FROM THE DESK OF THE EDITOR The Indian Partnership Act, 1932 is mainly based on the English law with certain amendments. Most of the family businesses and professional firms in India are carried on in the status of partnership firm because of its advantages and of lesser compliances in comparison to a corporate entity. In recent years number of large firms changed their status into a Limited Liability Partnership. One of the provisions of section 2(22)(e) of the Income-tax Act, 1961, i.e., deemed dividend which is applicable to companies, is not applicable to a firm. Tax Reform Committee (Dr. Raja J. Chelliah) [1992] 194 ITR 271 (St.) (Interim Report) para 12.25 had suggested that the scheme of registration of firm should be abolished and that all the firms be treated a like. It has also suggested that the income should be computed in the hands of the firm, inter alia based on the recommendations, The Finance Act, 1992, [1992] 195 ITR 214 (St.), brought major amendments in the assessment of the partnership firm i.e., the abolition of double taxation in the hands of firm and partners and of the concept of registration of a firm. In the year 2003 the All India Federation of Tax Practitioners have published a publication titled “Taxation of Firms, Partners, AOP/BOI, Joint Ventures - FAQs” which was well received by the Tax Professionals across the country. The Finance Act, 2021 [2021] 432 ITR 52/278 Taxman 3 (St.) has inserted a new section 9B in the Income-tax Act, 1961 which deals with, income on receipt of capital asset or stock-in-trade by specified person from specified entity. Explanation (i) deals with reconstitution of the specified entity, Explanation (ii) defines “specified entity” means a firm or other association of persons or body of individuals (not being
I-7
From the Desk of the Editor
a company or a co-operative society) and Explanation (iii) to section 9B of the Income-tax Act, 1961 defines “specified person”. The Central Board of Direct Taxes (CBDT) vide Circular No. 14 of 2021, dated July 2, 2021 [2021] 436 ITR 25/280 Taxman 29 (St.) have issued guidelines under section 9B and sub-section (4) of section 45 of the Income-tax Act, 1961. The said sections did not form a part of the Finance Bill, 2021 [2021] 430 ITR 74/276 Taxman 76 (St.). The Memorandum explaining the provisions of the Finance Bill, 2021 [2021] 430 ITR 214/276 Taxman 192 (St.) nor in the Notes on Clauses [2021] 430 ITR 160/276 Taxman 150 (St.), contains any explanation or reference to the said provisions. The provision of section 9B of the Income-tax Act, 1961 is being new and likely to generate many unintended litigations which may arise while implementing the provision. One of the schools of thought is as there is no amendment is made in the section 2(47) of the Act, the ratio of the judgment in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj.) (HC) affirmed in Addl.CIT v. Mohanbhai Pamabhai [1987] 165 ITR 166 (SC) wherein the Courts have held that on retirement there is no element of transfer of interest in partnership asset by the retired partner to the continuing partners and the amount received by him was not assessable to capital gains might hold good even after the introduction of section 9B of the Act. Another school of thought is that, when by operation of law i.e., death, a new partner is introduced whether the provision of section 9B of the Income-tax Act, 1961 still applicable, considering the section is a deeming provision and has to be strictly interpreted? The Federation has more than 10,000 members across the country who are actively involved in direct and indirect tax practice. One of the objects of the Federation is to spread education by publishing various publications to better equip the Tax Professionals and taxpayers. The Federation has published more than 45 publications till date.
I-8
From the Desk of the Editor
Considering the importance of the provision of section 9B and section 45(4) of the Income-tax Act, 1961 and complexities involved in the interpretation of the provisions, the Federation, made a request to a young lawyer, Mr. Shashi Ashok Bekal to write a publication for the benefit of tax Professionals. Adv. Shashi Ashok Bekal is a bright upcoming tax counsel, he is a qualified Chartered Accountant, holds two LL.M. degrees (Jindal Global Law School & MNLU-Mumbai) and a Fellow of the Foundation for International Tax. He is a professor at Pravin Gandhi College of Law, teaching Income-tax Act, 1961. He has authored several academic works and articles which are available in the public domain. Mr. Shashi Ashok Bekal has made considerable research on the subject and made an attempt to discuss various issues relating to partnership firm relating to direct taxes, indirect taxes, general law with reference to case laws. In this publication issues relating to Partnership Firm, Limited Liability Partnership, Assessment of AOP and BOI are also discussed. Publication also includes specimen deeds and case studies. This publication is dedicated to Late Shri Bharat ji Agrawal, Senior Advocate and Past National President of the Federation. Late Shri Bharat ji Agrawal was known for his integrity and knowledge and was considered as one of the authorities on direct and indirect taxes. I had the fortune of knowing Shri Bharat ji Agrawal closely for more than two decades. The messages for this publication are written by Hon’ble Mr. Justice Rajesh Bindal, Chief Justice Allahabad High Court. The foreword for this publication is written by Hon’ble Justice Mr. R.K. Agrawal former judge of Supreme Court & Chairman NCDRC, New Delhi. We are sure this publication will serve as a very useful guide to Tax Practitioners and Taxpayers in their day-today practice.
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From the Desk of the Editor
Federation for the first time associated with the team of Taxmann Publications Pvt. Ltd. for publishing this publication with the intention that with their large network and distribution systems, the Tax Practitioners and Taxpayers across the country will be able to take advantages of this publication which is very unique in nature which is part of educational activities of the Federation as an initiative of “75th year of Azadi ka Amrit Mahotsav” for educating the tax payers for better compliance of tax laws. We are quite optimistic that this publication will serve as a useful hand book to the Tax Professionals and Taxpayers to understand the new provision. The readers may write their views or suggestions to aiftpho@gmail.com, this will enable the Author to make improvements in the next edition of the publication. Dr. K. Shivaram, Senior Advocate December 15, 2021
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PRESIDENT’S MESSAGE Namaskar, Dear esteemed members of AIFTP, I am very happy to know that the AIFTP is releasing a hand book on Taxation of Partnership Firm and Limited Liability Partnerships at our 24th National Convention on 25th December, 2021 at Lucknow, the capital city of Uttar Pradesh. This book is dedicated to our own legal luminary, none other than Late Shri Bharatji Agrawal, Senior Advocate and Past National President of AIFTP from Allahabad (Prayagraj). This book contains a special reference to section 9B & section 45(4) of Income-tax Act, 1961, Case Studies, General Law & Specimens. This publication rightly dedicated to the late legend Shri Bharatji Agrawal, as he had argued number of Direct & Indirect Tax matters before the Hon’ble Supreme Court and various High Courts. He is as a role model and an inspiration to the upcoming lawyers. The book is authored by Shashi Bekal, Advocate, Mumbai under the able editorship of Dr. K. Shivaram, Senior Advocate and Past President, AIFTP Mumbai. I congratulate the Author of this book for his dedicated service towards enhancing the knowledge of tax practitioners. Our guide and mentor from Mumbai, Dr. Shivaram is a great contributor towards AIFTP publications. It is an immense pleasure to me for a part of this book which is published in association with Taxmann. I personally offer my profound thanks to all, who have involved in this publication.
