CASTE SYSTEM IN INDIA

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A PROJECT ONASSESSMENT OF FIRMS & SIMILARITIES & DIFFERENCES FROM ASSESSMENT OF AOPs

SUBMITTED TOMs. PRASHANNA SAMADDAR(FACULTY PRINCIPLES OF TAXATION LAW)

SUBMITTED BYSAKSHAM SAMARTHSEMESTER-VSECTION- BROLL NO- 117(B.A., L.L.B.)DATE OF SUBMISSION- 26/08/2013

HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR (C.G.)

ACKNOWLEDGMENTSI, SAKSHAM SAMARTH, feel myself highly elated, as it gives me tremendous pleasure to come out with work on the topic ASSESSMENT OF FIRMS & SIMILARITIES & DIFFERENCES FROM ASSESSMENT OF AOPs. I started this project a fortnight ago and on its completion I feel that I have not only successfully completed it but also earned an invaluable learning experience.First of all I express my sincere gratitude to my teacher, Ms. PRASHANNA SAMADDAR, who enlightened me with such a wonderful and elucidating research topic. Without her, I think I would have accomplished only a fraction of what I eventually did. I thank him for putting his trust in me and giving me a project topic such as this and for having the faith in me to deliver. His sincere and honest approach have always inspired me and pulled me back on track whenever I went off track. Maam, thank you for an opportunity to help me grow.I also express my heartfelt gratitude to staff and administration of HNLU in library and IT lab that was a source of great help for the completion of this project.Next I express my humble gratitude to my parents for their constant motivation and selfless support. I would thank my brother for guiding me. I also express my gratitude to all the class mates for helping me as and when required and must say that working on this project was a great experience. I bow my head to the almighty for being ever graceful to me.

Thanks,SAKSHAM SAMARTH(SEMESTER V)ROLL NO.117

TABLE OF CONTENTSACKNOWLEDGEMENTS...2TABLE OF CONTENTS...3OBJECTIVES4RESEARCH METHODOLOGY...4RESEARCH QUESTION.............................................................................................................................4INTRODUCTION.........................................................................................................................................5CHAPTER-1 TAX IMPLICATION OF A FIRM....................................................................................6-13CHAPTER 2 ASSESSMENT & TAXATION OF AOPs......................................................................14-19CHAPTER-3 ASSESMENT OF FIRMS AS SUCH, AOPs (DIFFERENCES)....................................19-21CONCLUSION.......................................................................................................................................21-22

OBJECTIVESThe main objectives are: To discuss the tax implication of a firm To discuss the taxation of AOPs To see when can a firm be assessed as an AOP.RESEARCH METHODOLOGYThis is a doctrinal research project. This research paper is based on secondary and electronic sources. Other references as guided by Faculty of Principles of Taxation Law have been primarily helpful in giving this project a concrete shape. Websites and articles have also been referred.Footnotes have been provided wherever needed, to acknowledge the source.

RESEARCH QUESTION1. What is the tax implication of a firm?2. How are AOPs taxed?

INTRODUCTION

A partnership firm or firm is a common vehicle in India for carrying on business activities on a small or medium scale. A profession is generally carried on through a partnership. There is no restriction on a company's participation in a partnership, but this is rate in practice. A partnership firm is not a legal entity, but only consists of individual partners for the time being to generate income or get profit but for income tax and sales tax purpose it has limited identity and considered as the legal entity.Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them. Persons who have entered into partnership with one another are called partners individually and a firm collectively. Hence we can authoritatively say that the tax implication of firms comes under the corporate taxation.Association of Persons is not a new assessable entity under the Income Tax Act. AOP as an assessable entity is in existence even under 1922 Act. However, there was rampant growth of AOPs and the taxation of AOPs assumed great significance. In fact the mushroom growth of AOPs , the planning through AOPs and tax evasion through this entity was so glaring that the legislature came down heavily on such assesses through numerous amendments.

