Circular No. 12/2019
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi, the 19th of June, 2019
Subject: 'Assessment of Firms'- some of the important issues to be kept under consideration by the Assessing Officers while framing assessment-reg.-
C&AG had carried out a Performance Audit regarding Assessment of Firms under the Income-tax Act, 1961 Act') and in its Report No. 7 of 2014, has made certain suggestions so that in future, assessments in these cases are handled in a more effective manner by the Assessing Officers (AOs). Various recommendations made by the C&AG in its Report have been duly considered by the Board. In order to improve the quality of assessments being framed in these cases and also to reduce the scope for committing errors, the Board desires that Assessing Officers should duly take into consideration the following issues while making assessments in case of firms:
(i) Expenses in the hands of the firm such as interest on capital paid to the partners, remuneration payable to the working partners etc. are taxable in the hands of respective partners. Therefore, while framing assessment in case of firms, a cross-verification of such amounts with income-tax return of firm's partner will be desirable and any discrepancy between the tax return of a firm and its partners should be dealt with as per provisions of the Act. Further, ADs should invariably call for a copy of the partnership deed during the course of assessment proceedings and examine it carefully so that instances of payment of remuneration to any non-working partner or remuneration payment for period prior to the date of partnership deed but claimed as deductible are identified and cognizance of these are duly taken in assessment.
(ii) Section 40(b)(iv) stipulates following three conditions for allowability of interest to the partners of a firm:
a) the payment should be in accordance with the terms of the partnership deed; and
b) it should relate to any period falling after the date of such partnership deed; and
c) it should not exceed the amount calculated at the rate of twelve percent simple interest per annum.
Instances have been nnt-ced where the interest in the partnership deed was stated to be below twelve percent, yet, the same was allowed at the rate of twelve percent by the AO. Such mistakes should be avoided. Further, in case the rate prescribed in the partnership deed is in excess of twelve percent, the excess should be disallowed in assessment.
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