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President’s Message
This publication is available to our AIFTP members at a concessional price. I wish all the success to all of them involved in this publication. Long live AIFTP M Srinivasa Rao, National President, AIFTP December 15, 2021
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ALL INDIA FEDERATION OF TAX PRACTITIONERS (AIFTP) Inspired by the ideology to have a common platform for all those who practice taxation laws, irrespective of their individual affiliations and to enable them to share the benefits of their learning and sharing of knowledge, eminent professionals from the fields of Direct and Indirect Taxes conceived the idea of establishing an All-India body for the tax practitioners. It was at the opening ceremony of the National Conference held on November 11, 1976 organised by The Chamber of Income Tax Consultants, Mumbai under Presidentship of Shri B. C. Joshi, that the doyens of the Professionals christened the Association in the presence of former Chief Justice of India, Hon’ble Justice J. C. Shah, distinguished Jurist Padma Vibhushan Dr. N. A. Palkhivala Senior Advocate and Shri Ram Rao Adik, Senior Advocate, Advocate General of Maharashtra. Shri N. C. Mehta, Chartered Accountant, Mumbai, was elected as Founder President of the All-India Federation of Tax Practitioners (AIFTP) and Shri P. C. Joshi Advocate was elected as Secretary General. The AIFTP has completed 45 glorious years of its existence. The main object of AIFTP is to spread education in the matters relating to tax laws, other laws and Accountancy. The AIFTP has its registered Head Office at 215, Rewa Chambers, 31, New Marine Lines, Mumbai - 400 020. The total strength of National Executive Committee Members is 75 headed by the National President, Deputy President, five Vice-Presidents, Secretary General, Treasurer, five Joint Secretaries. The National President (2021) is Mr. M. Srinivasa Rao, Tax Practitioner from Eluru (Vijaywada) and Deputy President Mr. D. K. Gandhi, Advocate from Ghaziabad. The AIFTP is divided into five zones namely, Central Zone, Eastern Zone, Northern Zone, Southern Zone and West-
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All India Federation of Tax Practitioners (AIFTP)
ern Zone. Each Zone is headed by a Chairman, and ViceChairman from each State to which Zone represents, One Secretary and two Joint Secretaries and Treasurer as Office Bearers. The term of the Zonal Office bearers and Managing Committee coincide with the terms of the National Executive Committee. The membership of the AIFTP comprise of Senior Advocates, Advocates, Solicitors, Chartered Accountants and Tax Practitioners who are practicing on Direct & Indirect Taxes, from all States and union territory of the Country. Members of the AIFTP enjoy a strong bond of fellowship leading to fraternal brotherhood amongst professionals. The AIFTP is the only voluntary professional organisation of our country which has 138 Professional Associations as its affiliated members and more than 10,000 individuals as life members from 28 States and 4 Union Territories. For spreading the educational activities, the AIFTP has various Sub-Committees, such as, Journal Committee, Law & Representation Committee (Direct & Indirect Taxes), ITAT Bar Associations’ Co-ordination Committee, Membership Development, Times Committee, publication committee, etc. The AIFTP publishes a monthly Journal covering the latest reported and unreported decisions of the Supreme Court, High Courts and Income Tax Appellate Tribunals, allied laws, and also the articles, opinions and Q&A. The unique feature of the AIFTP Journal is that every quarter, the gist of important case Laws which are published in 33 Tax Magazines, www.itatonline.org are published section wise. Yearly digest of case laws from 2012 onwards are also available on the website i.e., www.aiftponline.org which can be downloaded by the members and tax professionals. AIFTP publishes a monthly newsletter called AIFTP TIMES which is sent to all the members free of charge. Newsletter contains important Notifications, Circulars and other topical information and also information about various activities of the AIFTP.
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All India Federation of Tax Practitioners (AIFTP)
AIFTP website i.e., www.aiftponline.org, is an informative source for the members. The website is regularly updated by a team of dedicated professionals. The Journal and Times are uploaded every month on the website of AIFTP. Professionals can apply Membership, Journal Subscription, ID card through website. AIFTP has been making representations for better tax law and tax administration. AIFTP and Associate members have filed more than 41 Public Interest Petitions (PILs) before various Courts for better administration of tax laws and to uphold the independency of judicial forums. AIFTP regularly sends Pre- and Post-Budget Memorandums. Many of the suggestions and the recommendations are accepted. It regularly publishes books in simple language and questionanswer format at a low cost. It has published more than 45 publications till date. AIFTP in association with Income Tax Appellate Tribunal Bar Association, Mumbai has published a publication named “Digest of Case Laws — Direct Taxes (including allied laws) (2003-2011)”, to Commemorate the 150th Year anniversary of the Hon’ble Bombay High Court. In the year 2015, “Interpretation of Taxing Statutes - Frequently asked questions”, which was dedicated to Honourable Mr. Justice S. H. Kapadia, former Chief Justice of India, (2017) Income tax Appellate Tribunal - A Fine Balance, Law Practice, procedure and conventions - Frequently asked questions Dedicated to Padma Vibhushan Late Dr. N. A. Palkhivala, Senior Advocate. AIFTP has published a publication titled (2018) “311 - Frequently asked questions on Survey” - Direct taxes - Dedicated to Honourable Justice late Dr. B. P. Saraf, Former Chief Justice of Jammu and Kashmir High Court. (2020) “151 Landmark judgments of the Hon’ble Supreme Court of India - 151 years of Mahatma Gandhi” on the auspicious occasion of 151st birth anniversary of Father of the Nation Mahatma Gandhi. This publication dedicated to Honourable Justice late Dr. B. P. Saraf, former Chief Justice of Jammu and Kashmir High Court.
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All India Federation of Tax Practitioners (AIFTP)
AIFTP jointly with the Association Members, organise National Seminars, Conferences and Conventions in various parts of the Country to update its members on Direct and Indirect Taxation. A unique feature of the AIFTP is that its faculties, chairmen, trustees, office bearers and members of the National Executive and Zonal Committees pay a registration fee and bear their own travel and stay expenses. From April 2020 to September 2021 during the period of Covid-19 Pandemic, the AIFTP has conducted more than 200 Webinars on various subjects and all webinars were without any charges. AIFTP as an association with the help of their members have contributed an amount of Rs. 11 lakhs to the Prime Minister Cares Fund. In the year, 1999 the AIFTP had published a publication titled “NRI - A Legal companion” which was dedicated to the War Heroes of Kargil and the entire surplus of the said publication was handed over to the Defence fund. AIFTP members have sponsored various awards in memories of their respective parents in various categories i.e., Best Conference, Best Zone, Best Chairman, Best Upcoming Speakers, etc. For the development of the Tax Bar, the “Nani Palkhivala Memorial National Tax Moot Court Competition” and “Research in Tax Laws” is organised. On 26th November 2021 being celebrated as “National Day” the AIFTP in association with the Goods and Service Tax Practitioners Association Maharashtra (GSTPAM) and Maharashtra National law University Mumbai (MNLU-Mumbai) have hosted Padma Vibhushan N.A. Palkhivala Memorial Tax Moot Court Competition (Virtual) and Research Competition. Since 2004 AIFTP conducts regular International Study tours, in the first study tour a seminar was held at Law Society of England and Wales on April 24, 2004, wherein a publication titled “India - A Global Business Destination” was released at England. AIFTP has voluntarily adopted a Code of Ethics for its members in its Constitution. On request of the AIFTP the Government of India has released Commemorative Postage Stamp in Memory of Padma
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All India Federation of Tax Practitioners (AIFTP)
Vibhushan Late Dr. N. A. Palkhivala, Senior Advocate on 16th January, 2004. The then Hon’ble Prime Minister of India, Shri Atal Bihari Vajpayee released the Commemorative Postage Stamp at Mumbai. The AIFTP was earlier affiliated to the Asia Oceania Tax Consultants’ Association (AOTCA), Japan & had organized the First International Tax Conference at Mumbai from 19th to 21st November, 2009, representing 14 countries wherein 105 delegates enrolled, including 55 foreign delegates. Many members of the AIFTP have been elevated as Judges of the Supreme Court, High Courts, Tribunals and also appointed as Advocate General of various States. On November 11, 2016, on the occasion of completion of 40 years of the AIFTP a publication and a short film titled “40 Years of Milestones” and on November 11, 2021 the AIFTP celebrated its 45 years and a publication titled “Marching towards golden jubilee” was released by which contains the history of the AIFTP and vision for 2026 when we celebrate golden jubilee of the AIFTP. The said publication can be downloaded from the website of the AIFTP. The AIFTP has always believed in professional brotherhood. For support of the members of the AIFTP it has set aside a corpus of Rs. 1 crore for welfare of the members of the AIFTP. During the pandemic the AIFTP has supported financial aides many deserving members from across the country. The AIFTP has introduced a group insurance scheme for the benefit of its members. The AIFTP is the symbol and spirit of National Integration of tax professionals, and with active support of the members it is one of the leading National Tax professional organisations.