CHAPTER-1TAX IMPLICATION OF A FIRMThe Income-tax Act, 1961, does not define the term "Firm". Section 2(23) which deals with definition simply states that Firm, Partner and Partnership have the meanings respectively assigned to them in the Indian Partnership Act, 1932, as a person[footnoteRef:1] but the expression Partner shall also include any person who being a minor, has been admitted to the benefits of partnership. [1: Section 2(31) states: 'Person' includes:(i)an individual;(ii)HUF;(iii)a, company;(iv)a firm, etc.]

Thus, under the scheme of income-tax, Firm has a distinct assessable personality. However, for a definition of firm we have to refer back to the provisions of Indian Partnership Act, 1932. As per Section 4 of The Indian Partnership Act, 1932, Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them. Persons who have entered into partnership with one another are called partners individually and a firm collectively. Section 5 states that the relation of partnership arises from contract and not from status[footnoteRef:2]. [2: From the analysis of the above definition of the partnership it will be seen that it contains three elements:(i)There must be at least two or more persons who must have entered into in agreement.(ii)The agreement must be to carryon business and share profits.(iii)The business must be carried on by all or any of the persons concerned, acting for all.]

Though Hindu undivided family is included in the definition of person in section 2(31) of the Income-tax Act, 1961, but it is not a juristic person for all purpose. HUF is not like a corporation or limited company, and it has, therefore, no legal entity different from, and separate from the members who comprise the Hindu undivided family[footnoteRef:3]. [3: Ram Laxman Sugar MillsvCIT(1967) 66 ITR 613 (SC)].]

However, it was held that there is no legal bar in members of the HUF entering into partnership[footnoteRef:4]. Mere mention of a partner as representing as Karta of a family will not make a HUF as a partner[footnoteRef:5]. [4: CITvMaskara Tea Estate(1977) 108 ITR 70 (Gau).] [5: CITvR.S.Singh&Co(1979) 118 ITR 30 (Cal).]

When a Karta or a Manager of HUF enters into a contract of partnership with a stranger, the other members of the family do not ipso facto become partners in the firm. In such a case, family as a unit does not become a partner. The other members of the family are not parties of the firm so constituted and as such the other members cannot demand an inspection of the account books of the firm nor bring about dissolution of the firm or winding up the business[footnoteRef:6]. The Karta can join others in partnership in dual capacity i.e. in his individual capacity as well as Karta of the HUF[footnoteRef:7]. [6: CIT vBagyalakshmi&Co(1956) 55 ITR 660 (SC).] [7: CITvRaghavji Anandji&Co.(1975) 100 ITR 246 (Bom).]

Position of Firm under the Income-tax ActLegally, a partnership firm does not have a separate entity from that of the partners constituting the firm as the partners are the owners of the firm. However, a firm is treated as a separate tax-entity under the Income-tax Act. Salient features of the assessment of a firm are as under: (1) A firm is treated as a separate tax entity.(2) While computing the income of the firm under the head 'Profits and gains of business or profession', besides the deductions which are allowed u/S 30 to 37, special deduction is allowed to the firm on account of remuneration to working partners and interest paid to the partners. However, it is subject to certain limits laid down u/S 40(b).(3) Share of profit which a partner receives from the firm (after deduction of remuneration and interest allowable) shall be fully exempt in the hands of the partner. However, only that part of the interest and remuneration which was allowed as a deduction to the firm shall be taxable in the hands of the partners in their individual assessment under the head 'profits and gains of business or profession. (4) The firm will be taxed at a flat rate of 35% plus surcharge @ 2.5% plus education cess @ 2% after allowing deduction for interest on capital and loan of the partners and remuneration to working partners. (5) The firm will be assessed as a firm provided conditions mentioned under section 184 are satisfied. In case these conditions are not satisfied in a particular assessment year, although the firm will be assessed as firm, but no deduction by way of payment of interest, salary, bonus, commission or remuneration, by whatever name called, made to the partner, 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 in the hands of the partner.

