Assessment of Firms (Including LLPs) under Income Tax Act, 1961

1. Basic Concepts

• Firm: Partnership firm registered under Partnership Act, 1932
• LLP: Limited Liability Partnership registered under LLP Act, 2008
• Tax Status: Both treated as “firms” under Income Tax Act (Section 2(23))

2. Key Features of Firm/LLP Taxation

ASPECT	TREATMENT
Tax Rate	30% flat (+ surcharge if applicable)
Tax Slabs	No slab system – flat rate applies
Minimum Alternate Tax	Not applicable (AMT may apply in certain cases)
Dividend Distribution	No dividend tax (profits taxed at firm level only)
Interest to Partners	Deductible up to 12% p.a. (Section 40(b))
Partner’s Salary	Deductible subject to limits (Section 40(b))

3. Key Requirements for Firm Assessment

REQUIREMENT	DETAILS
Valid Partnership Deed	Must be in writing and signed by all partners
Specified Contents	Should include profit-sharing ratio, capital contributions, etc.
Continuity Clause	Must specify if firm continues after partner changes
PAN of Firm	Mandatory separate PAN for the firm
ITR Filing	Must file returns in Firm’s name (not individual partners)

4. Computation of Taxable Income

Step 1: Calculate Gross Total Income

• Business income (main component)
• Capital gains
• Income from other sources

Step 2: Allowable Deductions

• Business expenses (Section 30-37)
• Depreciation (Section 32)
• Remuneration to partners (within limits)
• Interest to partners (max 12% p.a.)

Step 3: Disallowances (Section 40)

• Personal expenses
• Cash payments > ₹10,000
• Interest to partners beyond 12%
• Partner’s salary beyond limits

Step 4: Apply Tax Rate

• 30% on taxable income
  • Surcharge if income exceeds:
  • ₹50 lakh: 10%
  • ₹1 crore: 12%
  • ₹2 crore: 15%
  • 4% Health & Education Cess

5. Special Provisions for LLPs

• Additional Deduction:
  • Section 80JJAA (for new employee hiring)
  • Section 35AD (specified businesses)
• AMT Applicability:
  • LLP must pay Alternate Minimum Tax if claiming certain deductions
  • AMT rate: 18.5% of adjusted total income

6. Partner’s Taxation

INCOME TYPE	TAX TREATMENT
Share of Profit	Exempt in partner’s hands (Section 10(2A))
Interest from Firm	Taxable as “Income from Other Sources”
Salary from Firm	Taxable as “Profits and Gains from Business”
Remuneration	Taxable as business income

7. Compliance Requirements

FORM	PURPOSE	DUE DATE
ITR-5	Firm/LLP return filing	July 31/Sept 30*
Form 3CEB	Audit report for international transactions	Sept 30
Form 29B	CA report for AMT	With ITR
Form 3CD	Tax audit report	Sept 30

*September 30 if audit required

8. Tax Audit Requirements

Mandatory if:

• Gross receipts > ₹1 crore (business)
• Gross receipts > ₹50 lakh (profession)
• Eligible for presumptive taxation but doesn’t opt for it

9. Presumptive Taxation (Section 44AD)

• Available for firms with turnover ≤ ₹3 crore
• Deemed profit: 6-8% of turnover
• No need to maintain books
• Cannot claim deductions

10. Recent Changes (Budget 2025)

• New tax regime not applicableto firms/LLPs
• AMT threshold increasedto ₹20 lakh
• TDS on LLP withdrawals> ₹50,000/month

11. Practical Example

ABC LLP (FY 2024-25)

• Gross receipts: ₹2.5 crore
• Business expenses: ₹1.8 crore
• Partner salary: ₹12 lakh
• Interest to partners: ₹6 lakh

Tax Calculation:

Gross Receipts: ₹2.5 crore

(-) Expenses: ₹1.8 crore

(-) Partner salary: ₹12 lakh (within limits)

(-) Interest: ₹6 lakh (within 12% limit)

Taxable Income: ₹52 lakh

Tax @30%: ₹15.6 lakh

+ Surcharge @10%: ₹1.56 lakh

+ Cess @4%: ₹68,640

Total Tax: ₹17,84,640

12. Key Takeaways

1. Firms/LLPs taxed at flat 30% rate
2. Partner’s profit share is tax-exempt
3. Strict limits on partner remuneration/interest
4. AMT may apply if claiming certain deductions
5. Compliance burden higher than individual taxpayers

