The AO has invoked section 185 because of a defect in the partnership deed filed with our return. What exactly do we lose, and does the partner get any relief?
The firm loses every rupee it paid its partners. Section 185 provides that where a firm does not comply with section 184 for any assessment year, it is so assessed that no deduction by way of interest, salary, bonus, commission or remuneration to any partner is allowed in computing its business income. Section 184(5) imposes the same consequence where there is a section 144 failure. The partner is not taxed on the same amounts, because both provisions end by saying those sums are not chargeable under clause (v) of section 28.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2004-04-01, reported as Section 185 substituted, and section 184(5) substituted, by the Finance Act 2003 with effect from 1 April 2004; sections 184 to 186 substituted as a group by the Finance Act 1992 with effect from 1 April 1993; text as in force for assessment year 2025-26, read from the Income-tax Department's Year 2025 section pages. It bears on section 184, section 184(1), section 184(2), section 184(3), section 184(4), section 184(5), section 185, section 40(b), section 28(v), section 144 of the Income Tax Act 1961, in Assessment & Scrutiny, Deductions & Disallowances and Appeals matters.
The consequence is total, not proportionate: it is not a disallowance of the excess over the section 40(b) ceiling but of the whole payment, and it applies for the assessment year in which the failure occurs. The conditions in section 184(1) are short — the partnership must be evidenced by an instrument and the individual shares of the partners must be specified in that instrument — but sub-sections (2) to (4) add the procedural layer that generates most of the litigation: a certified copy of the instrument must accompany the return for the year in which assessment as a firm is first sought, the certification being by all the partners who are not minors (or, after dissolution, by all who were partners immediately before it, and by the legal representative of a deceased partner); the status then continues for subsequent years so long as there is no change in constitution or in the partners' shares; and where such a change has taken place in the previous year, a certified copy of the revised instrument must go with the return for that year. The one piece of relief built into the scheme is the mirror in section 28(v): what the firm cannot deduct, the partner is not taxed on.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Chapter XVI of the Act carries the special provisions applicable to firms. Section 184 sets out when a firm is assessed as a firm and what has to be filed to obtain and keep that status. Section 185 sets out what happens when section 184 is not complied with. Section 184(5) sets out the same consequence for a failure of the kind mentioned in section 144. The consequence in both provisions runs in the same words, and both end by taking the disallowed sums out of section 28(v) in the partners' hands.
A firm is assessed as a firm if the partnership is evidenced by an instrument and the individual shares of the partners are specified in that instrument. A certified copy of the instrument must accompany the return of income of the firm for the previous year relevant to the assessment year, commencing on or after 1 April 1993, in respect of which assessment as a firm is first sought; the Explanation prescribes who must certify it. Where a firm is assessed as such for any assessment year it is assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or in the shares of the partners as evidenced by the instrument on the basis of which assessment as a firm was first sought; where such a change has taken place in the previous year, a certified copy of the revised instrument must be furnished with the return for the relevant assessment year. Where there is on the part of a firm any such failure as is mentioned in section 144, sub-section (5) provides that the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration to any partner is allowed in computing income under the head 'Profits and gains of business or profession', and that such amounts are not chargeable under section 28(v). Section 185 imposes the identical consequence where a firm does not comply with section 184 for any assessment year.
The scheme introduced from assessment year 1993-94 replaced registration of firms with a set of conditions attached to the deduction. The Act no longer refuses the firm a status; it refuses it the deductions that make the firm status worth having. Because those deductions are the mirror image of the partner's charge under section 28(v), the legislature could not simply disallow at the firm level without creating double taxation, so both section 184(5) and section 185 close with the same sentence removing the sums from section 28(v). The result is that non-compliance shifts the whole of the partners' remuneration and interest into the firm's taxable income and out of the partners' — which will usually be worse overall, but not always, and the arithmetic is worth doing before conceding.
Notwithstanding anything contained in any other provision of this Act, where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be so assessed that 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 the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.