Assessment of firmFrom point (5) above, it may be concluded that if the firm satisfies the conditions laid down under Section 184, the firm shall be eligible for deduction on account of interest, salary, etc. while computing its income under the head business and profession. However, it will be subject to the maximum of the limit specified under Section 40(b). On the other hand, if such conditions are not satisfied, no deduction shall be allowed to the firm on account of such interest, salary, bonus, etc.Besides the above, as per Section 184(5), if there is any such failure on the part of the firm as mentioned in Section 144, the firm shall not be eligible for any deduction on account of any interest to the partners or remuneration to the working partners.

Essential conditions to be satisfied by a firm to be assessed as firm and to be eligible for deduction of interest, salary, etc. to the partners [Section 184](A) In the first assessment year the following conditions must be satisfied by the firm:(1) Partnership is evidenced by an instrument i.e. there is a written document giving the terms of partnership. (2) The individual share of the partners are specified in that instrument (3) Certified copy[footnoteRef:8] of partnership deed must be filed [8: What a certified copy means:TheExplanationto Section 184(2) lays down the implication of the term certified copy of the instrument which is to accompany the return. The certified copy means that the copy of the instrument of partnership is to be certified in writing by all the partners except minors. It means that the copy of the deed should carry the expression certified to be true copy and below that it should carry the signature with date of all the major partners.]

(B) In the subsequent assessment years: Once the firm is assessed as a firm 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 share of the partners.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.Circumstance where the firm will be assessed as a firm but shall not be eligible for deduction on account of interest, salary, bonus, etc.:In the following two cases, the firm shall be assessed as a firm but shall not eligible for any deduction on account of interest to a partner and remuneration to a working partner although the same are mentioned in the partnership deed:(a) Where there is, on the part of the firm, any such failure as is mentioned in section 144 (relating to the best judgment assessment). [Section 184(5)](b) Where the firm does not comply with the conditions mentioned under section 184 discussed above. [Section 185]10. Computation of Total Income of the firmAs discussed above, the total income of the partnership firm will be determined as a separate entity and it will be computed under various heads of income. However, while computing taxable profits under the head 'profits and gains of business or profession, a deduction is allowable to the firm on account of interest and remuneration payable to the partners. Deduction of interest to a partner is allowable u/S 36 and remuneration to a working partner will be allowed u/S 37.Section 40(b) deals with the amounts which are not deductible in case of a firm assessable as such. Therefore, deductions on account of interest and remuneration to the partners can be claimed under Sections 36 or 37, as the case may be, but it will be subject to the conditions prescribed by Section 40(b), which are as under:(1) Payment of salary, bonus, commission or remuneration by whatever name called, to a non-working partner shall not be allowed as deduction.(2) Payment of remuneration to working partners and interest to any partner will be allowed as deduction only when it is authorised by and is in accordance with partnership deed.(3) Payment of remuneration/interest, although authorised by the partnership deed but which relates to a period prior to the date of such partnership deed, shall not be allowed.(4) Interest payable to a partner, although authorised by the partnership deed shall be allowable as a deduction subject to a maximum of 12% (18% up to 31-5-2002) simple interest per annum. If the partnership deed provides for interest at less than 12% p.a., the deduction of interest shall be allowed to the extent provided by the partnership deed.(5) The payment of remuneration to working partner, although relates to a period after the date of the partnership deed and authorised by the partnership deed, shall be allowed as a deduction only to the extent of the following limits:Remuneration paid to individual who is a partner in representative capacityIn the case of Rashik Lal & Co v CIT[footnoteRef:9] the Supreme Court held that if commission is paid to a member of HUF who is a partner in a firm representing his HUF, such commission paid cannot be regarded as payment to HUF and such commission shall be in his individual capacity and will thus be hit by the provisions of section 40(b). However, the Supreme Court in the case of K.S. Subbaiah Pillai v CIT[footnoteRef:10] (SC) held that where the remuneration is paid by a business, which is financed by the joint family, the issue as to whether such amount should be considered in the hands of the joint family or in the individual assessment has to be decided on the facts as to whether such amount is payable because of the personal qualification and exercise of individual exertion, or whether it is because of investment of family funds in the business of the company. [9: (1998) 229 ITR 458 (SC).] [10: (1999) 237 ITR 11.]

