Assessment of Firms

Chapter XVI
Definition of Firm- Sec 2(23): firm” shall have the meaning assigned to it in:
– the Indian Partnership Act, 1932 (9 of 1932), and shall include
– a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009);
Assessment as a Firm – Sec 184
(1) A firm shall be assessed as a firm for the purposes of this Act, if—
(i) the partnership is evidenced by an instrument; and
(ii) the individual shares of the partners are specified in that instrument.
(2) 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.
Disallowance of interest, remuneration etc – Sec 184(5):
– Where, in respect of any assessment year, there is a failure as is mentioned in Sec 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 u/s 28(v) for the respective partner.
Assessment when section 184 not complied with- Sec 185
– Where a firm does not comply with the provisions of Sec 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 u/s 28(v) for the respective partner.

Change in constitution of a firm – Sec 187
(1) Where at the time of making an assessment u/s 143 or 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.
(2) Change in the constitution of the firm means:
(a) if one or more of the partners cease to be partners 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 ; or
(b) where all the partners continue with a change in their respective shares or in the shares of some of them :
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 – Sec 188
– Where a firm carrying on a business or profession is succeeded by another firm, and
– the case is not one covered u/s 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of Sec 170.
Joint and several liability of partners for tax payable by firm – Sec 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, 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 – Sec 189
(1)Assessment:
– In the case of dissolution or discontinuance, the 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) Levy of Penalty:
– Where the Assessing Officer or the Commissioner (Appeals) in the course of any proceeding under this Act is satisfied that
– the firm was guilty of any of the acts specified in Chapter XXI (imposition of penalties)
– he may impose or direct the imposition of a penalty in accordance with the provisions of that Chapter.
(3) Joint liability:
– 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.
(4) Dissolution after commencement of assessment:
– 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 ss(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 Sec 159(6) i.e assessment in the case of legal representatives.
Liability of partners of limited liability partnership in liquidation – Sec 167C
– Notwithstanding anything contained in the Limited Liability Partnership Act, 2008 (6 of 2009),
– where any tax due from a LLP or from any other person in respect of any income of any previous year during which such other person was a limited liability partnership
– cannot be recovered, in a such case,
– every person who was a partner of the limited liability partnership at any time during the relevant previous year,
– shall be jointly and severally liable for the payment of such tax 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 limited liability partnership.
Note: For the purposes of this section, the expression “tax due” includes penalty, interest or any other sum payable under the Act.