Partnership firm is subjected to taxation under the Income Tax Act,1961
. It is the umbrella Act for all the matters relating to income tax and empowers the Central Board of Direct Taxes (CBDT)
to formulate rules (The Income Tax Rules,1962
) for implementing the provisions of the Act. The CBDT is a part of Department of Revenue
in the Ministry of Finance
. It has been charged with all the matters relating to various direct taxes in India and is responsible for administration of direct tax laws through the Income Tax Department
. The Income Tax Act is subjected to annual amendments by the Finance Act
, which mentions the 'rates' of income tax and other taxes for the corresponding year.
Under the Income Tax Act, the Partnership firm is taxed as a separate entity, distinct from the partners. In the Act, there is no distinction between assessment of a registered and unregistered firms. However, the partnership must be evidenced by a partnership deed. The partnership deed is a blue print of the rights and liabilities of partners as to their capital, profit sharing ratio, drawings, interest on capital, commission, salary, etc, terms and conditions as to working, functioning and dissolution of the partnership business.
Under the Act, a partnership firm may be assessed either as a partnership firm or as an association of persons(AOP). If the firm satisfies the following conditions, it will be assessed as a partnership firm, otherwise it will be assessed as an AOP:-