Q. Write short notes on the following : (a) Working partner and his remuneration. (b) Assessment as a Firm u/s 184.

Q. Write short notes on the following :
(a) Working partner and his remuneration.
(b) Assessment as a Firm u/s 184.

Ans. 

(a) Working partner and his remuneration 

‘Working Partner’ means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner. A non-working partner may be financing partner, dormant or sleeping partner. 

Sometimes, the amount of remunation payable to each working partner is not specifically is stated in the partnership deed. It contains only the fact that the “ Working partners shall be paid the remuneration permissible u/s 40(b).” Similarly, in some cases it is mentioned in the deed that the remoneration payable to working partners shall be decided at the end of accounting year.

In this connection, the board has clarified that the partnership deed must specifically state the amount of remuneration payable to each working partner or how the remuneration will be computed otherwise no deduction will be allowed u/s 40(b) regarding remuneration to working partners. 

(b) Assessment as a Firm u/s 184

1. A firm shall be assessed as firm, if : OR A firm shall be assessed as firm if it satisfies the following conditions : 

(i) the partnership is evidenced by an instrument.

(ii) the individual shares of the partners are specified in that instrument. 

2. A certified copy of the instrument of partnership deed shall accompany the return of income of the firm for the previous year relevant to the assessment year in respect of which assessment as a firm is first sought.

3. If once a firm is assessed as a firm for any assessment year, it shall continue to be assessed as a firm for every subsequent year if there is no change in the constitution of the firm. 

4. If any change occurs in the previous year, the firm shall furnish a certified copy of the revised partnership deed along with the return of income for the relevant previous year. 

5. If there is, on the part of the firm, any failure to comply with the provisions of section 144 [viz., failure to file the return of income, failure to comply with the terms of a notice issued under section 142(1) or 143 (2)], the firm shall be assessed as a firm. In such a case the following provisions shall apply : 

(a) No deduction by way of payment of interest, salary, bonus, commission or remunration, by whatever name called, made by the firm to its partners shall be allowed in computing, the income chargeable under the head ‘Profits and Gains of Business or Profession’.

(b) Such interest, salary, bonus, commission or remunration shall not be chargeable to tax in the hands of partners under the head ‘Profits and Gains of Business or Profession’ u/s 28(v).

Assessment of firm u/s 185: [K.U 2012M] 

1. Where a firm does not comply with the provision of section 184 for any assessment year, the forum shall be assessed for the assessment year as a firm. 

2. No deduction by way of payment of interest, salary, bonus, commission or remunration, by whatever name called made by the firm to its partners shall be allowed in computing the income chargeable under the head ‘Profits and Gains of Business or Profession’.

3. Such interest, salary, bonus, commission or remunration shall not be chargeable to tax in the hands of partners under the head ‘Profits and Gains of Business or Profession’. [u/s 28(v)].

working partner remuneration assessment as firm section 184 185

‘Income Tax is charged on the income of previous year’. Do you fully agree with this statement? If not, what are the exceptions?

Q. ‘Income Tax is charged on the income of previous year’. Do you fully agree with this statement? If not, what are the exceptions?

Ans. The year in which income is earned is known as previous year and the next year in which this income is taxable is known as assessment year. 

‘Income Tax is charged on the income of previous year’. This statement is generally true but not fully. Under the Income Tax Act, income earned in previous year is taxable in assessment year. This means that tax is not charged in the same year in which the income is earned. 

Income tax is charged on the income of the previous year. However, there are certain exceptions to this rule. In the following cases the assessee is liable to be assessed to tax in the same year in which he earns the income :

1. Income of non-resident from shipping business: In case of a non-resident carrying shipping business, any income derived from carrying passengers, livestock, mail or goods shipped at a port in India, will be taxed in the year of its earning. 7½% of the amount paid or payable on account of such carriage will be deemed to be the income. 

2. Income of persons leaving India: When an individual may leave India during the current assessment year or shortly after its expiry, and that he has no present intention of returning to India, the total income of such individual for the period from the expiry of the previous year for that assessment year up to the probable date of his departure from India shall be charged to tax in the assessment year.