In some cases, the partnership deed does not specify the amount of remuneration payable to each individual working partner. It just mentions that the remuneration to working partners will be the amount of remuneration allowable under the provisions of Section 40(b). Similarly, some partnership deeds mention that the amount of remuneration to working partners will be as mutually agreed between the partners at the end of the year.In respect of the above, the CBDT has given a clarification that from assessment year 1997-98 no deduction u/s 40(b) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.Treatment of share of profit, interest and remuneration received by a partner from a firm1. Share of profit in the hands of the partner shall be fully exempt under Section 10(2A).2. Interest received/receivable by a partner shall be included in the Total Income of the partner under the head 'Profits and gains of business or profession' to the extent deduction of interest was allowed to the firm as per Section 40(b), which cannot exceed 12% per annum.3. Remuneration to a working partner shall also be included in the Total Income of the partner under the head 'profits and gains of business or profession' to the extent deduction of remuneration was allowed to the firm as per Section 40(b)[footnoteRef:11]. [11: For example, if the partner was paid a remuneration of Rs. 60,000 by the firm, but as per section40(b)deduction was allowed to the firm on account of such remuneration to the extent of Rs. 50,000, Rs. 50,000 only will be included in the Total Income of the partner. Balance Rs. 10,000 may be treated as share of profit which is exempt.]

Change in constitution of a firm [Section 187]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.When is there a change in the constitution of the firm [Section 187(2)]: There is a change in the constitution of the firm-(a) if one or more of the partner 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.Where a partnership deed provides that death shall not result into the dissolution of the firm, such provision is lawful under section 42 of the Partnership Act; on the death of the partner, a partnership is not dissolved and the business is continued by the reconstituted partnership, then only one assessment is to made for the entire year.[footnoteRef:12] [12: CITvEmpire Estate,(1996) 218 ITR 355 (SC).]

A firm will not be deemed to be dissolved on retirement of a partner even if the partnership deed says so A perusal of section 187(2)(a) of the Income-tax Act, 1961, shows that by legal fiction for the purposes of the Income-tax Act, if even one of the partners continues to remain in the firm then the firm will not be deemed to be dissolved. Hence, even if the partnership deed says that the firm will stand dissolved on the retirement of a partner, for the purposes of the Income-tax Act, it will not be deemed to be dissolved in view of section 187(2)(a)[footnoteRef:13]. [13: CITvRatanlal Garib Das,(2003) 261 ITR 200 (All).]

Dissolution of a firm due to death of any partner will not be considered as change in the constitution of the firm [Proviso to section 187]However, in the case of CIT v Jai Mewar Wine Contractors[footnoteRef:14] it was held that even if the partnership deed is silent on the contingency of death of a partner, it need not dissolve the firm as it was pointed out that a clause for continuation of the partnership without dissolution may not be express and it may be inferred from the conduct of the partners consequent on the death. The only exception in this case shall be where there are only two partners so that death of one cannot avoid dissolution. [14: (2001) 251 ITR 785 (Raj).]

Succession of one firm by another firm [Section 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.As per section 170 the predecessor firm shall be assessed in respect of the income of the previous year in which succession took place up to the date of succession. The successor firm shall be assessed in respect of the income of the previous year after the date of succession. Final dissolved or business discontinued [Section 189]Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, 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.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.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 above 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.Firm Legal Entity For Purpose Of Taxation - For tax law, income-tax as well as sales tax, partnership firm is a legal entity[footnoteRef:15]. Though a partnership firm is not a juristic person, Civil Procedure Code enables the partners of a partnership firm to sue or to be sued in the name of the firm[footnoteRef:16]. A partnership firm can sue only if it is registered. [15: State of Punjabv.Jullender Vegetables Syndicate- 1966 (17) STC 326 (SC),CITv.A W Figgies- AIR 1953 SC 455,CITv.G Parthasarthy Naidu(1999) 236 ITR 350.] [16: Ashok Transport Agencyv.Awadhesh Kumar1998(5) SCALE 730 (SC).]

