1. Partnership Firm – Definition [Sec. 2(23)]

The terms “Firm” and “Partnership” carry meanings respectively assigned to them in the Indian Partnership Act, 1932. By the Finance (No. 2) Act, 2009, LLP has also been included in the definition of the firm.

2. Rates of Tax

1. Total income of a Firm excluding Long term capital gain and Short term capital gain referred to in section 111A is chargeable as follows:—

   A.Y. 2010-11
   Income Tax	30%
   Education Cess	2%
   Secondary and Higher Ed. Cess	1%

 
Long term capital gain is chargeable at rates specified in section 112(1)(d)(ii) and short term gain of securities subjected to Securities Transaction Tax is chargeable at 15% (as increased by primary education cess & secondary and higher education cess) as per section 111A.

3. Due dates for filing of Return of Income [Sec. 139(1)]

If the accounts of the firm are subject to audit under the Income-tax Act, the due date is 30th September, otherwise it is 31st July. With effect from A.Y. 2006-07, it is mandatory for a firm to file return of income irrespective of whether there is taxable income or not. From A.Y. 2007-08, return of income for firms which are subject to Tax Audit u/s. 44AB need to compulsorily filed in electronic form with or without digitally signed.

4. Conditions for Assessment as a firm

1. The partnership should be evidenced by an instrument in writing and individual shares of partners should be specified therein. (Sec. 184)

2. A certified copy of the instrument of partnership should be filed with the return of income of the year in which assessment is first sought. The copy is to be certified by all partners in writing. (Sec. 184)

3. In the year in which there is a change in constitution of firm or shares of partners, a certified copy of the revised instrument of partnership is to be filed with the return of income for the relevant previous year. (Sec. 184)

4. In the event there is failure on part of firm in complying with the conditions of section 184 or has committed failure as stated in section 144, no deduction shall be allowed in respect of interest, salary, bonus, commission or remuneration, by whatever name called. (Secs. 184, 185). However in view of new income tax returns which are filed annexureless, compliance of the above provisions can be made when first notice is received by the firm.

5. If, at the time of making an assessment of the firm, it is found that a change has occurred in the constitution of the firm, the assessment shall be made on such reconstituted firm.

   For this purpose,

   1. If any of partners cease to be partners or any new partner is admitted and one or more of the persons who were partners of the firm before change continue to be partner after the change, or

   2. Where all partners continue but there is change in shares of some or all of them, such change would constitute change in constitution of the firm
      (Sec. 187)

6. Where a firm is succeeded by another firm (not being a change in constitution u/s. 187 as referred in (e) above) separate assessments shall be made on the predecessor and successor firms. (Sec. 188)

7. If business or profession carried on by the firm is discontinued or where a firm is dissolved, all the proceedings under the Act shall be made as if there is no discontinuance or dissolution.
   
   If such discontinuance or dissolution takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against persons who were partners at the time of dissolution or discontinuation or legal representative of such person who is deceased. (Sec. 189)

5. Joint and Several liability of Partners for tax payable by the firm [Sec. 188A]

Every person who was a partner during the relevant previous year or legal representative of such person who is deceased, is jointly and severally liable for tax, penalty or any other sum payable by the firm in respect of the relevant previous year.

6. Interest to Partners [Sec. 40(b)]

Maximum interest allowable on capital/current accounts of partners is 12% per annum. The payment of interest should be authorised by and in accordance with the instrument of partnership.

7. Remuneration to Partners [section 40(b)]

1. Any payment of salary, bonus, commission or remuneration, by whatever name called can be paid only to a “working partner”; i.e., a partner who is actually engaged in conducting the affairs of the business or profession of the firm.

Such remuneration should be authorised by and in accordance with terms of the instrument of partnership.

2. Maximum permissible deduction in respect of remuneration payable collectively to all working partners has been made uniform with effect from a. y. 2010-11 is as follows:—

   Book Profit	Maximum allowable deduction
   Loss or book profit up to Rs. 3,00,000	Rs.1, 50,000 or 90% of book profit whichever is higher
   On balance book profit	60% of book profit

The remuneration is to be calculated on book profit of the firm; i.e. net profit as per profit and loss account (in the manner laid down in Chapter IV-D) of the firm before allowing deduction of remuneration to partners.

8. Allowability of remuneration and interest vis-à-vis presumptive income

Remuneration and interest will be allowed from the presumptive income computed at prescribed rates u/ss. 44AD, 44AE & 44AF.

9. Losses of the Firm [section 78]

Unabsorbed losses of the firm shall be carried forward and set off as per provisions of sections 70, 71, 71B, 72, 73, 74 and 74A in the hands of the firm.

In case of change in constitution of the firm, the loss proportionate to share of the retired or deceased partner shall not be allowed to be carried forward.

10. OTHER ISSUES OF TAXATION OF LLPs

MAT and DDT not applicable to LLP:

• Though LLP is fairly similar to a private company, it is not a ‘Company’ as defined under section 2 (17) of the Income Tax Act. Accordingly LLP is not liable to pay Minimum Alternate Tax (MAT) under section 115 JB.

• Similarly it would not be liable to dual taxation on distribution of its profits as it is not liable for Dividend Distribution Tax (DDT) under section 115 O of the Income Tax Act.

• Signing of Income Tax Return: Under section 140 return of income of an LLP is to be signed by a designated partner. However, if for any unavoidable reason designated partner cannot sign or where there is no designated partner, any partner may sign the return. The designated partners have been defined in section 7 of the LLP Act, 2008 being an individual who shall be resident in India. The designated partners are necessarily individuals and in case of body corporate individuals being nominees of such bodies corporate.
   

• Joint and Several liability of Partners: Under new Section 167C, each partner of an LLP is jointly and severally liable for tax due from an LLP if it cannot be recovered from the LLP unless he proves that the non recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP. The section is similar to Section 179 applicable to directors of a private company. It is materially different from Section 188A already existing and applicable to partners of a partnership firm.
   

• Carry forward and Setoff of losses: Provisions of section 78 relating to carry forward and set off of losses in case of change in constitution of firm or on succession are applicable to LLP also.
   

• Benefit of presumptive taxation not available to LLP: It may be noted that the newly amended provisions of section 44AD relating to presumptive taxation specifically exclude partnership firms established under the limited liability Partnership, 2008. Benefit of newly inserted provisions of Section 44AD will not be availed in case of LLP.

Capital gain issues on conversion of an existing Firm/Company into an LLP:

• Conversion of a Partnership Firm into an LLP:

In view of amendment made to Section 2 (23) by Finance Bill, 2009, an LLP is treated as equivalent (except for recovery purposes) to a Partnership Firm under the Indian Partnership Act 1932 General Partnership) for Income-tax purpose. Accordingly, as specified in the Explanatory Memorandum, conversion of a General Partnership Firm to an LLP will have no tax implications if

1. the rights and obligations of partners remain the same after conversion

and

2. there is no transfer of any Asset or Liability after conversion.

If the above conditions are violated, the provision of Capital gains specified in section 45 shall apply.

• Conversion of a Company into an LLP: There are no specific provisions for exemption from taxation on conversion of a Company into an LLP. Accordingly, Capital gains would arise on such conversion.