CHAPTER XVI

Special provisions applicable to firms

 

96[R1] [A.—Assessment of firms]

 

Assessment of registered firms.

182.      97[R2] [Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]

 

Assessment of unregistered firms.

183.      98[R3] [Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]

 

99[R4] [Assessment as a firm.

184.     (1)        A firm shall be assessed as a firm for the purposes of this Act, if—

               

(i)         the partnership is evidenced by an instrument1[R5]  ; and

           

(ii)        the individual shares of the partners are specified2[R6]  in that instrument1[R7] .

 

(2)        A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year com­mencing on or after the 1st day of April, 1993 in respect of which assessment as a firm is first sought.

 

Explanation.—For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.

 

(3)        Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partner­ship on the basis of which the assessment as a firm was first sought.

 

(4)        Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.

 

(5)        Notwithstanding anything contained in the foregoing provi­sions of this section, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall not be assessed as such for the said assessment year and, thereupon, the firm shall be assessed in the same manner as an association of persons, and all the provisions of this Act shall apply accordingly.

 

The following sub-section (5) shall be substituted for the exist­ing sub-section (5) of section 184 by the Finance Act, 2003, w.e.f. 1-4-2004 :

 

(6)        Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remunera­tion, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession” and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.

 

Assessment when section 184 not complied with.

185.     Where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be assessed for that assessment year in the same manner as an association of persons, and all the provisions of this Act shall apply accordingly.]

 

The following section 185 shall be substituted for the existing section 185 by the Finance Act, 2003, w.e.f. 1-4-2004 :

 

Assessment when section 184 not complied with.

185.     Notwith­standing anything contained in any other provision of this Act, where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, com­mission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head “Profits and gains of busi­ness or profession” and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.

 

C.—Changes in constitution, succession and dissolution

 

Change in constitution of a firm.

187.     (1)        Where at the time of making an assessment under section 143 or section 144 it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment :

3[R8] [***]

 

(2)        For the purposes of this section, there is a change in the constitution of the firm—

               

(a)        if one or more of the partners cease to be partners4[R9]  or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change ; or4[R10] 

           

(b)        where all the partners continue with a change in their respective shares or in the shares of some of them :

 

5[R11] [Provided that nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners.]

 

Succession of one firm by another firm.

188.     Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made on the predeces­sor firm and the successor firm in accordance with the provisions of section 170.

 

6[R12] [Joint and several liability of partners for tax payable by firm.

188A. Every person who was, during the previous year, a partner of a firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the assessment year to which such previous year is relevant, and all the provisions of this Act, so far as may be, shall apply to the assessment of such tax or imposition or levy of such penalty or other sum.]

 

Firm dissolved or business discontinued.

189.     (1)        Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the 7[R13] [As­sessing] Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provi­sions relating to the levy of a penalty or any other sum charge­able under any provision of this Act, shall apply, so far as may be, to such assessment.

 

(2)        Without prejudice to the generality of the foregoing sub-section, if the 8[R14] [Assessing] Officer or the 9[R15] [***] 10[R16] [Commissioner (Appeals)] in the course of any proceeding under this Act in respect of any such firm as is referred to in that sub-section is satisfied that the firm was guilty of any of the acts specified in Chapter XXI, he may impose or direct the imposition of a penalty in accordance with the provisions of that Chapter.

 

(3)        Every person who was at the time of such discontinuance or dissolution a partner of the firm, and the legal representative of any such person who is deceased, shall be jointly and several­ly liable for the amount of tax, penalty or other sum payable, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum.

 

Explanation.—11[R17] [Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]

 

(4)        Where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against the person referred to in sub-section (3) from the stage at which the proceedings stood at the time of such discontinuance or dissolution, and all the provisions of this Act shall, so far as may be, apply according­ly.

 

(5)        Nothing in this section shall affect the provisions of sub-section (6) of section 159.

 

12[R18] [Provisions applicable to past assessments of firms.

189A.  In relation to the assessment of any firm and its partners for the assessment year commencing on the 1st day of April, 1992, or any earlier assessment year, the provisions of this Chapter as they stood immediately before the 1st day of April, 1993, shall continue to apply.]