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Handle my notice → Ask a CA on WhatsAppThe firm loses every rupee it paid its partners. Section 185 provides that where a firm does not comply with section 184 for any assessment year, it is so assessed that no deduction by way of interest, salary, bonus, commission or remuneration to any partner is allowed in computing its business income. Section 184(5) imposes the same consequence where there is a section 144 failure. The partner is not taxed on the same amounts, because both provisions end by saying those sums are not chargeable under clause (v) of section 28. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 184, section 184(1), section 184(2), section 184(3), section 184(4), section 184(5), section 185, section 40(b), section 28(v), section 144 of the Income Tax Act 1961. It is reported as Section 185 substituted, and section 184(5) substituted, by the Finance Act 2003 with effect from 1 April 2004; sections 184 to 186 substituted as a group by the Finance Act 1992 with effect from 1 April 1993; text as in force for assessment year 2025-26, read from the Income-tax Department's Year 2025 section pages. The consequence is total, not proportionate: it is not a disallowance of the excess over the section 40(b) ceiling but of the whole payment, and it applies for the assessment year in which the failure occurs. The conditions in section 184(1) are short — the partnership must be evidenced by an instrument and the individual shares of the partners must be specified in that instrument — but sub-sections (2) to (4) add the procedural layer that generates most of the litigation: a certified copy of the instrument must accompany the return for the year in which assessment as a firm is first sought, the certification being by all the partners who are not minors (or, after dissolution, by all who were partners immediately before it, and by the legal representative of a deceased partner); the status then continues for subsequent years so long as there is no change in constitution or in the partners' shares; and where such a change has taken place in the previous year, a certified copy of the revised instrument must go with the return for that year. The one piece of relief built into the scheme is the mirror in section 28(v): what the firm cannot deduct, the partner is not taxed on. If it applies to you, the first step is this: Identify which limb the AO is on: non-compliance with section 184 (section 185) or a section 144 failure (section 184(5)). They have the same consequence but different triggers and different answers.
Chapter XVI of the Act carries the special provisions applicable to firms. Section 184 sets out when a firm is assessed as a firm and what has to be filed to obtain and keep that status. Section 185 sets out what happens when section 184 is not complied with. Section 184(5) sets out the same consequence for a failure of the kind mentioned in section 144. The consequence in both provisions runs in the same words, and both end by taking the disallowed sums out of section 28(v) in the partners' hands. The matter was decided on 2004-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. A firm is assessed as a firm if the partnership is evidenced by an instrument and the individual shares of the partners are specified in that instrument. A certified copy of the instrument must accompany the return of income of the firm for the previous year relevant to the assessment year, commencing on or after 1 April 1993, in respect of which assessment as a firm is first sought; the Explanation prescribes who must certify it. Where a firm is assessed as such for any assessment year it is assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or in the shares of the partners as evidenced by the instrument on the basis of which assessment as a firm was first sought; where such a change has taken place in the previous year, a certified copy of the revised instrument must be furnished with the return for the relevant assessment year. Where there is on the part of a firm any such failure as is mentioned in section 144, sub-section (5) provides that the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration to any partner is allowed in computing income under the head 'Profits and gains of business or profession', and that such amounts are not chargeable under section 28(v). Section 185 imposes the identical consequence where a firm does not comply with section 184 for any assessment year.
The scheme introduced from assessment year 1993-94 replaced registration of firms with a set of conditions attached to the deduction. The Act no longer refuses the firm a status; it refuses it the deductions that make the firm status worth having. Because those deductions are the mirror image of the partner's charge under section 28(v), the legislature could not simply disallow at the firm level without creating double taxation, so both section 184(5) and section 185 close with the same sentence removing the sums from section 28(v). The result is that non-compliance shifts the whole of the partners' remuneration and interest into the firm's taxable income and out of the partners' — which will usually be worse overall, but not always, and the arithmetic is worth doing before conceding. In the words reproduced by the source cited on this page: "Notwithstanding anything contained in any other provision of this Act, where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be so assessed that 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 the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28."