CHAPTER-2ASSESSMENT & TAXATION OF AOPsAssociation of Persons is not a new assessable entity under the Income Tax Act. AOP as an assessable entity is in existence even under 1922 Act. However, there was rampant growth of AOPs and the taxation of AOPs assumed great significance. In fact the mushroom growth of AOPs, the planning through AOPs and tax evasion through this entity was so glaring that the legislature came down heavily on such assesses through numerous amendments.AOP A TAXABLE ENTITY Section 4, which is charging section, creates a charge in respect of total income of every person and such person is separately defined under the Act. Section 2 (31) defines a person which includes seven (eight if BOIis considered as separate entity) categories of the assessee one among them is an association of person or a body of individual whether incorporated or not. Thus, an AOP is a defined taxable entity under the I. T. Act.AOP, even though included as a separate taxable entity, has not been defined under the Act. Therefore, in order to understand the meaning of the expression association of persons, one will have to look various case laws on the point.The Supreme Court has explained the attributes of an association of persons in its landmark judgment CIT Vs Indira Balkrishna[footnoteRef:17]. The word associate means to join in common purpose or to join in an action. Therefore, an association of persons means an association in which two or more persons join in a common purpose or common action and as the words occur in the section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. Therefore, for forming an association of persons for the purposes of the Act the following are essential. [17: (1960) 39 ITR 546(SC).]

a)An A O P must be one in which two or more persons join in a common purpose or a common action

b)The association must be one the object of which is to produce the income, profits and gains. Now this condition has to be tested in the light of Explanation inserted by Finance Act 2002 to section 2(31) which states that object of deriving income, profit or gain is not necessary for forming an AOP. c)An association of persons can be formed only when two or more persons voluntarily combined together for a certain purpose. Hence, volition on the part of member is an essential ingredient. However, the Supreme Court cautioned that there is no formula of universal application as to what facts, how many of them and of what nature are necessary to come to a conclusion that there is an AOP and it depends on particular facts and circumstances to determine whether AOP exists or not.Whether volition of members is necessary for forming AOP? Deccan Wine & General Stores Vs CIT[footnoteRef:18] Association for income producing activity is must. Common design or combined will distinguishes an association of person from a body of individual. The High Court further observed that the absence of common design is what principally distinguishes a BOI from AOP. [18: (1977)106 ITR 111 (AP).]

Contrary View -CIT Vs Buldhana District Main Cloth Importers Group[footnoteRef:19] wherein the Supreme Court has held that the common design or common will is not essential for forming an AOP. [19: 42 ITR 172 (SC).]

Whether common purpose or action is essential?The Supreme Court in the case of N. V. Shanmugham & Co Vs CIT[footnoteRef:20] held that common purpose or design or action is necessary to form an association of persons. In coming to the conclusion the Supreme Court held that [20: (1971) 81 ITR 310.]

a)The Control and management of the business was in the hands of receivers.b)The Control and management was a unified one.c)The receivers had joined in a common purpose and acted jointly.Whether the object of production of income is still an essential requirement even after insertion of Explanation to section 2(31) by the Finance Act 2002?Association of persons as used in section 3 of the Income Tax Act 1922, now section 2(31)(v) of 1961 Act, means an association in which two or more persons join in a common purpose or common action and as the words occur in the section which imposes a tax on income, the association must be one the object of which is to produce income, profits and gains as held by the Supreme Court in CIT Vs. Indira Balkrishna[footnoteRef:21] For forming an association of persons the members of the association must join together for the purpose of producing an income. However, the Finance Act 2002 has inserted an Explanation to section 2(31) according to which the object of producing income is not material. The Explanation reads as under [21: 39 ITR 546 (SC).]