 

 [R1]Reintroduced by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989. Earlier, it was omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from the same date.

 [R2]Prior to omission, section 182, as omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989 and later reintro­duced by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989, read as under :

        “182. Assessment of registered firms.—(1) Notwithstanding anything contained in sections 143 and 144 and subject to the provisions of sub-section (3), in the case of a registered firm, after assessing the total income of the firm,—

    (i)   the income-tax payable by the firm itself shall be determined ; and

   (ii)   the share of each partner in the income of the firm shall be included in his total income and assessed to tax accord­ingly.

        (2) If such share of any partner is a loss it shall be set off against his other income or carried forward and set off in ac­cordance with the provisions of sections 70 to 75.

        (3) When any of the partners of a registered firm is a non-resident, the tax on his share in the income of the firm shall be assessed on the firm at the rate or rates which would be applica­ble if it were assessed on him personally, and the tax so as­sessed shall be paid by the firm.

(4) A registered firm may retain out of the share of each partner in the income of the firm a sum not exceeding thirty per cent thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him ; and where the tax so levied cannot be recovered from the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or could have been so retained.”

 [R3]Prior to omission, section 183, as amended by the Taxation Laws (Amendment) Act, 1970, w.e.f. 1-4-1971 and the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988 and later omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989 and then reintroduced by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989, read as under :

        “183. Assessment of unregistered firms.—In the case of an unreg­istered firm, the Assessing Officer—

(a)   may determine the tax payable by the firm itself on the basis of the total income of the firm ; or

(b)           if, in his opinion, the aggregate amount of the tax payable by the firm if it were assessed as a registered firm and the tax payable by the partners individually if the firm were so assessed would be greater than the aggregate amount of the tax payable by the firm under clause (a) and the tax which would be payable by the partners individually, may proceed to make the assessment under sub-section (1) of section 182 as if the firm were a registered firm; and, where the procedure specified in this clause is applied to any unregistered firm, the provisions of sub-sections (2), (3) and (4) of section 182 shall apply thereto as they apply in relation to a registered firm.”

 [R4]Substituted for sub-heading “B” and sections 184, 185 and 186 by the Finance Act, 1992, w.e.f. 1-4-1993. Prior to substitu­tion, sub-heading “B” and sections 184, 185 and 186 as amended by the Taxation Laws (Amendment) Act, 1970, w.e.f. 1-4-1971, the Taxation Laws (Amendment) Act, 1975, w.e.f. 1-4-1976, the Taxa­tion Laws (Amendment) Act, 1984, w.e.f. 1-10-1984, the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988/1-4-1989, the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989 and the Direct Tax Laws (Second Amendment) Act, 1989, w.e.f. 1-4-1989, read as under :

        “B.—Registration of firms*

        184. Application for registration.—(1) An application for regis­tration of a firm for the purposes of this Act may be made to the Assessing Officer on behalf of any firm if—

    (i)   the partnership is evidenced by an instrument ; and

   (ii)   the individual shares of the partners are specified in that instrument.

        (2) Such application may, subject to the provisions of this section, be made either during the existence of the firm or after its dissolution.

        (3) The application shall be made to the Assessing Officer having jurisdiction to assess the firm, and shall be signed—

   (a)   by all the partners (not being minors) personally ; or

   (b)   in the case of a dissolved firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.

        Explanation.—In the case of any partner who is absent from India or is a lunatic or an idiot, the application may be signed by any person duly authorised by him in this behalf, or, as the case may be, by a person entitled under law to represent him.

        (4) The application shall be made before the end of the previous year for the assessment year in respect of which registration is sought :

        Provided that the Assessing Officer may entertain an application made after the end of the previous year, if he is satisfied that the firm was prevented by sufficient cause from making the appli­cation before the end of the previous year.

        (5) The application shall be accompanied by the original instru­ment evidencing the partnership, together with a copy thereof :

        Provided that if the Assessing Officer is satisfied that for sufficient reason the original instrument cannot conveniently be pro­duced, he may accept a copy of it certified in writing by all the partners (not being minors), or, where the application is made after the dissolution of the firm, by all the persons referred to in clause (b) of sub-section (3), to be a correct copy, or a certified copy of the instrument; and in such cases the applica­tion shall be accompanied by a duplicate copy of the original instrument.