1.  Salient Features of Assessment of Firms (Including LLPs) under Income Tax Act

1. Separate Legal Entity for Taxation

• Firms/LLPs are treated as distinct taxable entitiesseparate from partners
• Must obtain separate PANand file returns independently
• Assessment done in name of firm, not individual partners

2. Flat Tax Rate Structure

• Standard tax rate: 30% on taxable income
• No slab system(unlike individuals)
• Surchargeapplicable:
  • 10% (income > ₹50 lakh)
  • 12% (income > ₹1 crore)
  • 15% (income > ₹2 crore)
• Health & Education Cess: 4% on tax + surcharge

3. Special Treatment of Partner Remuneration

• Working partnerscan receive salary:
  • Deductible by firm within limits(Section 40(b))
  • Taxable as business incomein partner’s hands
• Interest to partners:
  • Allowed up to 12% p.a.
  • Excess interest disallowedin firm’s assessment

4. Profit Distribution to Partners

• Share of profitexempt in partners’ hands (Section 10(2A))
• Firm must first pay taxon entire income
• Only after-tax profitscan be distributed

5. Loss Treatment

• Cannot be carried forwardby firm
• Allocated to partnersbased on profit-sharing ratio
• Partners can carry forwardsubject to:
  • Timely filing of firm’s return
  • Continuance in same firm

6. Alternate Minimum Tax (AMT)

• Applies if claiming certain deductions (Sections 80H-80RRB, 10AA)
• AMT rate: 18.5% of adjusted total income
• Credit mechanism: Excess AMT can be carried forward for 15 years

7. Compliance Requirements

REQUIREMENT	DETAILS
Audit	Mandatory if turnover > ₹1 crore (business) or > ₹50 lakh (profession)
ITR Form	ITR-5
Tax Audit Report	Form 3CD
AMT Report	Form 29B (if applicable)
International Transactions	Form 3CEB (if applicable)

8. LLP-Specific Provisions

• Same tax treatmentas partnership firms
• Additional compliance under LLP Act, 2008
• Designated partnershave similar status as working partners
• Must file Annual Returnwith MCA

9. Presumptive Taxation Option

• Available under Section 44AD:
  • For businesses with turnover ≤ ₹3 crore
  • Deemed profit: 6-8% of turnover
  • No need to maintain detailed books
  • Cannot claim additional deductions

10. Recent Changes (Budget 2025)

• Digital compliancemandated for all firms/LLPs
• TDS on LLP withdrawals> ₹50,000/month
• AMT thresholdincreased to ₹20 lakh
• Standard deductionof ₹75,000 allowed for professional LLPs

Key Advantages

✔ Single-layer taxation (no dividend distribution tax)

✔ Flexible profit distribution to partners

✔ Lower compliance than companies for small businesses

Key Disadvantages

✖ No loss carry forward at firm level

✖ Higher tax rate compared to individual slabs for lower incomes

✖ Strict documentation requirements

Practical Implications

1. Tax Planning Tip: Optimize partner remuneration within limits
2. Compliance Focus: Maintain proper books and partnership deeds
3. LLP Consideration: Weigh benefits vs. additional compliance

2.  Set Off and Carry Forward of Losses for Firms

The Income Tax Act, 1961, provides specific provisions for partnership firms (including LLPs) regarding the set-off and carry forward of losses. Below is a detailed breakdown of the rules, conditions, and tax implications.

1. Key Provisions Applicable to Firms

(A) Section 75 – Losses of Firms

• Applies to: Registered and unregistered partnership firms, including LLPs.
• General Rule:
  • Firms cannot carry forward lossesin their own name (unlike companies).
  • Losses are allocated to partnersbased on their profit-sharing ratio.
  • Partners can carry forwardthese losses in their individual capacity.

(B) Section 70 & 71 – Set-Off Rules

• Intra-head set-off:
  • Business loss from one source can be set off against profit from another business under the same head (“Profits and Gains of Business or Profession”).
  • Exception: Speculative losses can only be set off against speculative profits.
• Inter-head set-off:
  • Business losses can be set off against income from other heads (except salary).
  • Restriction: Losses from speculative business, specified business (Section 35AD), and racehorsescannot be set off against other heads.