It was decided by the CBDT Circulars & Instructions on 2004-04-01 and is reported as Section 185 substituted, and section 184(5) substituted, by the Finance Act 2003 with effect from 1 April 2004; sections 184 to 186 substituted as a group by the Finance Act 1992 with effect from 1 April 1993; text as in force for assessment year 2025-26, read from the Income-tax Department's Year 2025 section pages. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 184, section 184(1), section 184(2), section 184(3), section 184(4), section 184(5), section 185, section 40(b), section 28(v), section 144, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. A firm is assessed as a firm if the partnership is evidenced by an instrument and the individual shares of the partners are specified in that instrument. A certified copy of the instrument must accompany the return of income of the firm for the previous year relevant to the assessment year, commencing on or after 1 April 1993, in respect of which assessment as a firm is first sought; the Explanation prescribes who must certify it. Where a firm is assessed as such for any assessment year it is assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or in the shares of the partners as evidenced by the instrument on the basis of which assessment as a firm was first sought; where such a change has taken place in the previous year, a certified copy of the revised instrument must be furnished with the return for the relevant assessment year. Where there is on the part of a firm any such failure as is mentioned in section 144, sub-section (5) provides that the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration to any partner is allowed in computing income under the head 'Profits and gains of business or profession', and that such amounts are not chargeable under section 28(v). Section 185 imposes the identical consequence where a firm does not comply with section 184 for any assessment year. It arises in Assessment & Scrutiny, Deductions & Disallowances and Appeals matters, on section 184, section 184(1), section 184(2), section 184(3), section 184(4), section 184(5), section 185, section 40(b), section 28(v), section 144 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Check the two substantive conditions in section 184(1) first — an instrument, and the individual shares specified in it. A defect in either is the strongest ground for the department and the hardest to cure. Then check the procedural conditions in sub-sections (2) to (4), including whether this was the year in which assessment as a firm was first sought and whether there was a change in constitution or in shares during the previous year requiring the revised instrument to be filed. Verify the form of certification against the Explanation to section 184(2) — certification in writing by all partners not being minors, or after dissolution by all persons who were partners immediately before it together with the legal representative of any deceased partner. If the disallowance stands, make sure the partners' own assessments are corrected: sections 184(5) and 185 both provide that the same interest, salary, bonus, commission or remuneration is not chargeable under section 28(v), and that relief has to be claimed. Treat the question whether a failure to file the certified copy with the return is by itself fatal as contested — this entry states the statutory scheme only and does not decide it.
Still good law. Sections 184 and 185 were read this pass from the Department's Year 2025 section pages, the most recent versions published there. No later amendment was found on those pages. The judicial conflict over section 184(2) — whether the certified copy must accompany the return on pain of section 185 — was not researched this pass and is not resolved here. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Statutory entry, not a decision. 'tier' is set to 'cbdt' because the library's fixed tier vocabulary has no value for a statutory entry; the source is the Income-tax Department's own section pages. 'decided_on' is the commencement of the present sections 185 and 184(5), 1 April 2004, not a date of decision. Legislative history, sourced this pass: sub-heading 'B' and sections 184, 185 and 186 were substituted as a group by the Finance Act 1992, w.e.f. 1-4-1993 (footnote 32 on the Department's Year 2009 page for section 184); the present section 185 and the present section 184(5) were then substituted by the Finance Act 2003, w.e.f. 1-4-2004 (footnote 37 on /w/section-185-1 and footnote 36 on /w/section-184-1, both Year 2009). That change matters: before 1 April 2004 the consequence of non-compliance was assessment 'in the same manner as an association of persons', not the loss of the partner-payment deduction described here, and the Department's Year 2000 page /w/section-185 still prints that older text. The Year 2025 pages for sections 184 and 185 carry no footnote list at all, so no commencement can be sourced from them. The judicial conflict on whether the certified copy required by section 184(2) is a mandatory condition was not examined this pass and no case is cited for it; the statement above is deliberately limited to the statutory text. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
A firm is assessed as a firm if the partnership is evidenced by an instrument and the individual shares of the partners are specified in that instrument. A certified copy of the instrument must accompany the return of income of the firm for the previous year relevant to the assessment year, commencing on or after 1 April 1993, in respect of which assessment as a firm is first sought; the Explanation prescribes who must certify it. Where a firm is assessed as such for any assessment year it is assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or in the shares of the partners as evidenced by the instrument on the basis of which assessment as a firm was first sought; where such a change has taken place in the previous year, a certified copy of the revised instrument must be furnished with the return for the relevant assessment year. Where there is on the part of a firm any such failure as is mentioned in section 144, sub-section (5) provides that the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration to any partner is allowed in computing income under the head 'Profits and gains of business or profession', and that such amounts are not chargeable under section 28(v). Section 185 imposes the identical consequence where a firm does not comply with section 184 for any assessment year.
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