Taxation of Partnership Firm
This query is : Resolved
03 November 2008
Hai, Belated Happy DiwaliGreeatings.
Can the A.O., tax a Partnership firm as A.O.P.,? If yes in what circumstances? If any case law is there let me know.
Thank U
Can the A.O., tax a Partnership firm as A.O.P.,? If yes in what circumstances? If any case law is there let me know.
Thank U
03 November 2008
Answer to a que of CA (Final) paper on direct taxes:
Que: Amarjit & Co, a partnership firm constituted on April 14, 1999, approaches you to advise based on the following: Taxable income of all the partners before receipt of any income from thefirm exceeds Rs. 2 lakhs; taxable income of the firm for the ye ar ended March 31, 2000, is Rs. 8,19,000 before appropriation of working partners' salary and interest on capital. Advise the firm on `tax saving' through choice of status, if any.
Ans: In this case, all the partners of the firm are having income exceeding Rs. 2 lakhs before inclusion of working partner salary/interest on capital from the firm. If the firm opts for FAS status, the tax liability would be at 38.5 per cent on the inco me of Rs. 8.19 lakhs less any appropriation by the partners. Further, the partners would be paying tax at 33 per cent on the income received from thefirm.
Instead of the regular procedure, the assessee firm can seek AOP status, in which case, the income would be chargeable to tax at 33 per cent (being the maximum marginal rate) and share income of the members from thefirm will be exempt from tax. By this method, the firm can save a tax of 5.5 per cent, which means Rs. 45,045.
However, if the partners of the firm consist of any corporate entity, then the suggested AOP measure will not be possible. This is because, if any member of the AOP is taxed at a rate higher than the maximum marginal rate, then the AOP will also be taxab le at that rate. For domestic companies, the tax rate is 35 per cent and, for foreign companies, 48 or 50 per cent in addition toa surcharge k 10 per cent. Hence, if the firm has a domestic/foreign company as a partner, then the AOP status may not be useful.
**DM
Que: Amarjit & Co, a partnership firm constituted on April 14, 1999, approaches you to advise based on the following: Taxable income of all the partners before receipt of any income from thefirm exceeds Rs. 2 lakhs; taxable income of the firm for the ye ar ended March 31, 2000, is Rs. 8,19,000 before appropriation of working partners' salary and interest on capital. Advise the firm on `tax saving' through choice of status, if any.
Ans: In this case, all the partners of the firm are having income exceeding Rs. 2 lakhs before inclusion of working partner salary/interest on capital from the firm. If the firm opts for FAS status, the tax liability would be at 38.5 per cent on the inco me of Rs. 8.19 lakhs less any appropriation by the partners. Further, the partners would be paying tax at 33 per cent on the income received from thefirm.
Instead of the regular procedure, the assessee firm can seek AOP status, in which case, the income would be chargeable to tax at 33 per cent (being the maximum marginal rate) and share income of the members from thefirm will be exempt from tax. By this method, the firm can save a tax of 5.5 per cent, which means Rs. 45,045.
However, if the partners of the firm consist of any corporate entity, then the suggested AOP measure will not be possible. This is because, if any member of the AOP is taxed at a rate higher than the maximum marginal rate, then the AOP will also be taxab le at that rate. For domestic companies, the tax rate is 35 per cent and, for foreign companies, 48 or 50 per cent in addition toa surcharge k 10 per cent. Hence, if the firm has a domestic/foreign company as a partner, then the AOP status may not be useful.
**DM
03 November 2008
The AO can assess a partnership firm as AOP under the following circumstances:-
1) If the firm does not comply with the conditions mentioned u/s 184(1) for the assessment year.
2)If the firm commits any default referred in section 144 for the said assessment year resulting in best judgement assessment for the year.
Please refer sections 184(5) and 185 for detailed study.
1) If the firm does not comply with the conditions mentioned u/s 184(1) for the assessment year.
2)If the firm commits any default referred in section 144 for the said assessment year resulting in best judgement assessment for the year.
Please refer sections 184(5) and 185 for detailed study.
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