        (6) The application shall be made in the prescribed form and shall contain the prescribed particulars.

        (7) Where registration is granted or is deemed to have been granted to any firm for any assessment year, it shall have effect for every subsequent assessment year :

        Provided that—

    (i)   there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted ; and

   (ii)   the firm furnishes, before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income for such subsequent assessment year, a declara­tion to that effect, in the prescribed form and verified in the prescribed manner, so, however, that where the Assessing Officer is satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made.

        (8) Where any such change has taken place in the previous year, the firm shall apply for fresh registration for the assessment year concerned in accordance with the provisions of this section.

        185. Procedure on receipt of application.—(1) On receipt of an application for the registration of a firm, the Assessing Officer shall inquire into the genuineness of the firm and its constitu­tion as specified in the instrument of partnership, and—

   (a)   if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year ;

   (b)   if he is not so satisfied, he shall pass an order in writing refusing to register the firm.

        Explanation.—For the purposes of this section and section 186, a firm shall not be regarded as a genuine firm if any partner of the firm was, in relation to the whole or any part of his share in the income or property of the firm, at any time during the previous year, a benamidar—

   (a)   of any other partner to whom the first-mentioned part­ner does not stand in the relationship of a spouse or minor child, or

   (b)   of any person, not being a partner of the firm, and any of the other partners knew or had reason to believe that the first-mentioned partner was such benamidar and such knowledge or belief had not been communicated by such other partner to the Assessing Officer in the prescribed manner.

        (2) Where the Assessing Officer considers that the application for registration is not in order, he shall intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one month from the date of such intimation; and if the defect is not rectified within that peri­od, the Assessing Officer shall, by order in writing, reject the application.

        (3) Where the Assessing Officer considers that the declaration furnished by a firm in pursuance of sub-section (7) of section 184 is not in order, he shall intimate the defect to the firm and give it an opportunity to rectify the defect in the declaration within a period of one month from the date of such intimation; and if the defect is not rectified within that period, the As­sessing Officer shall, by order in writing, declare that the registration granted to the firm shall not have effect for the relevant assessment year.

        (4) Where a firm is registered for any assessment year, the Assessing Officer shall record a certificate on the instrument of partnership or on the certified copy submitted in lieu of the original instrument, as the case may be, to the effect that the firm has been registered under this Act, for that assessment year; and where a declaration under sub-section (7) of section 184 is furnished by the firm, for the relevant subsequent assessment year.

        (5) Notwithstanding anything contained in this section, where, in respect of any assessment year, there is, on the part of a firm, any such failure as is mentioned in section 144, the Assessing Officer may refuse to register the firm for the assessment year.

        (6) Notwithstanding anything contained in sub-sections (1) to (4), where a firm has made an application for registration in relation to an assessment year and has furnished the return for that assessment year, such firm shall be deemed to have been registered under this section on the expiry of the period for serving notice as specified in the proviso to sub-section (2) of section 143 in respect of such return :

        Provided that nothing in this sub-section shall affect the power of the Assessing Officer to intimate the defect to the firm under sub-section (2) and where any such intimation is sent, all the provisions of sub-section (2) shall apply.

        (7) The provisions of this section as they stood immediately before their amendment by the Direct Tax Laws (Second Amendment) Act, 1989 shall apply to and in relation to any assessment for the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year and references in this section to the other provisions of this Act shall be construed as references to those provisions as for the time being in force and applicable to the relevant assessment year.

        186. Cancellation of registration.—(1) If, where a firm has been registered or is deemed to have been registered, or its registra­tion has effect under sub-section (7) of section 184 for an assessment year, the Assessing Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard cancel the registration of the firm for that assessment year :

        Provided that no such cancellation shall be made after the expiry of eight years from the end of the assessment year in respect of which registration has been granted or is deemed to have been granted or has effect :

        Provided further that the Assessing Officer shall not cancel the registration granted under sub-section (1) of section 185 except with the previous approval of the Deputy Commissioner.

