Section 325 — Assessment as a firm. Successor to s.184 of the 1961 Act.
Section 325 is in Chapter XVII — Special Provisions Relating to Certain Persons, which runs from section 302 to section 355.
Sub-section (1) makes assessment as a firm conditional on two things: the partnership must be evidenced by an instrument, and the individual shares of the partners must be specified in it. Sub-section (2) requires a certified copy of that instrument to accompany the firm's return for the tax year in which assessment as a firm is first sought, and sub-section (3) prescribes who certifies it — all the partners other than minors, or, where the return is made after dissolution, all persons who were partners immediately before dissolution other than minors, together with the legal representative of any deceased partner. Sub-section (4) carries the status forward to every subsequent year so long as there is no change in the firm's constitution or in the partners' shares as evidenced by that instrument. Sub-section (5) requires a certified copy of the revised instrument with the return for any year in which such a change took place. Sub-section (6) overrides the rest of the Act: where the firm commits a failure of the kind mentioned in section 271, no deduction is allowed for interest, salary, bonus, commission or remuneration paid to any partner in computing income under "Profits and gains of business or profession", and that payment is correspondingly not chargeable in the partner's hands under section 26(2)(g).
Assessment as a firm carries the deduction for partner remuneration and interest, so the section makes that status depend on a written, certified instrument that fixes each partner's share, giving the Department a verifiable basis for the shares. Sub-section (6) attaches the loss of the deduction to a section 271 failure, with a matching exclusion in the partners' hands so the amount is not taxed twice.
The certified copy is filed once, with the return for the first year in which firm status is sought, and only again when the constitution or the partners' shares change — sub-section (4) otherwise carries the status forward automatically. Certification is by all the partners who are not minors, so a partly signed copy does not satisfy sub-section (3). The consequence in sub-section (6) is symmetrical and worth noting before disputing it: where a section 271 failure occurs, the firm loses the deduction for partner remuneration and interest, but the same payment ceases to be chargeable to the partner under section 26(2)(g).
Four persons carry on business under a deed that records the partnership but leaves the profit-sharing to be agreed year by year. Sub-section (1)(b) is not satisfied — the individual shares of the partners must be specified in the instrument — so the firm cannot be assessed as a firm however genuine the partnership is. Even where the shares are specified, the certified copy filed with the return for the first year firm status is sought must be certified by all the partners who are not minors, so a copy signed by three of the four adult partners does not meet sub-section (3). The consequence of a section 271 failure is symmetrical and worth pricing before disputing it: Rs. 24 lakh of interest and remuneration paid to the partners is disallowed to the firm under sub-section (6)(a), but the same Rs. 24 lakh ceases to be chargeable in the partners' hands under section 26(2)(g).
In the firm's return for the first tax year in which assessment as a firm is sought, which the certified copy of the instrument must accompany, and again in the return for any year in which the constitution or the partners' shares change. It is then met in an assessment that denies firm status or disallows partner interest and remuneration.
A firm shall be assessed as a firm for the purposes of this Act, if— (a) the partnership is evidenced by an instrument; and (b) the individual shares of the partners are specified in that instrument.
See the full 1961 to 2025 concordance.
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