Provisions relating to assessment of partnership firms--Clarification regarding - Income Tax - 516/1988

Provisions relating to assessment of partnership firms--Clarification regarding Circular No. 516 Dated 15/6/1988 A new scheme relating to assessment of partnership firms has been introduced by the Direct Tax Laws (Amendment) Act, 1987 (hereinafter referred to as ``the DTL(A) act, 1987), to be effective from 1-4-1989, i.e., from the assessment year 1989-90. 2. After the DTL(A) Act, 1987, was enacted, a number of representations from various quarters were received regarding the new scheme of taxation. On 30-3-1988, the Minister of State in the Ministry of Finance made a statement in Parliament to the effect that suitable amendments will be moved by the Government to provide that the new scheme relating to assessment of partnership firms will come into effect from 1-4-1990 instead of 1-4-1989, i.e., from the assessment year 1990-91. Before that date, the provisions that existed, before these were amended by the DTL(A) Act,1987, will continue to operate. Because of the change relating to date of commencement of the new provisions relating to assessment of partnerships, doubts have been raised regarding some other aspects concerning the assessment of firms. Hence, the following clarifications are being issued to set at rest any controversy in this regard. 3. For the assessment years 1988-89 and 1989-90, the old provisions in the Income-tax Act regarding assessment of firms, before these were amended by the DTL(A) Act, 1987, will continue to apply. The important sections containing the old provisions for taxation of firms and their partners, which will continue to operate for the assessment years 1988-89 and 1989-90 are listed below :-- (i) Section 40(b) relating to disallowance of interest and salary, etc., paid by a firm to its partners. (ii) Section 64(1) relating to inclusion of shares of spouse and minor children in the income of the other spouse or parent. (iii) Section 67 relating to computation of a partner's share in the income of the firm. (iv) Sections 75 to 77 relating to carry forward of losses of registered and unregistered firms. (v) Section 86(iii) relating to rebate on the share income of a partner of an unregistered firm including in his total income. (vi) Section 182 relating to assessment of a registered firm and its partners. (vii) Section 183 relating to assessment of an unregistered firm. (viii) Sections 184 to 186 relating to application for registration, procedure for registration and cancellation of registration of a firm under the Income-tax Act. (ix) Section 187 relating to change in constitution of a firm. 4. Although the new provisions relating to assessment of partnership firms are to come into force with effect from 1-4-1990, there are other amendments made by the DTL(A) Act, 1987, which are operative with effect from 1-4-1989, in case of all the assessees including partnership firms. The important ones are discussed below :-- (i) Introduction of financial years as the uniform previous year : A new section 3 substituted in the Income-tax Act for the old section 3 by the DTL(A) Act, 1987, provides for the financial year (year ending on 31st March) as the uniform previous year for all the assessees. the provisions of the new section 3 and those of the Tenth Schedule, which provide relief during the transitional previous year for the assessment year 1989-90, will be applicable in the case of partnership firms also, like other assessees. This means that a partnership firm, which has been having a previous year different from that ending on 31st March, will have to extend its previous year for the assessment year 1989-90 up to 31-3-1989. Thus for example, in the case of a partnership firm, which closes its accounts on 30th June every year, the previous year for the assessment year1989-90 will consist of 21 months (1-7-1987 to 31-3-1989). (ii) The new provisions relating to filing of return of income, assessment procedure and charging of mandatory interest under sections 234A to 234C will also be applicable in the case of partnership firms with effect from 1-4-1989, like other assessees. 5. Deduction of tax at source : The provisions of the new section 194E relating to deduction of tax at source from interest and salary, etc., paid by a firm to the partners and also consequent amendment of section 194A will not be effective from 1-4-1988, as provided in the Direct Tax Laws (Amendment) Act, 1987. These will now be made effective, if not changed, from 1-4-1989. 6. The new advance tax provisions are effective from 1-4-1988 and are applicable to all assessees, including partnership firms and their partners. Thus advance-tax during the current financial year (for the assessment year 1989-90) is to be paid as follows : 1st instalment of not less than 20 per cent of advance tax payable By 15th September, 1988. 2nd instalment of not less than 30 per cent of advance tax payable By 15th December, 1988. 3rd instalment of the balance 50 per cent. of the advance tax payable By 15th March, 1989. 7. The contents of this circular may be brought to the notice of all the officers working under your charge.