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ABOUT THE AUTHOR Advocate Shashi Ashok Bekal is a Tax Counsel from the chamber of Dr. K. Shivaram, Senior Advocate, Mumbai. He is also a visiting professor for teaching Income-tax at Pravin Gandhi College of Law, Mumbai. He is also serving as an Independent Director in Golkunda Diamonds & Jewellery Limited. He is a qualified Chartered Accountant from Institute of Chartered Accountants of India, and a Lawyer from the University of Mumbai. He was awarded a scholarship to pursue his Masters in Law in the field of taxation from Jindal Global Law School. He pursued his second Masters in Law from Maharashtra National Law University - Mumbai. He was honoured as a Fellow of the Foundation for International Tax. He is regularly practicing before the Tax Authorities, Hon’ble Income-tax Appellate Tribunal and various High Courts. He advices Domestic and International Taxpayers on various issues emanating from Withholding of tax, Transfer Pricing, Permanent Establishment, Mergers and Restructurings, Estate Planning, Prosecution under Income Tax laws, et cetera. He has contributed several articles in the filed of Income-tax. His Article on the Faceless Appeal Scheme has been cited in by the Hon’ble Income-tax Appellate Tribunal in the case of Mahadev Cold Storage v. JCIT [2021] 127 taxmann.com 722/190 ITD 273 (Agra-Trib.). He can be reached at shashi.ashok13@gmail.com; Mobile +919920189666
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CHAPTER-HEADS PAGE
Profile of Bharatji Agrawal
I-3
Message by Rajesh Bindal
I-4
Foreword
I-5
From the Desk of the Editor
I-7
President’s Message
I-11
All India Federation of Tax Practitioners (AIFTP)
I-13
About the Author
I-19
Contents
I-23
Abbreviations
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1. General
1
2. Operational issues
15
3. Issues on Residency
33
4. Compliances
45
5. Registration and Inception of a Partnership Firm/Limited Liability Partnership
52
6. Section 9B of the Income-tax Act, 1961
63
7. Section 45(4) of the Income-tax Act, 1961
71
8. Interplay between section 9B & section 45(4) of the Income-tax Act, 1961
81
9. Admission of a Partner
82
10. Retirement of a Partner
87
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Chapter-heads PAGE
11. Expulsion, Death and Insolvency of a Partner
93
12. Reconstitution of a Partnership Firm
104
13. Dissolution of a Partnership Firm
107
14. Conversion of a Partnership Firm
112
15. Set-off and Carry Forward of Losses
120
16. Gift Implications
123
17. Liability and Prosecution
125
18. Stamp Duty Implications
131
19. Goods & Services Tax (GST) Implications
135
20. Labour Law Implications
138
21. Association of Persons and Body of Individuals
142
22. Miscellaneous
149
23. Specimens
162
24. Case Studies
182 Appendices
Appendix 1 : Indian Partnership Act, 1932
191
Appendix 2 : Limited Liability Partnership Act, 2008 214 Appendix 3 : Relevant Sections and Rules of Income-tax
278
Appendix 4 : Circular No. 14 of 2021, dated July 02, 2021
289
List of cases 297 Subject Index 307
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CONTENTS
PAGE
Profile of Bharatji Agrawal
I-3
Message by Rajesh Bindal
I-4
Foreword
I-5
From the Desk of the Editor
I-7
President’s Message
I-11
All India Federation of Tax Practitioners (AIFTP)
I-13
About the Author
I-19
Chapter-heads
I-21
Abbreviations
I-49 CHAPTER 1 GENERAL
Q.1
What is a Partnership?
Q.2
What is a Limited Liability Partnership (LLP)?
Q.3
What is the difference between a Partnership and a Limited Liability Partnership? How to register a Partnership Firm?
Q.4 Q.5 Q.6 Q.7
Q.8
How to register a Limited Liability Partnership? What are the consequences of non-registration of a Partnership Firm? Can the Partners of an unregistered Partnership Firm sue for enforcing their rights under other Acts? Who can become a Partner?
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1 2 2 3 4 4 4 5
Contents PAGE
Q.9
Q.12
What is the maximum number of Partners a Partnership Firm and a Limited Liability Partnership can have? Can a Hindu Undivided Family (HUF) become a Partner in a Partnership Firm or LLP? Who represents the Hindu Undivided Family in a Partnership Firm? Can a company become a Partner?
Q.13
Can a Trust become a Partner?
Q.14
Can two companies enter into a Partnership?
Q.15
Can two Partnership Firms enter into a Partnership? Can a Partnership deed be amended?
Q.10 Q.11
Q.16 Q.17
Q.21
Can a Partnership deed be amended retrospectively? Can a Partnership Firm purchase immovable property? Can Partners assign their property to the Partnership Firm? Can a Coparcener enter into a partnership with the Hindu Undivided Family in their individual capacity? Can a Minor be a Partner?
Q.22
Can a Firm be a pass-through entity?
Q.23
Does the doctrine of piercing/lifting/poking the corporate veil applicable to Partnership Firms? Is the principle of ‘Substance over Form’ applicable to Partnership Firms? Are the provisions of General Anti-Avoidance Rules (GAAR) applicable to Partnership Firms? Are provisions of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, applicable to Partnership Firms?
Q.18 Q.19 Q.20
Q.24 Q.25 Q.26
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5 6 6 7 7 8 8 9 9 10 10 11 11 11 12 12 12 13
Contents PAGE
Q.27 Q.28 Q.29
Can the principle of mutuality apply to Partnership Firms? Can a Partnership Firm purchase agricultural land? Who is a “person” under the Indian Partnership Act, 1932?
13 13 14
CHAPTER 2 OPERATIONAL ISSUES
Q.30 Q.31 Q.32 Q.33 Q.34 Q.35 Q.36 Q.37
Q.38 Q.39
Q.40 Q.41 Q.42
Which method of accounting should be adopted by a Partnership Firm? Does the method of accounting have any bearing on Income-tax Act, 1961 (Act)? Can a Partnership Firm start its operations prior to registration of the Firm? What are ‘Book Profits’? How to compute Book Profits under the Income-tax Act, 1961? Can Capital gains form part of Book Profits? Can Income from other sources form part of Book Profits? Will advance money received in the course of business be considered for the purpose of determining “book profits”? What is the limit on remuneration under section 40(b)(v) of the Income-tax Act, 1961? Can the remuneration received by a Partner attract section 40A(2) of the Income-tax Act, 1961? What would amount to excessive remuneration drawn by a Partner? Can a Partner draw a salary? Can salary paid to a partner be disallowed in the hands of the Partnership Firm?
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15 15 16 16 16 17 17 18 18 19 19 20 20
Contents PAGE
Q.43
Q.44 Q.45
Q.46
Q.47 Q.48 Q.49 Q.50 Q.51 Q.52
Q.53
Q.54 Q.55 Q.56 Q.57
Can a Firm pay salary to a Hindu Undivided Family (HUF) which is a Partner in the Partnership Firm? Can a Partnership Firm pay commission to its Partners? Can commission paid to a partner be disallowed in the hands of the Partnership Firm under section 40A(2) of the Income-tax Act, 1961? Can a Partnership Firm pay commission to a Hindu undivided family, which is a Partner in the Partnership Firm? Can a Partnership Firm pay bonus to its Partners? Can bonus paid to a partner be disallowed in the hands of the Partnership Firm? Can a Partnership Firm pay interest to its Partners? Can interest paid to a partner be disallowed in the hands of the Partnership Firm? Can a Partnership Firm pay interest on the Partner’s current account? Can a Partnership Firm pay interest on the deposits made by the HUF and not by the Individual Partner? Will deduction on payment of interest on partner’s capital be allowed where the income is computed on presumptive basis? What is the maximum rate of interest allowed to a Partner? Can a Firm receive interest on loan advanced to a Partner? Can a Partnership Firm set-off interest payable and receivable from a Partner? Can remuneration or salary be disallowed in a best judgment assessment under section 144 of the Income-tax Act, 1961? I-26
20 21 21
22 22 23 23 23 24 24 25 25 25 26 26
Contents PAGE
Q.58 Q.59 Q.60 Q.61 Q.62 Q.63
Q.64
Q.65
Q.66 Q.67
Q.68 Q.69
Q.70
What is the rate of tax applicable to a Partnership Firm? Are provisions of Minimum Alternate Tax (MAT) applicable to a Partnership Firm? Can a Partnership firm be a charitable organization? Can a Partnership firm make donations? Are there any taxes on distribution of profits to the Partners? Are provisions of section 2(22)(e) of the Income-tax Act, 1961 i.e., deemed dividend applicable to Partnership Firms? Where addition is made in the hands of the Firm on substantive basis, can the same addition be made in the hands of the Partner on protective basis? Can a Partner claim deduction for expenses against remuneration received from the Partnership Firm? Can a Partnership Firm give discounts to its Partners? Whether the provisions of presumptive taxation are applicable to the remuneration and interest received by a Partner? Does a Partner have to pay tax on the share of profits received from the partnership firm? Whether premium paid on keyman Insurance Policy a deductible expense for a Partnership Firm or a Limited Liability Partnership? What is the difference between a Partnership firm/Limited Liability Partnership doing business and a Partnership Firm/Limited Liability Partnership in profession?
