Assessment Of Firms: CBDT Wants AOs To Verify Partnership Deeds & Salary/income Of Partners

Tax authorities will take a closer look at the income and remuneration of partners of partnership firms with the partnership deed being the key document to ensure that there is no under-reporting of tax liability.

The Central Board of Direct Taxes recently issued a circular highlighting important issues that should be considered by the Assessing Officer while assessing such firms.

“Expenses in the hands of the firm such as interest on capital paid to the partners, remuneration payable to the working partners are taxable in the hands of respective partners. While framing assessment in case of firms, a cross-verification of such amounts with income-tax return of firm’s partner will be desirable,” the CBDT said.

It said in “in all situations, the partnership deed should form the basis for determination of remuneration payable to the working partners”. This will also curb instances of payment of remuneration to any non-working partner or remuneration payment for period prior to the date of partnership deed but claimed as deductible.

The CBDT further pointed out there have been instances where some firms have tried to increase the profits eligible for deduction under section 80IA of the Act by not claiming expenditure towards remuneration, salary, interest that are payable to the partners. In such situations, the AO can, under law, re-compute profits after excluding the profits of the related activity or business which produced the excessive profit, it said.

Officers have also been directed to refer to the terms of the partnership deed for computation of interest on capital payable to a partner while framing assessment as there have been discrepancies in the past.

Experts’ view

“It seems instructions stem from the discovery of apparent gaps in the way assessments have been conducted and unsatisfactory compliance of tax laws by the firms,” said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.

Noting that partnership firms along with Association of Persons and Body of Individuals constitute a significant part of the taxpayer base in India, Sandeep Jhunjhunwala, Director, Nangia & Co, said, “This is clearly an indication of the onset of data-intensive assessment approach and compliance-oriented administration. Cross verification of the firms’ returns with that of partners and reliance on the terms of partnership deed to corroborate claims with respect to interest, remuneration is a good detection scheme to clasp evading taxpayers”.

CAG concern

The circular comes after a report of the Comptroller and Auditor General of India in 2014 had flagged the low effective tax rate of these firms and had recommended that the veracity of exemptions and deductions allowed to the partnership firms as against those claimed by them must be examined.