2. Conditions for Carry Forward of Losses

(A) For Firms (Pre-1993 Cases)

• Historical Rule (Pre-1993):
  • If a firm’s loss could not be set off in the same year, it was allocated to partners.
  • Partners could carry forward these losses only if they remained in the same firm.
• Current Rule (Post-1993):
  • Firms cannot carry forward lossesin their own name.
  • Losses are directly passed to partnersfor carry forward.

(B) For Partners

• Losses allocated to partnerscan be carried forward only if:
  • The firm files its ITR on time(by due date under Section 139(1)).
  • The partner continues in the same firm(if the firm’s constitution changes, losses may lapse).
• Time Limit:
  • Non-speculative business loss: 8 years(Section 72).
  • Speculative business loss: 4 years(Section 73).
  • Capital losses: 8 years(Section 74).

3. Special Cases & Restrictions

(A) Specified Business Loss (Section 35AD)

• Applies to: Firms engaged in infrastructure, power, or other specified businesses.
• Carry Forward:
  • No time limit(can be carried forward indefinitely).
  • Set-off only against profits from the same specified business.

(B) Change in Firm Constitution

• If a partner retires/dies, the unabsorbed loss allocated to them lapses.
• The remaining partners cannot claimthe retired/deceased partner’s loss share.

(C) LLP vs. Partnership Firm

• LLPsfollow the same rules as firms.
• Key Difference:
  • LLPs must comply with AMT (Alternate Minimum Tax)if claiming deductions under Section 35AD.

4. Practical Example

Scenario:

• Firm ABCincurs a business loss of ₹5 lakh in FY 2024-25.
• Partners: X (60% share), Y (40% share).
• Allocation:
  • X’s share: ₹3 lakh (can carry forward in personal ITR).
  • Y’s share: ₹2 lakh (can carry forward in personal ITR).
• Conditions:
  • The firm must file ITR by due date(July 31, 2025).
  • X & Y must continue in the firmto retain loss benefits.

5. Key Takeaways

1. Firms cannot carry forward lossesin their own name—losses are allocated to partners.
2. Partners can carry forward lossesif:
   • The firm files ITR on time.
   • They remain in the same firm.
3. Time Limits:
   • Non-speculative business loss: 8 years.
   • Speculative loss: 4 years.
4. Special Cases:
   • Section 35AD losses: No time limit but restricted to specified business profits.
   • Change in firm constitution: Lapses unabsorbed partner losses.

For LLPs, AMT may apply if deductions under Section 35AD are claimed

3.  Tax Treatment of Partner’s Income from Firm/LLP

1. Share of Profit from Firm (Section 10(2A))

• Tax Status: Fully exemptin partner’s hands
• Rationale: Avoids double taxation (firm already pays tax on profits)
• Conditions:
  • Must be from a registered partnership firm or LLP
  • Should be as per profit-sharing ratioin partnership deed
• Reporting:
  • Disclosed in ITR but not taxable
  • Included in total income for rate purposes(to determine slab rate)

2. Interest Received from Firm (Section 28(v))

• Tax Status: Taxable as “Income from Other Sources”
• Deduction Limit for Firm:
  • Maximum 12% p.a.allowed as deduction to firm
  • Excess interest disallowedin firm’s hands (Section 40(b))
• Taxability for Partner:
  • Full interest received is taxable
  • No TDS deduction by firm
  • Taxable even if firm doesn’t claim deduction

3. Remuneration/Salary from Firm (Section 40(b))

• Tax Status: Taxable as “Business Income”
• Deduction Limit for Firm:
  • For working partnersonly
  • Calculated as:
    • On first ₹3 lakh of firm’s book profit: ₹1.5 lakh or 90% of book profit (whichever higher)
    • On remaining book profit: 60%
  • Subject to overall ceiling
• Taxability for Partner:
  • Full remuneration received is taxable
  • Considered as business income(eligible for business deductions)
  • No TDS if paid to individual partners

4. Comparison Table: Tax Treatment

INCOME TYPE	TAXABILITY	DEDUCTION FOR FIRM	REPORTING IN ITR
Share of Profit	Exempt u/s 10(2A)	N/A	Disclosed but not taxed
Interest from Firm	Taxable as IFOS	Max 12% p.a.	Taxable in full
Remuneration	Taxable as Business Income	Subject to 40(b) limits	Taxable in full

5. Special Cases

• LLP Partners:
  • Same treatment as partnership firms
  • Salary to designated partners is taxable as business income
• Non-Working Partners:
  • Not eligible for remuneration
  • Any payment treated as interest (subject to 12% limit)