        (2) If, where a firm has been registered or is deemed to have been registered or its registration has effect under sub-section (7) of section 184 for any assessment year, there is, on the part of the firm, any such failure in respect of the assessment year as is mentioned in section 144, the Assessing Officer may cancel the registration of the firm for the assessment year, after giving the firm not less than fourteen days’ notice intimating his intention to cancel its registration and after giving it a reasonable opportunity of being heard.

        (3) Where the registration of a firm is cancelled for any assess­ment year, the Assessing Officer shall amend the assessments of the firm and its partners for that assessment year on the footing that the firm is an unregistered firm.

        (4) The provisions of section 154 shall, so far as may be, apply to the amendments of the assessments of the firm and its partners under sub-section (3) of this section, the period of four years specified in sub-section (7) of that section being reckoned from the end of the financial year in which the order cancelling the registration was passed.”

        *For relevant departmental circulars and clarifications, see Letter [F. No. 26/12/67-IT (A-II)], dated 15-11-1967, Circular No. 4-D (XXV-25), dated 31-1-1966, Circular No. 3P(XXV-22), [F.No. 3(16)-63/TPL], dated 29-7-1964, Letter [F. No. 26/3/65-IT(A-I)], dated 26-6-1965, Circular No. 289, dated 29-12-1980, Letter [F. No. 279/70/77-ITJ (Extracts)], dated 4-8-1977, Letter [F. No. 26/3/65-IT(A-I)], dated 20-5-1967, Instruction No. 26, dated 20-3-1969, Letter [F. No. 210/13/74-IT (A-II)(Extracts)], dated 19-3-1976 and Circular No. 224, dated 22-6-1977. For details, see  Income-tax Act.

                                For relevant rules, see rules 22 and 23 and Form Nos. 11 and 11A; rule 24 and Form No. 12; rule 24A and Form No. 12A and rule 25.

 [R5]For the meaning of term “instrument”,

 [R6]For the meaning of term “specified”,

 [R7]For the meaning of term “instrument”,

 [R8]Omitted by the Finance Act, 1992, w.e.f. 1-4-1993. Prior to omission, the proviso, as omitted by the Direct Tax Laws (Amend­ment) Act, 1987, w.e.f. 1-4-1989 and later reintroduced by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989, read as under :

        “Provided that—

    (i)   the income of the previous year shall, for the purposes of inclusion in the total incomes of the partners, be apportioned between the partners who, in such previous year, were entitled to receive the same ; and

   (ii)   when the tax assessed upon a partner cannot be recov­ered from him, it shall be recovered from the firm as constituted at the time of making the assessment.”

 [R9]For the meaning of the term/expression “cease to be partners” and “or”,

 [R10]For the meaning of the term/expression “cease to be partners” and “or”,

 [R11]Inserted by the Taxation Laws (Amendment) Act, 1984, w.r.e.f. 1-4-1975.

 [R12]Inserted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989.

 [R13] Substituted for “Income-tax” by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.

 [R14]                Substituted for “Income-tax” by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.

 [R15]Words “Deputy Commissioner (Appeals) or the” omitted by the Finance (No. 2) Act, 1998, w.e.f. 1-10-1998. Earlier “Deputy Commissioner (Appeals)” was substituted for “Appellate Assistant Commissioner” by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.

 [R16]Inserted by the Finance (No. 2) Act, 1977, w.e.f. 10-7-1978.

 [R17]Prior to omission, Explanation, as inserted by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1-10-1975 and omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989 and later reintroduced by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1-4-1989, read as under :

“Explanation.—The amount of tax referred to in this sub-section shall also include that part of the share of each partner in the income of the firm before its discontinuance or dissolution which the firm could have retained under sub-section (4) of section 182 but which has not been so retained.”

 [R18]Inserted by the Finance Act, 1992, w.e.f. 1-4-1993. Earlier section 189A, which made provisions applicable to past assess­ments of firms and inserted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1989, was omitted by the Direct Tax Laws (Amendment) Act, 1989, with effect from the same date.