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27 27 28 28 28 29 29
30 30 30 31 32 32
Contents PAGE CHAPTER 3 ISSUES ON RESIDENCY
Q.71
Q.72 Q.73
Q.74 Q.75 Q.76 Q.77 Q.78 Q.79 Q.80
Q.81
Q.82 Q.83
How to determine the residential status of a Partnership Firm under the Income-tax Act, 1961? How to determine the residential status of a Limited Liability Partnership? How to determine the residential status of a Partnership Firm and a Limited Liability Partnership under the Foreign Exchange Management Act, 1999? What is a Foreign Limited Liability Partnership? Can a Non-Resident be a Partner in a Partnership Firm? Can a Firm have a majority of Non-Residents as Partners? Can remuneration be paid to Non-Resident Partners? Can interest be paid to Non-Resident Partners? What are the regulations on Foreign Direct Investment into a Partnership Firm? Can the management and control of a Partnership firm/Limited Liability Partnership be outside India? Are the provisions of Place of Effective Management (PoEM) applicable to Partnership Firms/Limited Liability Partnership? Can Foreign Firms have Permanent Establishment (PE) in India? Can the existence of a Partner as an agent of a Firm result in Agency Permanent Establishment?
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33 33 34
34 35 35 36 36 37 37 38 38 39
Contents PAGE
Q.84
Q.85
Q.86 Q.87
Q.88 Q.89
Q.90 Q.91
Q.92
Q.93
Are the provisions of Transfer Pricing applicable to Partnership Firms/Limited Liability Partnerships? What are the situations where Transfer Pricing is applicable to Partnership Firms/ Limited Liability Partnerships? Does the residential status of the Managing Partner matter? What are the consequences in change in the residential status of a Partnership Firm/ Limited Liability Partnership? Can residents invest in a Foreign Partnership Firm? Whether fee received by Non-resident Partner outside India on behalf of the Partnership Firm situated in India, taxable? Can an unregistered Partnership Firm make an Overseas Direct Investment? Can Partnership Firm/Limited Liability Partnerships make overseas direct investment under the Automatic Route? Can the partners of a partnership firm hold shares of the overseas Joint Venture (JV)/ Wholly Owned Subsidiary (WOS) for and on behalf of the firm? Can a Foreign Firm purchase agricultural land?
39 39 42 42 42 43 43 43 43
44
CHAPTER 4 COMPLIANCES
Q.94 Q.95
Does a Partnership Firm need to acquire a Permanent Account Number (PAN)? When does a Partnership Firm/Limited Liability Partnership have to file its Annual Return?
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45 45
Contents PAGE
Q.96 Q.97 Q.98 Q.99 Q.100 Q.101 Q.102 Q.103 Q.104
Q.105
Q.106
How does a Partnership Firm maintain its books of account? Who signs the Income-tax returns of the Partnership Firm? Does a Partnership Firm/Limited Liability Partnership have to be audited? Do Partners in a Partnership Firm have to be Audited? What are the consequences in failure to get the accounts audited? Does a Partnership Firm/Limited Liability Partnership have Advance-tax compliance? Does a Partnership Firm/Limited Liability Partnerships have to Deduct tax at Source? Does a Partnership Firm have to Collect tax at Source? Do Partnership Firms/Limited Liability Partnerships have to prepare a Transfer Pricing Study Report? Does a Partnership Firm/Limited Liability Partnerships require registration under Goods and Services Tax Act, 2017 (GST)? Are there any specific compliances for a Limited Liability Partnership?
46 46 47 47 48 48 48 49 49 50 50
CHAPTER 5 REGISTRATION AND INCEPTION OF A PARTNERSHIP FIRM/ LIMITED LIABILITY PARTNERSHIP
Q.107 Q.108
Q.109
How is Capital Introduced in a Partnership Firm/Limited Liability Partnership? Is section 68 of the Income-tax Act, 1961 i.e., Cash credits, applicable on introduction of Capital? Whether “source of source” rule under section 68 of the Income-tax Act, 1961 applicable to Partnership Firm/Limited Liability Partnerships?
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52 52 53
Contents PAGE
Q.110
Q.123
Are provisions of Benami Transactions (Prohibition) Act, 1988 applicable on introduction of Capital in a Partnership Firm? Can there be two Partnership Firms with the same Partners? Whether revaluation of assets on contribution to a Partnership Firm, taxable in the hands of the Partner? What are the tax implications of revaluation of stock-in-trade at the time of introducing stock-in-trade as a capital contribution? What is the advisable number of Partners in a Partnership Firm? Should the Partnership deed have any clause so as to protect itself from dissolution? Does the profit-sharing ratio be as per the Capital Contribution of the Partners? Do all the Partners have to be paid interest according to their Capital Contribution? Do all the Partners have to be paid interest at the same rate? Can a Partner assign their immovable property in the name of the Partnership Firm? Will assignment of immovable property in the name of the Partnership Firm amount to Transfer? Whether assignment of stock-in-trade by a Partner in the name of the Partnership Firm amounts to Sale? Can a share in the partnership Firm be allotted to a Partner without any Capital Contribution? What are Professional Firms?
Q.124
Can a Firm be a Joint Venture?
Q.125
Can a Special Purpose Vehicle be a Partnership Firm?
Q.111 Q.112
Q.113
Q.114 Q.115 Q.116 Q.117 Q.118 Q.119 Q.120
Q.121
Q.122
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54 54 56 57 57 58 58 59 59 59 60 60 60 61 61 61
Contents PAGE CHAPTER 6 SECTION 9B OF THE INCOME-TAX ACT, 1961
Q.126
Q.134
What is section 9B of the Income-tax Act, 1961? When was section 9B of the Income-tax Act, 1961 introduced? Whether section 9B of the Income-tax Act, 1961 passes the test of Constitutional Validity? Can section 9B of the Income-tax Act, 1961 have retroactive applicability? When is section 9B of the Income-tax Act, 1961 applicable? Whether section 9B of the Income-tax Act, 1961 applicable on cash payment? How to compute ‘Capital Gains’ or ‘Profits & Gains’ under section 9B of the Income-tax Act, 1961? How is Fair Market Value of the asset or stock in trade computed? What is a specified entity?
Q.135
Who is a specified person?
Q.136
Are there any guidelines issued by the Central Board of Direct Taxes for the purpose of section 9B of the Income-tax Act, 1961? Whether deeming sections like section 43CA, section 50C or section 56(2)(x)(b) applicable to transactions covered under section 9B of the Income-tax Act, 1961? Whether section 9B of the Income-tax Act, 1961 applicable to distribution of assets without reconstitution or dissolution of the specified entity? Whether section 9B of the Income-tax Act, 1961 is applicable to payment made to legal heirs of the deceased specified person?
Q.127 Q.128
Q.129 Q.130 Q.131 Q.132
Q.133
Q.137
Q.138
Q.139
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63 63 64 64 64 65 65 65 66 66 66 66
67
67
Contents PAGE
Q.140 Q.141
Q.142
Q.143
Q.144
Q.145
Q.146
Who is liable to pay tax under section 9B of the Income-tax Act, 1961? Whether section 9B of the Income-tax Act, 1961 is applicable to distribution of rural Agricultural Land? Can the Assessing Officer assess a Firm after dissolution as per section 189(1) of the Income-tax Act, 1961? Whether deduction claimed under section 29 of the Income-tax Act, 1961 will be applicable to ‘Profits & Gains’ computed as per section 9B of the Income-tax Act, 1961? Whether Cost of acquisition/Cost of improvement will be applicable as deduction to ‘Capital Gains’ computed as per section 9B of the Income-tax Act, 1961? How is Capital Gains on transfer of self-generated assets and self-generated goodwill as per section 9B of the Income-tax Act, 1961? Will the Specified entity get the benefit under section 48(iii) of the Income-tax Act, 1961?