3. Income of an association of persons or a body of individuals or an artificial juridical person formed for a particular event or purpose: Where any A.O.P or B.O.I or an artificial juridical person is formed or established or incorporated for a particular event or purpose and is likely to be dissolved in the assessment year in which it is formed or established or incorporated or immediately after such assessment year, the total income of such assessee for the period from the expiry of the previous year for that assessment year upto the date of its dissolution, shall be chargeable to tax in that assessment year.

4. Transfer of property to avoid tax: An assessee is likely to transfer his property to avoid tax, the total income of such person for the period from the expiry of the previous year for the assessment year to the date when assessing officer commences preceeding shall be chargeable to tax in the same assessment year.

5. On discontinuance of business or profession: In the case of discontinuance of a business or profession, the income of the period from the expiry of the previous year for the assessment year in which the business or profession is discontinued upto the date of such discontinuance may be charged to tax in the same assessment year. 

[C.W. General rule is that income of previous year is taxable in assessment year with some exceptions.

Exceptions to the general rule:

1. Income of non-resident shipping company: Shipping company is one which carry passengers from one port to another. 7.5% of the total freight shall deemed to be the income of non-resident shipping company.

2. Income of person leaving India: has no intention to come back will chargeable to tax in the same assessment year.

3. Income of AOI, BOI or artificial juridical person fall for a particular object.

4. Transfer of assets/shares to avoid tax liability: tax will be paid on same year.]

5. On discontinuance of business.

Best Judgement Assessment.

Q. What is meant by the expression ‘Best Judgement Assessment’? Under what circumstances can recourse be had to this method of assessment? Are there any remedy open to the assessee against such assessment? 

Ans. MEANING OF BEST JUDGEMENT ASSESSMENT: In Best Judgement Assessment, assessing officer should really base the assessment on the best of his judgement. The law states he must act honestly not vindictively (बदला लेते हुए). He must make fair estimate of the income for the proper assessment. For that, he must be able to take into consideration the local knowledge and repute in regard of assessee’s circumstances and his own knowledge regarding previous returns and assessments of the assessee and other matters which he thinks will help him in making proper assessment. It is purely a guess work. It is also known as ex-parte assessment. If appeal is file against Best Judgement Assessment, the assessing officer shall have to disclose the basis of a judgement befote appellate authority. 

Best Judgement Assessment can be compulsory or discretionary. 

Compulsory Best Judgement Assessment: Sec. 144 empowers the Assessing Officer to make assessment to the best of his judgement in the following circumstances:

(i) Where assessee has failed to file voluntarily return u/s 139(1) or no return has been made in response of the notice of the Assessing Officer.

(ii) Where there has been failure to comply with the terms of notice issued u/s 142(1) requesting the assessee to produce the books of accounts or he fails to get his accounts audited u/s 142(2A).

(iii) To verify the correctness of the return, assessing officer serve the notice upon the assessee u/s 143(2) asking him to attend the office or to produce the evidences in support of the return but the assessee does not comply with the terms of such notice. 

Consequences of Best Judgement Assessment: There are four consequences of a Best Judgement Assessment: 

(i) The assessee becomes liable to penalties u/s 272A. 

(ii) The assessee becomes liable to prosecution u/s 276CC and 276D.

(iii) A refund may not be granted.

(iv) The assessee is prevented (रोक दिया जाता है) from bringing on record any new facts before the appellate authority if appeal is filed under best judgement assessment. 

Remedies against Best Judgement Assessment: If assessee is in opinion or feels that excess tax has been imposed by the assessing officer then–

(i) He can appeal to the Commissioner (appeal) against the order of assessing officer.

(ii) He can appeal to the Tribunal against the order of Commissioner (appeal).

(iii) He may go to high court.

(iv) He may apply to the Commissioner for revision.

Discretionary Best Judgement Assessment: If assessing officer is in the opinion that the accounts maintained by the assessee are incorrect or no proper system employ for maintaining accounts ot income has not been computed in proper way, he can make the assessment at his own discretion.