920. New scheme relating to assessment of partnership firms to come into effect from 1-4-1990 instead of 1-4-1989 - Clarification of certain issues arising from change of date of commencement of new provisions
Circular No. 516 was issued by the Central Board of Direct Taxes on 15 June 1988. Its subject is 920. New scheme relating to assessment of partnership firms to come into effect from 1-4-1990 instead of 1-4-1989 - Clarification of certain issues arising from change of date of commencement of new provisions.
Works out the consequences of the Government's announcement that the new scheme for assessing partnership firms under the Direct Tax Laws (Amendment) Act, 1987 would start from 1 April 1990, that is assessment year 1990-91, instead of 1 April 1989. For assessment years 1988-89 and 1989-90 the old firm provisions continue: sections 40(b), 64(1), 67, 75 to 77, 86(iii), 182, 183, 184 to 186 and 187 as they stood before the amending Act. Other changes made by that Act still take effect from 1 April 1989 for firms as for everyone else, in particular the new section 3 making the financial year the uniform previous year, with the Tenth Schedule relief for the transitional previous year of assessment year 1989-90, and the new return, assessment and mandatory interest provisions in sections 234A to 234C. Section 194E on deduction from interest and salary paid by a firm to its partners, and the consequential amendment of section 194A, will not operate from 1 April 1988 as originally provided but from 1 April 1989 if unchanged. The new advance tax provisions are effective from 1 April 1988 for all assessees, with instalments of not less than twenty per cent by 15 September 1988 and not less than thirty per cent by 15 December 1988.
After the amending Act was passed, representations came in from various quarters about the new scheme, and on 30 March 1988 the Minister of State stated in Parliament that amendments would be moved to postpone it; the postponement raised doubts about other aspects of firm assessment which the Board sought to set at rest.
920. New scheme relating to assessment of partnership firms to come into effect from 1-4-1990 instead of 1-4-1989 - Clarification of certain issues arising from change of date of commencement of new provisions
1. A new scheme relating to assessment of partnership firms has been introduced by the Direct Tax Laws (Amendment) Act, 1987 [hereinafter referred to as the DTL(A) Act, 1987] to be effective from 1-4-1989, i.e., from the assessment year 1989-90.
2. After the DTL(A) Act, 1987 was enacted, a number of representations from various quarters were received regarding the new scheme of taxation. On 30-3-1988, the Minister of State in the Ministry of Finance made a statement in the Parliament to the effect that suitable amendments will be moved by the Government to provide that the new scheme relating to assessment of partnership firms will come into effect from 1-4-1990 instead of 1-4-1989, i.e., from the assessment year 1990-91. Before that date, the provisions that existed, before these were amended by the DTL(A) Act, 1987 continue to operate. Because of the change relating to date of commencement of the new provisions relating to assessment of partnership, doubts have been raised regarding some other aspects concerning the assessment of firms. Hence, the following clarifications are being issued to set at rest any controversy in this regard.
3. For the assessment years 1988-89 and 1989-90 the old provisions in the Income-tax Act regarding assessment of firms, before these were amended by the DTL(A) Act, 1987, will continue to apply. The important sections containing the old provisions for taxation of firms and their partners, which will continue to operate for the assessment years 1988-89 and 1989-90 are listed below :
- Section 40(b) relating to disallowance of interest and salary, etc., paid by a firm to its partner
- Section 64(1) relating to inclusion of shares of spouse and minor children in the income of the other spouse or parent
- Section 67 relating to computation of a partner’s share in the income of the firm
- Sections 75 to 77 relating to carry forward of losses of registered and unregistered firms
- Section 86(iii) relating to rebate on the share income of a partner of an unregistered firm included in his total income
- Section 182 relating to assessment of a registered firm and its partners
- Section 183 relating to assessment of an unregistered firm
- Section 184 to 186 relating to application for registration, procedure for registration and cancellation of registration of a firm under the Income-tax Act
- Section 187 relating to change in constitution of a firm
4. Although the new provisions relating to assessment of partnership firms are to come into force with effect from 1-4-1990, there are other amendments made by the DTL(A) Act, 1987 which are operative with effect from 1-4-1989 in case of all the assessee including partnership firms. The important ones are discussed below :
1. Introduction of financial year as the uniform previous year—A new section 3 substituted in the Income-tax Act for the old section by the DTL(A) Act, 1987 provides for the financial year (year ending on 31st March) as the uniform previous year for all the assessees. The provisions of the new section 3 and those of the Tenth Schedule, which provide relief during the transitional previous year for the assessment year 1989-90, will be applicable in the case of the partnership firms also, like other assessees. This means that a partnership firm, which has been having a previous year different from that ending on 31st March, will have to extend its previous year for the assessment year 1989-90 up to 31-3-1989. Thus, for example, in the case of partnership firm, which closes its accounts on 30th June every year, the previous year for the assessment year 1989-90 will consist of 21 months [1-7-1987 to 31-3-1989].
2. The new provisions relating to filing of return of income, assessment procedure and charging of mandatory interest under sections 234A to 234C will also be applicable in the case of partnership firms with effect from 1-4-1989, like other assessees.
5. Deduction of tax at source - The provisions of the new section 194E relating to deduction of tax at source from interest and salary, etc., paid by a firm to the partners and also consequent amendment of section 194A will not be effective from 1-4-1988, as provided in the DTL(A) Act, 1987. These will now be made effective, if not changed, from 1-4-1989.
6. The new advance tax provisions are effective from 1-4-1988 and are applicable to all assessees, including the partnership firms and their partner. Thus advance tax during the current financial year (for the assessment year 1989-90) is to be paid as follows :
1st instalment of not less than 20 per cent of
advance tax payable
...
By 15th September, 1988.
2nd instalment of not less than 30 per cent of
advance tax payable
...
By 15th December, 1988.
3rd instalment of the balance 50 per cent of
advance tax payable
...
By 15th March, 1989.
Circular : No. 516, dated 15-6-1988.
In old firm assessments and appeals for assessment years 1988-89 and 1989-90, particularly on registration and on section 40(b) disallowance.
Source: the Income Tax Department’s own published text — its page for this instrument.