Explanation:- For the purposes of this clause an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person whether or not such person was formed or established with the object of deriving income, profits or gainsTherefore the issue is as to whether object of producing income is a pre-requisite or not for forming AOP in view of Explanation to section 2(31) inserted by Finance Act 2002. It would, prima facie, appear that, after the amendment, the object of producing income is not material. CBDT Circular explaining the insertion of the above Explanation reads as underAlthough the definition of person is inclusive and starts with the qualifying word unless context otherwise requires in some cases, a claim has been made that certain bodies do not fall within any of the of the definition of person provided in clause (31) of section 2 due to sole reason that they are not supposed to have any income or profits and gains or they are not formed with the object of producing income. To clarify the legal position, an Explanation has been inserted so as to provide that an AOP or BOI shall be deemed to be a person, whether or not such person, was formed or established or incorporated with the object of deriving income, profits or gains Having regard to the forgoing purpose of enacting Explanation, it appears that a non profit making association or body is disabled from claiming that it is not a person for the purposes of the Act. However, joining together with the common purpose and production of joint income shall continue to be a material requisite for determining the existence of AOP for tax purposes. Volition and common management of business would still be essential pre-requisite for inference of AOP.TAXATION OF AOP An AOP being a separate assessable entity, the total income shall be computed in the normal manner applicable assessee falling under any other category such as individual, company etc. The provisions of section 28 to 44, as well as capital or revenue expenditure, expenses incurred for business or otherwise shall be applicable. However, there are certain specific provisions which are enacted for assessment of income of AOP, rates of tax applicable and its treatment in the hands of members which is being dealt in following paragraphsSection 40(ba) provides that interest and/or remuneration paid to members shall not be allowed as deduction.In case of income from house property, section 26 provides that where property is owned by co-owners in definite and ascertainable shares then the income from property shall be computed independently for each person in relation to his share. A common collecting agent shall not make any differenceIn case of capital gain arising to co-owners, the same can not be assessed as an income of AOP.Section 167B lays down the scheme of taxation of AOP under different circumstances as follows

a) Sub-section (1) where individual shares of the members of the AOP or BOI in the whole or any part of the income of AOP or BOI are unknown, tax shall be charged on the total income of the AOP or BOI at the maximum marginal rate. A proviso to the sub-section provides that where the total income of any member of such association of or body is chargeable to tax at a rate higher than the maximum marginal rate, tax shall be charged at such higher rate on the total income of the association or body.

b) Sub-section (2) provides that in case of other association of persons or body of individuals (i.e. where the shares of the members are determinate)

i) If the total income of any member of such association or body (excluding his shares from such association or body) exceeds the maximum amount which is not chargeable to tax in case of that member; tax shall be charged on the total income of association or body at maximum marginal rate;

j) If any member or members of such association or body is or are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate, tax shall be charged at such higher rate or rates only on that portion or portions of the total income of association or body which is or are relatable to the share or shares of such member or members and the balance total income of the association or body shall be charged to tax at the maximum marginal rate.

k) The effect of the provisions of section 167B is that only those association of persons or body of individuals will be taxed at the normal rates applicable to individuals, where the shares of the members are determinate and none of the member has taxable income or none of the member is taxable at a rate higher than maximum marginal rateMaximum Marginal Rate is defined under section 2(29C) to mean the rate of income tax (including surcharge on income tax, if any) applicable in relation to the highest slab of income in case of an individual, AOP or BOI as specified in the Finance Act of the relevant year.

TAXATION OF MEMBERS OF AOP After having considered the taxation of AOP, it is imperative to consider the taxation of members of AOP. Section 67A deals with the method of computation of members share in the income of AOP. Section 86 provides for inclusion and chargeability of share in the income of and tax payable thereon. Section 86 read with section 110, the shares of a member in the income of the association or body is treated in three different ways, depending upon whether the AOP or BOI is chargeable to tax at the maximum marginal rate or at normal rate or is not chargeable to tax at all.Section 80A(3) provides that where a deduction is admissible under chapter VI-A in computing total income of AOP, then no deduction under same section is allowable in the hands of members in relation to the share from AOP.

