Assessment of Firm

Firm means association of two or more person with the object to earn profit. From the taxation point of view, partners and firm both have seperate entity. For the purpose of income-tax the following conditions are required to be assessed as a firm under section 184 of Income Tax Act, 1961.

1.      Conditions :

(i)   A partnership firm is formed by an instrument (means partnership Deed);

(ii)   The individual share of profit must be specified in the instrument;

(iii)  A certified copy of the instrument of partnership must accompany the first income-tax return of the firm;

(iv)  If there is any change in the constitution of the firm or in the profit sharing ratio during the previous year, a certified copy of revised instrument should be filed alongwith the Income-tax return of the relevant assessment year.

(v)  No default should be made in compliance of section 144 of Income-tax Act.

         If any of the condition is not satisfied the firm shall be assessed as an Association of person (AOP).

2.      Computation of Total Income of Firm :

         Gross Total Income of the firm following head of income shall be included :

�    Income from House Property.

�    Income from Business or Profession.

�    Capital Gain

�                Income from other sources.

As per provisions under Income Tax Act, 1961 following deductions are given to firm under chapter VIA. 

 

3       Computation of Business/profession income of the firm :

         Following points should be kept in mind while calculating income from Business Profession :

(i)   Remuneration to partner : While computing the taxable income from business or profession, the remuneration paid by the firm, to its partner shall be allowed in accordance with the provision of section 40(b) of the Income-tax Act.

These are as under :

Remuneration is allowed to working partners and not to non-working partners.

Remuneration shall be authorised by partnership deed.

Remundration should not for the period prior to the date of the partnership deed.

Remuneration to working partners shall not exceed the following limit which is based on Book

Profit. Here book profit means profit before deducting remuneration paid to working partner

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