68 68 69 69
69
70 70
CHAPTER 7 SECTION 45(4) OF THE INCOME-TAX ACT, 1961
Q.147 Q.148 Q.149
Q.150
Q.151
What is section 45(4) of the Income-tax Act, 1961? When was section 45(4) of the Income-tax Act, 1961 introduced? What is the difference between the erstwhile section 45(4) of the Income-tax Act, 1961 and the new provision? Whether section 45(4) of the Income-tax Act, 1961 passes the test of Constitutional Validity? Can section 45(4) of the Income-tax Act, 1961 have retroactive applicability?
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71 71 72 72 73
Contents PAGE
Q.152 Q.153 Q.154 Q.155
Q.156 Q.157
Q.158 Q.159
Q.160 Q.161
Q.162
Q.163 Q.164 Q.165 Q.166 Q.167
When is section 45(4) of the Income-tax Act, 1961 applicable? Whether section 45(4) of the Income-tax Act, 1961 applicable on dissolution? Who is liable to pay tax under section 45(4) of the Income-tax Act, 1961? Does section 45(4) of the Income-tax Act, 1961 override section 45(1) of the Income-tax Act, 1961? How are Gains computed under section 45(4) of the Income-tax Act, 1961? Whether revaluation of capital accounts to be considered for the purpose of computation of Capital Gains under section 45(4) of the Income-tax Act, 1961? What are the implications if the Capital account balance is negative? Can self-generated Goodwill or self-generated assets be revalued for the purpose of section 45(4) of the Income-tax Act, 1961? What is self-generated Goodwill and self-generated assets? Whether section 45(4) of the Income-tax Act, 1961 operates exclusive of section 9B of the Income-tax Act, 1961? Whether the Capital Gains under section 45(4) of the Income-tax Act, 1961, Longterm or short-term Capital Gains? What is section 48(iii) of the Income-tax Act, 1961? How are assets revalued? How to claim the benefit of revaluation of assets? Whether depreciation is allowed on the amount of revaluation? How and when to file Form 5C?
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73 73 73 74 74 75
75 75 76 76 76 77 77 77 78 78
Contents PAGE
Q.168
Q.169
Q.170 Q.171
Q.172
Whether any share of profits is to be considered for the purpose of section 45(4) of the Income-tax Act, 1961? Whether revaluation of stock in trade is accounted for the purpose of section 45(4) of the Income-tax Act, 1961? Whether section 45(4) of the Income-tax Act, 1961 is applicable to Slump Sale? Whether section 45(4) of the Income-tax Act, 1961 is applicable to payments made to the legal heirs of the specified persons? Whether the specified entity can claim the benefit of deduction under section 54EC and section 54EE of the Income-tax Act, 1961 on Capital Gains under section 45(4) of the Income-tax Act, 1961?
78 79 79 79 80
CHAPTER 8 INTERPLAY BETWEEN SECTION 9B & SECTION 45(4) OF THE INCOME-TAX ACT, 1961
Q.173
When will both provisions be applicable?
Q.174
Which section will be made applicable first?
Q.175
What is the impact of ‘gains’ and ‘profits’ computed as per section 9B of the Income-tax Act, 1961 on computation under section 45(4) of the Income-tax Act, 1961?
81 81 81
CHAPTER 9 ADMISSION OF A PARTNER
Q.176
How to admit a Partner?
Q.177
Can a Partner be admitted at any time during the year? Does admission of a Partner amount to reconstitution of the Firm?
Q.178
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82 82 82
Contents PAGE
Q.179
Q.180 Q.181
Q.182
Q.183 Q.184 Q.185
Q.186
Does a ‘Retirement cum Admission’, where the profit-sharing ratios of other partners remain unchanged, also amount to reconstitution of the Firm? Can the share in a Partnership firm be valued? Are provisions of section 56(2)(x) of the Income-tax Act, 1961 applicable to a share in a Partnership Firm? Do the assets of a Firm have to be revalued upon admission of a Partner? If yes, is there a tax incidence? Is section 9B of the Income-tax Act, 1961 applicable on admission of a Partner? Is section 45(4) of the Income-tax Act, 1961 applicable on admission of a Partner? Do the Partners have to prepare a fresh Partnership Deed every time a new Partner is admitted or will an amendment to the existing deed suffice? Is there any specific compliance for a Limited Liability Partnerships (LLP) on admission of a Partner?
83
84 84 84 84 85 85
85
CHAPTER 10 RETIREMENT OF A PARTNER
Q.187 Q.188 Q.189 Q.190 Q.191
How does a Partner retire from a Partnership Firm? Can a Partner retire at any time of the year? Who determines the nature of pay-out on retirement? Does retirement of a Partner amount to reconstitution of the Firm? Does retirement amount to dissolution of the Partnership Firm?
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87 87 87 88 88
Contents PAGE
Q.192
Q.193
Q.194 Q.195
Q.196 Q.197 Q.198
Q.199 Q.200
Q.201
Q.202 Q.203 Q.204
Does a ‘Retirement-cum-Admission’, where the profit-sharing ratios of other partners remain unchanged, also amount to reconstitution of the Firm? Does a retirement of a Partner where the profit-sharing ratios of other partners remain unchanged, also amount to reconstitution of the Firm? What happens when majority of the Partners retire? Are provisions of section 56(2)(x) of the Income-tax Act, 1961 applicable on sale of a share in a Partnership Firm during retirement of a Partner? Is section 9B of the Income-tax Act, 1961 applicable on retirement of a Partner? Is section 45(4) of the Income-tax Act, 1961 applicable on retirement of a Partner? Do the Partners have to prepare a fresh Partnership Deed every time a Partner is retirement or will an amendment to the existing deed suffice? Can a retired Partner claim rights in subsequent profits? Is there any specific compliance for a Limited Liability Partnership (LLP) on retirement of a Partner? Can section 45(1) of the Income-tax Act, 1961 attract on retirement of a Partner, in the hands of a Partner? Is the non-compete fee received on retirement, taxable under the Act? Whether a sum received for not using the Firm name or brand taxable? What is the tax treatment on sale of stock-intrade received by a Partner after retirement?
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88
88
89 89
89 90 90
90 90 91 91 91 91
Contents PAGE
Q.205
Whether allotment of retiring partner’s share to an existing partner taxable or third person?
92
CHAPTER 11 EXPULSION, DEATH AND INSOLVENCY OF A PARTNER
Q.206
What is an expulsion of a Partner?
Q.207
How can a Partner be expelled?
Q.208
Who determines the nature of pay-out on expulsion? What is the journal entry on expulsion of a Partner? Is it necessary that the Partnership Deed to have a clause empowering the partners to expel a Partner? Can the expulsion be challenged before an Authority? What are the consequences of an invalid expulsion? Is section 9B of the Income-tax Act, 1961 applicable on expulsion of a Partner? Is section 45(4) of the Income-tax Act, 1961 applicable on expulsion of a Partner? Do the Partners have to prepare a fresh Partnership Deed every time a Partner is expulsion or will an amendment to the existing deed suffice? Is there any specific compliance for a Limited Liability Partnership (LLP) on the expulsion of a Partner? What are the implications on the death of a Partner? Who determines the nature of pay-out to the legal heirs of the deceased Partner? What are the journal entries required to be passed in case of a death of a Partner?
Q.209 Q.210
Q.211 Q.212 Q.213 Q.214 Q.215
Q.216
Q.217 Q.218 Q.219
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93 93 94 94 94 94 95 95 95 96
96 96 97 97
Contents PAGE
Q.220
Q.221
Q.222 Q.223 Q.224 Q.225 Q.226
Q.227 Q.228
Q.229
Q.230 Q.231 Q.232
Q.233
Does death of a partner amount to reconstitution of a Firm under section 9B or section 45(4) of the Income-tax Act, 1961? Does death of a partner amount to Dissolution of a Firm for the purpose section 9B of the Income-tax Act, 1961? Will death of a Partner result in two assessments? Does a legal heir have to be brought in as a Partner? Are legal heirs bound by the terms of the Partnership Deed? Can a Partner of the Firm also be the legal heir of a deceased Partner? Does the firm continue till the end of the financial year with the legal heirs or is the firm reconstituted immediately? What happens when there are only two partners and one dies? In case of a Partnership between two partners, can the surviving partner enter into a partnership with the legal heirs of the surviving partner? Whether any ex-gratia payment made to the legal heirs of a deceased Partner for services rendered to the Firm, taxable? Is section 9B of the Income-tax Act, 1961 applicable on the death of a Partner? Is section 45(4) of the Income-tax Act, 1961 applicable on the death of a Partner? Do the Partners have to prepare a fresh Partnership Deed on the death a Partner is expulsion or will an amendment to the existing deed suffice? Is there any specific compliance for an LLP on the death of a Partner?