CHAPTER-3ASSESSMENT OF FIRMS AS SUCH, AOP(DIFFERENCES)For Income tax purpose, the firm is assessed as a separate entity. When a firm is assessed as a firm it is called partnership firm assessed as such (PFAS). However, a partnership firm in certain situation may not be assessed as such but may be assessed as AOP. In case of PFAS, the salary, bonus, commission or remuneration due to be received by partner is allowed as deduction subject to certain restriction. Similarly when firm pays interest to any partner, the deduction is allowed to the extent of 12% simple interest per annum. The income of the firm is assessed at the flat rate of 30% plus surcharge at 10% and education cess at 3% of tax and surcharge. The share of partner in the income of the firm is not included in computing the taxable income of the partner. Conditions for firm to be PFAS The firm must be evidenced by an instrument. The instrument means a document of legal nature by which any right or liability is or purports to be created, transferred, extended, recorded etc. The individual shares of the partners are specified in that instrument. A certified copy of the instrument of partnership accompanies the return of income in the first year. Whenever during the previous year, there is a change in the constitution of the firm or in the profit sharing ratio of partners; a certified copy of the revised instrument of partnership must be submitted along with the return of income of the concerned assessment year. There should not be any failure on the part of the firm in attending income tax proceedings and furnishing documents during assessment.

Partnership firm assessed as Association of Persons (PFAOP) If any of the conditions listed under "Conditions for firm to be PFAS" is not fulfilled a firm is assessed as AOP. This is how income of PFAOP is to be computed: If any salary, bonus, commission or remuneration is paid by the PFAOP to its partners, it will not be deductible. If any interest is paid by PFAOP to its partners, it is not deductible. Total income of the AOP is taxable at the rate applicable to individual, or at the maximum marginal rate or at a rate higher than maximum marginal rate. The rate applicable to an individual is applied when the share of partners in AOP is determinate and none of the partner has income in excess of maximum amount not chargeable to tax. When this condition is not satisfied and the shares of partners are determinate, the AOP is taxed at maximum marginal rate. In case any partner is a person who on his own income is liable to be taxed at a rate higher than maximum marginal rate then that share of partner in AOP is taxed at such higher rate. In case the shares of partners in AOP are indeterminate then the AOP is taxed at maximum marginal rate. If any of the partners of AOP is liable to be taxed at a rate higher than maximum marginal rate then the whole income of AOP is taxed at such rate ( as in this case individual share is indeterminate). When AOP is taxed at maximum marginal rate or at a rate higher than maximum marginal rate, the partners are not further liable to be taxed on their share of income. Same system of taxation applies to all AOP and BOI.

CONCLUSIONBy going through all the relevant provisions provided under the legislation it is clear that what is the position of partners and firm for tax imposition. Although there are certain areas which are different from the other nation states like UK and USA but very much effective in Indian scenario. Under the general law a partnership is not a separate entity distinct from the partners, but for tax purposes a partnership is an entity. Typically, in many countries, partnership firms are considered pass-through entities for tax purposes. Hence, in such cases, it is the partners of the partnership firm who are subject to tax in respect of their share of income from the partnership firm. An interesting issue which arises for consideration in such situations is whether such foreign partnership firms are eligible to claim the benefit of the double tax avoidance agreements.Under the provisions of such tax treaties, benefits are normally available only to persons/entities that are considered tax residents of their respective countries. The tax treaty provisions dealing with tax residency inter-alia provide that the term resident of a contracting state means any person who under the laws of that respective country is liable to tax therein by reason of domicile, residence, place of management or any criterion of similar nature.In last few years some of the provisions has been omitted/modified and tried to reduce the complexity for imposition of tax in partnership firms.

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