Section 326 of the Income-tax Act, 2025

Section 326 — Assessment when section 325 not complied with. Successor to s.185 of the 1961 Act.

Where this section sits

Section 326 is in Chapter XVII — Special Provisions Relating to Certain Persons, which runs from section 302 to section 355.

← Section 325 · Section 327 →

What this section does

Where a firm does not comply with section 325 for a tax year, the section overrides every other provision of the Act to produce two consequences. Clause (a) disallows any deduction for interest, salary, bonus, commission or remuneration, by whatever name called, paid by the firm to any of its partners, in computing the firm's income under the head "Profits and gains of business or profession". Clause (b) correspondingly takes those same payments out of charge in the partners' hands, so they are not chargeable to income-tax under section 26(2)(g).

Why it is there

It supplies the sanction that makes section 325 effective: a firm that does not produce a certified instrument specifying the partners' shares loses the deduction that firm status carries. Clause (b) keeps the outcome symmetrical rather than punitive twice over, by removing the disallowed payments from the partners' income.

Who it applies to

A firm that does not comply with section 325 for a tax year
The partners of such a firm who receive interest, salary, bonus, commission or remuneration from it

What this means in practice

The consequence is annual and automatic — non-compliance for a tax year costs the firm the deduction for that year, without any order or finding required beyond the failure itself. It reaches every form of payment to a partner: interest, salary, bonus, commission or remuneration "by whatever name called". On the other side, a partner who has already offered such receipts to tax should note clause (b), which takes them out of section 26(2)(g) for the same year.

An example

Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.

A firm claims Rs. 60 lakh for partners' remuneration and Rs. 15 lakh for interest on partners' capital, but does not comply with section 325 for the year. Section 326 overrides every other provision of the Act: clause (a) disallows the whole Rs. 75 lakh in computing the firm's income under 'Profits and gains of business or profession', and renaming a payment changes nothing, since it reaches interest, salary, bonus, commission or remuneration 'by whatever name called'. The partners are not taxed on the same money on the other side — clause (b) takes those receipts out of charge under section 26(2)(g) in their hands. The consequence attaches to the year of non-compliance and does not, of itself, reach any other year.

Where you meet this section

In the firm's assessment order, as the disallowance of partners' interest and remuneration, and correspondingly in the partners' own returns and assessments, where the same amounts fall out of section 26(2)(g). The section names no form and no authority — the trigger is simply the firm's failure to comply with section 325 for the tax year.

The words themselves

no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing its income chargeable under the head "Profits and gains of business or profession"

Section section 326(a), Income-tax Act, 2025.

What people get wrong

Treating the disallowance as an add-back that the partner still pays tax on. Clause (b) removes the same payments from charge under section 26(2)(g).
Assuming a renamed payment escapes. Clause (a) covers interest, salary, bonus, commission or remuneration "by whatever name called".
Reading the failure as permanent or as affecting other years. The section operates in respect of the tax year for which section 325 is not complied with.

What this replaced

The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.

185 - Assessment when section 184 not complied with

See the full 1961 to 2025 concordance.

Circulars of the Board on this section

A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.

Circular No. 224 — Whether coparcener of HUF can be regarded as benamidar of HUF and thus obliged to file Form No. 12A in terms of Explanation (b) of 1977-06-22
Circular No. 207 — Whether coparcener of HUF can be regarded as benamidar of HUF and thus obliged to file Form No. 12A in terms of Explanation (b) of 1976-09-24
Circular No. 70 — New Form Nos. 11, 11A and 12 incorporating provisions of Explanation inserted by Taxation Laws (Amendment) Act, 1970 not to be ins 1971-12-11

See the circulars index.

Notifications that reach this section

A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.

Notification No. Notification No. 103/2019 [F. No. 370149/159/2019-TPL]/SO 4455(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 2019-12-13
Notification No.59/2016 [F.No.142/8/2016-TPL] /SO 2476(E) — [To BE Published in the Gazette of INDIA, Extraordinary, Part II, section 3, Sub-section (ii)] 2016-07-20

See the notifications index.

Read with

Section 26
Section 325

What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.