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97 98 98 99 99 100 100 100 101
101 101 102 102
102
Contents PAGE
Q.234 Q.235 Q.236
What are the implications of being adjudicated as insolvent? Does insolvency of a Partner amount to dissolution of the Partnership Firm? Is a Partner responsible for the act of the firm after his insolvency?
102 103 103
CHAPTER 12 RECONSTITUTION OF A PARTNERSHIP FIRM
Q.238
104 Does a change in profit sharing ratio amount 104
Q.239
105
Q.237
Q.240
Q.241
What is reconstitution of a Partnership Firm?
to reconstitution of the Firm? Does a change in capital contribution amount to reconstitution of the Firm? Is section 9B of the Income-tax Act, 1961 applicable is payment is made in cash to a Partner? Where all the partners are family members and there is a distribution of asset/share in partnership as per a Deed of Family Settlement, will it amount to reconstitution of the Partnership Firm?
105 105
CHAPTER 13 DISSOLUTION OF A PARTNERSHIP FIRM
Q.242 Q.243 Q.244 Q.245
Q.246 Q.247
107 When can a firm be dissolved? 107 What is dissolution by will? 108 Can a Partnership Firm get automatically 108 What is dissolution of a Partnership Firm?
dissolved, if the partnership was for a fixed tenure? What is dissolution by the Court?
108 Does dissolution of a Firm attract section 109 9B of the Income-tax Act, 1961?
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Contents PAGE
Q.248
Q.249 Q.250 Q.251 Q.252
Q.253 Q.254
Q.255
Will dissolution of a Firm attract section 9B of the Income-tax Act, 1961 if the payment is made in cash? Does dissolution of a Firm attract section 45(4) of the Income-tax Act, 1961? Does compulsory dissolution attract Income tax provisions? Are partners liable for acts done prior to dissolution? What is the Income-tax incidences in the hands of the Partners upon dissolution of the Partnership Firm? Whether sale of goodwill of the Firm is taxable? Can a warrant for search & seizure be issued in the name the Partnership Firm after its dissolution? Can a Firm waive a loan given to a Partner and vice versa? What would be the implications under the Act?
109 109 109 110 110 110 110 111
CHAPTER 14 CONVERSION OF A PARTNERSHIP FIRM
Q.256
Can a proprietary concern be converted into a Partnership? Can a firm be converted into a Company?
112
Q.258
113 Can an unregistered Partnership Firm be 113
Q.259
113
Q.257
Q.260 Q.261
converted into a Company? What are the consequences of premature transfer of shares of the resultant company? Can a Partnership Firm be converted into a Limited Liability Partnership? What are the tax implications of converting a firm into a Limited Liability Partnership?
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114 114
Contents PAGE
Q.262
Q.263 Q.264
Q.265
Q.266 Q.267
What are the conditions under the Income-tax Act, 1961 for conversion of a Firm/Limited Liability Partnership into a Company? Can Company be converted into a Limited Liability Partnership? What are the conditions under the Income-tax Act, 1961 for conversion of a Company into a Limited Liability Partnership? Whether exemptions/deductions granted to a Partnership Firm be continued after conversion? What are the consequences of a Partnership Firm being sold in a Slump Sale? Is a successor entity entitled to deduction of bad debts incurred by the predecessor entity?
115 116 116 117 118 118
CHAPTER 15 SET-OFF AND CARRY FORWARD OF LOSSES
Q.270
120 What is carry forward of losses? 120 Carry forward of losses in case of a retire- 120
Q.271
121
Q.268 Q.269
Q.272
Q.273
Q.274
What is set-off of losses?
ment of a Partner? Carry forward of losses in case of a conversion of a Partnership Firm? Where a partnership firm is dissolved and the business is continued by a proprietary concern, will the proprietary concern be entitled to carry forward and set-off the losses of the Partnership Firm? Can the losses of a sole proprietorship concern be carried forward by the legal heirs by forming a Partnership? Can a partner of an unregistered firm setoff her share in losses against her personal income?
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121
122 122
Contents PAGE CHAPTER 16 GIFT IMPLICATIONS
Q.275 Q.276
123 Can a Partnership Firm accept gifts from 123 Can a Partnership Firm accept gifts?
sister concerns/associated enterprises? Can a Partnership Firm accept grants?
Q.278
123 Will Partners gifting other partners be 124
Q.279
124
Q.277
Q.280
taxable? Can a Partner bring capital which was received as a gift? Can a Partnership Firm distribute assets to a partner during the subsistence of the Partnership Firm?
124
CHAPTER 17 LIABILITY AND PROSECUTION
Q.281 Q.282 Q.283
Q.284 Q.285
Q.286
Who is liable for the Income-tax liability of the Partnership Firm? What will happen if the Firm does not pay tax on time? Where the Partners of a firm are also directors in a Company, can the Firm be made liable for the tax liability of the Company? Can a minor be held liable for Income-tax dues? If the Income-tax liabilities are not paid, can the Income-tax Authorities attach the properties and freeze the bank account of the Partnership Firm? If the Income-tax liabilities of the Firm are not paid, can the Income-tax Authorities attach the properties and freeze the bank account of the Partner?
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125 125 125 126 126
126
Contents PAGE
Q.287
Q.288 Q.289
Q.290 Q.291 Q.292 Q.293 Q.294
If the Income-tax liabilities of the Partner is not paid, can the Income-tax Authorities attach the properties and freeze the bank account of the Partnership Firm? Who is the ‘Principal Officer’ of the Partnership Firm? Can other partners other than the Managing Partner be prosecuted by the Income-tax Authorities? Can sleeping Partners be prosecuted by the Income-tax Authorities? Can a minor be prosecuted by the Income-tax Authorities? Can a Partner over the age of 70 be prosecuted under the Income-tax? Can the Offence be compounded?
127
127 128 128 129 129
130 Whether compounding fee would be allow- 130 able as deduction?
CHAPTER 18 STAMP DUTY IMPLICATIONS
Q.295 Q.296 Q.297
Q.298 Q.299 Q.300 Q.301
Is Stamp Duty applicable on registration of a Partnership Deed? Is Stamp Duty applicable on assignment of a property to a Partnership Firm? Can the assignment of a property attract section 50C or 56(2)(x) of the Income-tax Act, 1961? Is Stamp Duty applicable on assets taken over by a retiring partner? Is Stamp Duty applicable on assets taken over by the legal heirs on death of a Partner? Is Stamp Duty applicable on assets taken over by partners on dissolution of a Firm? Is Stamp Duty applicable on transfer of a share of Partnership?
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131 131 131 132 132 132 132
Contents PAGE
Q.302
Q.303
Q.304
Will the distributed assets attract section 43CA or 50C or 56(2)(x) of the Income-tax Act, 1961? Is Stamp Duty applicable on conversion of a Partnership Firm to a Limited Liability Partnership or Company? Can a share in Partnership Firm be settled in a Trust?
133 133 134
CHAPTER 19 GOODS & SERVICES TAX (GST) IMPLICATIONS
Q.305 Q.306 Q.307
Q.308 Q.309 Q.310
How does a Partnership Firm get its GST registration number? Does a new number have to be obtained on the reconstitution of the Partnership Firm? Does a new number have to be obtained on the conversion of the Partnership Firm to a Limited Liability Partnership or a Company? Who can be liable under recover proceedings under GST? Who can be arrested under GST?
135 135 135 136
136 Can a sleeping partner be arrested under 136 GST?
CHAPTER 20 LABOUR LAW IMPLICATIONS
Q.311 Q.312 Q.313 Q.314 Q.315
Whether The Payment of Gratuity Act, 1972 is applicable to Partnership Firms? Whether The Payment of Bonus Act, 1965 is applicable to Partnership Firms? Whether The Payment of Wages Act, 1936 is applicable to Partnership Firms? Whether The Minimum Wages Act, 1948 applicable to Partnership Firms? Whether The Factories Act, 1948 applicable to Partnership Firms?