6. Compliance Requirements

• Firm Must:
  • Maintain proper books of account
  • Compute book profits correctly for remuneration calculation
  • File ITR-5 with partner details
• Partner Must:
  • Disclose all receipts in ITR-2/ITR-3
  • Pay advance tax if liability exceeds ₹10,000

7. Practical Example

Scenario:

• Partner X in ABC LLP receives:
  • Profit share: ₹8 lakh (exempt)
  • Interest: ₹1.2 lakh @ 10% (taxable)
  • Salary: ₹5 lakh (taxable)

Tax Impact:

• Taxable income: ₹6.2 lakh (1.2+5)
• Exempt income: ₹8 lakh (disclosed but not taxed)

8. Recent Changes (Budget 2025)

• Standard Deductionof ₹75,000 allowed on salary from firm
• TDSproposed on LLP withdrawals > ₹50,000/month
• Digital reportingof partner remuneration mandatory

Key Takeaways

1. Profit share is tax-freebut must be disclosed
2. Interest is fully taxable(firm gets limited deduction)
3. Salary is taxable but firm gets conditional deduction
4. LLP partnersfollow same rules
5. Complianceis critical for both firm and partners

4.  Computation of Total Income of a Firm/LLP (AY 2025-26)

1. Basic Structure of Computation

PARTICULARS	AMOUNT (₹)
A. Gross Receipts/Turnover	XXX
B. Less: Deductible Expenses	(XXX)
C. Business Profit (B-D)	XXX
D. Add: Other Incomes	XXX
E. Gross Total Income (C+D)	XXX
F. Less: Deductions (Chapter VI-A)	(XXX)
G. Total Income (E-F)	XXX

2. Detailed Computation Steps

Step 1: Calculate Business Income

• Start with Gross Receipts(Sales + Service Income)
• Deduct:
  • Cost of goods sold
  • Operating expenses (rent, salaries, etc.)
  • Depreciation (Section 32)
  • Remuneration to partners (within limits)
  • Interest to partners (max 12% p.a.)
• Add:
  • Disallowed expenses (Section 40)
  • Unaccounted income (if any)

Step 2: Include Other Incomes

• Interest income
• Rental income
• Capital gains
• Any other income not from main business

Step 3: Apply Deductions (Chapter VI-A)

• Section 80JJAA (new employment)
• Section 35AD (specified businesses)
• Donations (80G)
• Other applicable deductions

Step 4: Compute Taxable Income

• Apply provisions for:
  • Set-off of losses (Section 70-72)
  • AMT (if applicable)

3. Special Considerations for LLPs

• Must comply with AMTif claiming certain deductions
• Additional compliance under LLP Act, 2008
• Salary to designated partners deductible within limits

4. Tax Calculation

• Normal Tax: 30% of total income
• Surcharge:
  • 10% if income > ₹50 lakh
  • 12% if income > ₹1 crore
  • 15% if income > ₹2 crore
• Cess: 4% on (tax + surcharge)

5. Example Computation

MNO Associates (Partnership Firm) – FY 2024-25

PARTICULARS	AMOUNT (₹)
Gross Receipts	1,50,00,000
Less: Cost of Goods Sold	(90,00,000)
Less: Operating Expenses	(30,00,000)
Less: Depreciation	(5,00,000)
Less: Partner Remuneration	(4,00,000)
Less: Interest to Partners	(3,00,000)
Business Profit	18,00,000
Add: Interest Income	2,00,000
Gross Total Income	20,00,000
Less: Deduction u/s 80JJAA	(1,50,000)
Total Income	18,50,000
Tax @30%	5,55,000
Add: Cess @4%	22,200
Total Tax Payable	5,77,200

6. Compliance Requirements

• ITR Form: ITR-5
• Audit Requirement:
  • Business: If turnover > ₹1 crore
  • Profession: If receipts > ₹50 lakh
• Due Dates:
  • Normal filing: July 31
  • Audit cases: September 30

7. Recent Changes (Budget 2025)

• AMT thresholdincreased to ₹20 lakh
• Digital reportingmandatory for partner remuneration
• TDS on LLP withdrawals> ₹50,000/month

Key Takeaways

1. Compute income under proper heads
2. Apply all allowable deductions
3. Consider AMT implications
4. File returns with proper disclosures
5. Maintain compliance with partnership/LLP laws