verify such expenses before filing return of income of partners.
2) Cross check the expenses claimed by firm with its partnership deed. It is important to note that under income tax act remuneration to non – working partner and remuneration before the date of partnership deed are not allowed under income tax act.
3) In case of allowance of interest on capital in firm’s assessment also maximum rate of interest is 12% pa. One should refer to partnership deed before filing return to verify if interest rate is lesser in deed that that lesser rate will be taken in assessment.
4) Further, methodology of calculating interest should clearly mention in deed and period after the date of partnership deed shall be taken.
5) Method of calculating remuneration to partners should clearly mention in the partnership deed.
6) While calculating book profit for ascertaining maximum amount of remuneration payable of partners one should not consider the income chargeable under the head capital gain, other sources and house property etc.
7) Compliance of section 184 of income tax is of absolute necessary. 8) Cross check whether remuneration, interest, salary etc is deducted before claiming amount deductible under section 80IA.
8) While claiming carry forward and set off of losses it is important to consider the provision of section 78 of income tax act as to change in constitution of the firm. Firm can not claim carry forward and set off losses if there is complete change in constitution of the firm.
Important point of partnership deed of the firm:
The existence of partnership firm is evident by partnership deed (in writing) only. If there is no partnership deed there could not be assessment as firm but same can be assessed as AOP and / or BOI. The prominent clauses of deed is given below:
- Name of the firm
- Place of business
- Nature of business
- Date of commencement of business
- Duration of partnership firm
- Capital subscribed by firm
- Profit sharing ratio
- Remuneration payable to partners
- Interest payable to partners, arbitrator
- Operation of bank account
- Method of maintaining books of account
- Other provision
Clarification as to remuneration clause in partnership deed:
Section 40(b) uses the term authorize and not quantify. Thus, only requirement as to deductibility of remuneration to partners is same is authorize from partnership deed with exact method of computation of remuneration.
Neither the amount has been qualified not even the limit of total remuneration has been specified – Payment of remuneration can not be allowed
Partnership deed provided that remuneration payable to partners as per the method of quantification given by section 40(b). – payment of remuneration is allowed
Quantum of remuneration or the manner of its computation should be stated in the partnership deed and should not be left undetermined, undecided or to be determined or decided on a future date.