I-45
138 138 139 139 139
Contents PAGE
Q.316 Q.317
Q.318 Q.319 Q.320
Whether The Employees’ State Insurance Act, 1948 is applicable to Partnership Firms? Whether The Employees Provident Fund and Miscellaneous Provisions Act, 1952 applicable to Partnership Firms? Under which section is payments made to Employee’s Provident Fund, deductible? Under which section is payments made to Employer’s Provident Fund, deductible? What will the implications of the Four new Labour Codes i.e., The Code on Wages, 2019; The Code on Social Security, 2020; The Occupational Safety, Health and Working Conditions Code, 2020; and The Industrial Relations Code, 2020 on Partnership Firms?
140 140 140 141 141
CHAPTER 21 ASSOCIATION OF PERSONS AND BODY OF INDIVIDUALS
Q.321 Q.322 Q.323 Q.324 Q.325
Q.326
Q.327
What is an Association of Persons (AOP)? Who can be members of an AOP? What is a Body of Individuals (BoI)? Who can form a BoI? What is the difference between an AoP and a BoI? What is the manner of taxation of AOP and BOI? Is there any specific provision under the Income-tax Act, 1961 for disallowance of payments made to the members of an AOP? Is there any specific provision under the Income-tax Act, 1961 for computing the share of a member in the Income of an AOP? Does the Ld. Assessing Officer/Department have an option to either assess an AOP or its members?
I-46
142 142 142 143 144 145 145
Contents PAGE
Q.329
146 When can the members share be considered 146
Q.330
147
Q.328
Q.331
What is “Maximum Marginal Rate” (MMR)?
to be unknown and liable to be taxed at Maximum Marginal Rate? Whether the provisions of section 9B and section 45(4) of the Income-tax Act, 1961 are applicable to AOPs and BOIs? Who are the specified persons in an AOP and BOI for the purpose of section 9B and section 45(4) of the Income-tax Act, 1961?
148
CHAPTER 22 MISCELLANEOUS
Q.332 Q.333
Q.334
How is a Limited Liability Partnership wound up? Whether winding up of an LLP/Partnership Firm is akin to dissolution of an LLP/Partnership Firm? Who can file the appeal after dissolution of the Partnership Firm? Can the dissolution of an LLP be challenged?
149 149 149
Q.336
150 Is there a Tribunal for issues arising out of 150
Q.337
150
Q.335
Q.338 Q.339
Q.340
Q.341
LLP Act, 2008? Who is liable to repay a loan borrowed by a Partnership Firm? What is the consequence of dishonour of a cheque issued by a Partnership Firm? Can a Partner be a guarantor for the loan availed by the Partnership Firm and vice versa? Can an action under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) be initiated against the guarantor? As per SARFAESI does Income-tax dues have priority over a secured creditor?
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150 151 151
151
Contents PAGE
Q.342 Q.343 Q.344
Q.345
Q.346
Q.347
Q.348 Q.349
Q.350
Q.351
Q.352 Q.353
Is Insolvency and Bankruptcy Code, 2016 (IBC) applicable to Partnership Firms? Can IBC proceedings be initiated against the guarantor? Can an arbitration clause be included in a Partnership deed, so as to refer the disputes to arbitration? Where a Partnership Firm is dissolved can a third party enforce the Arbitration clause in the Arbitration agreement entered between the third party and Partnership Firm? Can a search proceeding at the Partner’s residence be considered as a search on the Partnership firm? Can it be contended that the stock found at the premises of a Partner in the course of search was their personal property and did not belong to the Partnership Firm? Can the statement of one partner be retracted by another partner? Can the premises of an erstwhile partner be searched where the search warrant is in the name of the Partnership Firm? Can an addition be made on a Partnership Firm purely on the basis of a confessional statement of a Partner, and without any tangible material or evidence? Where during a search proceeding, a partner surrenders unaccounted money, can the Department continue to make protective additions in the hands of the Partnership Firm? What is the validity of a statement given by a Partner during a survey proceeding? Whether a copy of the Partnership Deed is required to be submitted along with the return of Income?
I-48
152 152 153 154
154 155
155 155 156
156
157 157
Contents PAGE
Q.354
Q.355
Q.356
Q.357
Q.358
Q.359
Q.360
What are the consequences on not submitting a copy of the Partnership Deed along with the return of income? What are the implications under the Income-tax Act, 1961 in respect of credits appearing in the books of the Partnership Firm? What are the implications under the Income-tax Act, 1961 in respect of credits appearing in the name of partners in the books of the firm? In a case where receipts from a partner towards capital etc., has been recorded in the books of firm, whether assessment in the hands of partner can be made under section 68 of the Income-tax Act, 1961 on the basis of such credit entries in firm’s books? Is it legally required for a firm to explain a source from where the partners had brought the amounts into the firm? Whether unexplained credits in the books of the firm can only be added under section 68 of the Income-tax Act, 1961 in the hands of the firm? Whether in respect of certain deposits appearing in the books of the Partnership firm in the name of its partners, can additions be made both in the hands of partners as well as firm in respect of same deposits?
157 158
159
159
160 160
161
CHAPTER 23 SPECIMENS
A. Draft deed of Partnership B. Draft deed of Admission C. Draft deed of Retirement
I-49
162 167 169
Contents PAGE
171 173
D. Draft dissolution deed E. Draft LLP Agreement CHAPTER 24 CASE STUDIES
Case Study 1: A pplication of section 45(4) of the 182 Income-tax Act, 1961 (Act) Case Study 2: Application of section 9B and section 184 45(4) of the Income-tax Act, 1961 (Act) Case Study 3: Computation of Capital Gain tax under 186 section 45(4) of the Act Attribution of Profits under section 45(iii) of the Act Appendices Appendix 1 : Indian Partnership Act, 1932
191
Appendix 2 : Limited Liability Partnership Act, 2008 214 Appendix 3 : Relevant Sections and Rules of Income-tax
278
Appendix 4 : Circular No. 14 of 2021, dated July 02, 2021
289
List of cases
297
Subject Index
307
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ABBREVIATIONS
Journals, Reports & Magazines All India Federation of Tax Practitioners Journal – AIFTPJ All India Tax Tribunal judgments
– TTJ
All India Reporter
– AIR
Company Cases
– Comp-Cas
Current Tax Reporter
– CTR
Direct Taxes Reporter
– DTR
Goods and Service Tax Reports
– GSTR
Income-tax Tribunal Decisions
– ITD
ITR’s Tribunal – Tax Reports (ITR (Trib.))
– ITR (Trib)
Income-tax Reports
– ITR
Supreme Court Cases
– SCC
Taxman
– Taxman
Abbreviations – Authorities Additional Commissioners of Income-tax
– ACIT
Authority for Advance Rulings
– AAR
Assistant Commissioner of Income-tax
– ACIT
Assistant Directors of Income-tax
– ADIT
Assessing Officer
– AO
Appellate Tribunal
– ITAT
Central Board of Direct Taxes
– CBDT
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Abbreviations Chief Commissioner of Income-tax
– CCIT
Commissioner of Income-tax
– CIT
Commissioner of Income-tax (Appeals)
– CIT(A)
Deputy Commissioner of Income-tax
– DCIT
Director of Income-tax
– DIT
Director General of Income-tax
– DGI
High Court
– HC
Income-tax Officer
– ITO
Income-tax Settlement Commission
– ITSC
Joint Commissioner of Income-tax
– JCIT
Joint Directors of Income-tax
– JDIT
Principal Chief Commissioner of Income-tax
– PCIT
Principal Director General of Income-tax
– PDGI
Supreme Court
– SC
Tax Recovery Officer
– TRO
Transfer Pricing Officer
– TPO
Union of India
– UOI
Courts Supreme Court
– (SC)
High Court
– (HC)
Allahabad
– (All.)
Andhra Pradesh
– (AP)
Assam
– (Guwahati)
Bombay
– (Bom.)
Calcutta
– (Cal.)
Chhattisgarh
– (Chhattisgarh)
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Abbreviations Delhi
– (Delhi)
Gauhati
– (Gauhati)
Gujarat
– (Guj.)
Himachal Pradesh
– (HP)
Jammu & Kashmir
– (J&K)
Jharkhand
– (Jharkhand)
Karnataka
– (Kar.)
Kerala
– (Ker.)
Madhya Pradesh
– (MP)
Madras
– (Mad.)
Orissa
– (Orissa)
Patna
– (Patna)
Punjab & Haryana
– (P&H)
Rajasthan
– (Raj.)
Sikkim
– (Sikkim)
Telangana
- (Telangana)
Tripura
- (Tripura)
Uttarakhand
– (Uttarakhand)
Uttar Pradesh
– (UP)
Tribunal Benches Agra
– (Agra)
Ahmedabad
– (Ahd.)
Allahabad
– (All.)
Amritsar
– (Asr.)
Bangalore
– (Bang.)
Bilaspur
– (Bilaspur)
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Abbreviations Calcutta
– (Kol.)
Chandigarh
– (Chd.)
Chennai
– (Chennai)
Cochin
– (Cochin)
Cuttack
– (Cuttack)
Delhi
– (Delhi)
Guwahati
– (Gau.)
Hyderabad
– (Hyd.)
Indore
– (Indore)
Jabalpur
– (Jabalpur)
Jaipur
– (Jp.)
Jodhpur
– (Jodh.)
Lucknow
– (Luck.)
Mumbai
– (Mum.)
Nagpur
– (Nag.)
Panaji
– (Panaji)
Patna
– (Patna)
Pune
– (Pune)
Raipur
– (Raipur)
Rajkot
– (Rajkot)
Ranchi
– (Ranchi)
Surat
Vishakhapatnam
– (SRT) – (Vishakha)
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6
SECTION 9B OF THE INCOME-TAX ACT, 1961
CHAPTER
Section 9B of the Income-tax Act, 1961 was introduced via Finance Act, 1961. It was introduced retrospectively with effect from Assessment Year 2021-22. The newly inserted law has opened a pandora’s box of queries and issues. This chapter has attempted to address these ambiguities of tax payers and tax professionals. Q126. What is section 9B of the Income-tax Act, 1961? Answer: Section 9B of the Income-tax Act, 1961 is “Income on receipt of capital asset or stock in trade by specified person from specified entity”. The said section is a deeming provision to bring distribution of capital asset or stock in trade or both, on dissolution or reconstitution within the ambit of Income. Q127. When was section 9B of the Income-tax Act, 1961 introduced? Answer: Section 9B of the Income-tax Act, 1961 was not proposed in the Finance Bill, 2021. It was later introduced in the Finance Act, 2021 (2021) 432 ITR (St) 52. Section 5 and section 16 of the Finance Act, 2021 introduced Section 9B of the Income-tax Act, 1961. Therefore, as the same does not form part of “the Memorandum explaining the provisions of the Finance Bill, 2021” and as there were no Constitutional Assembly Debates while passing the Finance Bill, 2021, there is no literature explaining the intention of the Legislature. The Central Board of Direct taxes have prescribed guidelines under section 9B 63
Section 9B of the Income-tax Act, 1961
and section 45(4) of the Income-tax Act, 1961 vide Circular No. 14 of 2021 dated July 02, 2021. Q128. Whether section 9B of the Income-tax Act, 1961 passes the test of Constitutional Validity? Answer: Section 9B of the Income-tax Act, 1961 passes the test of Legislative competence, it is not violative of any Fundamental right guaranteed in Part III of the Constitution of India, nor does the provision infringe or is ultra vires any other provision of the Constitution. Therefore, Section 9B of the Income-tax Act, 1961 passes the test of Constitutional validity. In the case of Sardar Baldev Singh v. CIT [1960] 40 ITR 605 (SC) it was held that the legislative competence to enact the section can be clearly upheld on the ground that it was to prevent evasion of income-tax and that would be enough to dispose of the argument that the section was an incompetent piece of legislation. Q129. Can section 9B of the Income-tax Act, 1961 have retroactive applicability? Answer: Section 9B of the Income-tax Act, 1961 introduced vide Finance Act, 2021 is effective from Assessment Year 2021-22 onwards i.e., the same is applicable to Finance Year 2020-21. With respect to the retroactivity of the newly inserted provision, there is no bar on the Legislature to make retroactive amendments. The Hon’ble Supreme Court in the case of Chhotabhai Jethabhai Patel and Co. v. Union of India 1962 SCR Supl. (2)(1) has held that if a power to impose taxation has been conferred by a constitution, then the legislature could equally make the law retroactive and impose the duties from a date earlier than the date from which it was imposed. Q130. When is section 9B of the Income-tax Act, 1961 applicable?
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Section 9B of the Income-tax Act, 1961
Answer: Section 9B of the Income-tax Act, 1961 is applicable when a Specified Entity distributes Capital Assets or Stock-in-Trade or both to the specified person on dissolution or reconstitution of the Specified Entity. Refer Question No. 135 for “specified entity” and Question No. 136 for “specified person”. Q131. Whether section 9B of the Income-tax Act, 1961 applicable on cash payment? Answer: No. Section 9B of the Income-tax Act, 1961 is only applicable on distribution of Capital Asset or Stock-in-Trade or both. Q132. How to compute ‘Capital Gains’ or ‘Profits & Gains’ under section 9B of the Income-tax Act, 1961? Answer: The Fair Market Value of the Capital Asset or Stock-in-Trade will be consideration received. Any profits and gains arising from such deemed transfer to the specified persons by the specified entity would be taxable in the hands of the specified entity under the head “Profits and gains of business or profession” or under the head “Capital gains”, as applicable. Q133. How is Fair Market Value of the asset or stock in trade computed? Answer: As per section 2(22B) of the Income-tax Act, 1961, “fair market value”, in relation to a capital asset, means— (i) The price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and (ii) where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act.
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Handbook on Taxation of Partnership Firms & Limited Liability Partnerships: Frequently Asked Questions AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO PAGE NO. BINDING TYPE
: SHASHI ASHOK BEKAL : TAXMANN : JANUARY 2022 : 2022 EDITION : 9789392211225 : 370 : PAPERBACK
Rs. 945 | USD 46
Description This unique/one-of-a-kind book covers 360 frequently asked questions (FAQs) on the contentious subject of Taxation of Partnership Firms & Limited Liability Partnerships. It is the only publication in the country that exhaustively deals with the new provisions of Section 9B and Section 45(4) of the Income-tax Act, 1961 & General Law. This book will serve as a helpful reference and guide for Lawyers, Chartered Accountants, Tax Practitioners, Taxpayers, and the Officers of the Tax Department. The Present Publication is the 2022 Edition, edited by Dr K. Shivaram & authored by Adv. Shashi Ashok Bekal, with the following noteworthy features: u u
[360 Frequently Asked Questions] on taxation of Partnership Firms & Limited Liability Partnerships [Exhaustive Coverage] The book is divided into 24 Chapters viz:
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[Case Study] To provide clarity on Section 9B and Section 45(4), the following case studies are included in this book:
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[Implication of Other Laws] vis-à-vis Partnership Firms & Limited Liability Partnerships:
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Admission of a Partner Dissolution of a Partnership Firm Reconstitution of a Partnership Firm, etc.
Application of Section 45(4) of the Income-tax Act Application of Section 9B & Section 45(4) of the Income-tax Act Computation of Capital Gain tax under Section 45(4) of the Income-tax Act; Attribution of Profits under Section 45(4) Stamp duty Goods & Services Tax (GST) Foreign Exchange Management Act (FEMA) Labour Laws
Reviewed by the following Eminent Personalities u
Hon’ble Justice Rajesh Bindal | Chief Justice – Allahabad High Court
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“… It is an effort to make complex issues of taxation easier. This publication is in FAQ Format and aims at addressing not only the ambiguities arising from the amendments vide the Finance Act, 2021 vis-à-vis Partnership Firms, LLPs, etc. but will prove to be a tool for tax consultants, tax administrators, taxpayers and all others concerned with the subject…”
Hon’ble Justice R.K. Agarwal | Former Judge – Supreme Court of India & President | NCDRC
“… The book contains detailed information in FAQ format with respect to various provisions of the Partnership firm. I appreciate the pain taken by the Authors to do a lot of hard work and research before writing such a useful Handbook…”
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