The untouched provisions of Income Tax on Partnership

A partnership firm in a real sense is an agreement between two or more persons to carry out the business with certain terms and conditions incorporated in the deed of partnership. The business of the partnership is carried on by the working partners. Where the firm’s business was carried on by another partnership firm, it was held¬† (Oswal trading vs Commissioner of income tax 233 ITR 385) that it is not a genuine partnership firm, hence such a partnership firm is not entitled to registration.

A partnership firm is valid even though there may be various restrictions on some of the partners as per the terms of the partnership deed and one of the partners hold the power and is empowered to conduct the business at his sole discretion and to expel the other partners from the partnership firm in gurgaon (Kamath vs commissioner of Income-tax 82 ITR 689)

While drafting the deed of partnership we often think about the capital contribution, power of partners, profit and loss sharing ratio, working partners, or non-working partners. These all terms are important to incorporate in the partnership deed. Since these are the base of the partnership deed.

Meaning of Partner, Firm, and Partnership:

The partner, Firm, and partnership have the same meaning in the income tax act as assigned in the Indian Partnership act 1932, with one difference that under the income tax act partner includes a minor admitted to the benefits of the Partnership firm.

Capital Contribution, Working and Non-working partners:

Starting a business requires capital and each partner is required to introduce capital as per the mutual terms and deed of the partnership firm, however, the deed may provide different that every partner need not contribute capital to the firm. Similarly, it is not necessary for all partners mentioned in the partnership deed should be working partners. Some partners may have nonworking status because they can invest money in the firm but cannot put in hard work, time, and mind. It is important to remember that working partners can withdraw salaries from the partnership firm, however, non-working partners are not allowed to withdraw since salary is given to the partners who put in effort and time. Yes, nonworking partners are entitled to profits and even losses of the partnership firm.

Profit sharing ratio:

Deciding the profit-sharing ratio is a mutual decision for all partners. It can be 50:50 or something that the partners decide. It is important to decide the profit-sharing ratio at the time of incorporation of the partnership. Since profits at the end are distributed based on the profit-sharing ratio. The partners if they want, can change the ratio at any time during the financial year. An amendment deed of partnership is signed between all the partners for the consent of change in ratio. The withdrawal of profit from the firm is a decision of the partners. They can either retain the profit in the growth business or withdraw in their account. The deed of partnership may also provide that some of the partners will not share in losses. It is to be noted that the profit of a partnership in the hands of partners is exempt from income tax.

LLP is a hybrid feature of Company and Partnership firm:

The Limited Liability Partnership firm (LLP) is an entity having features of both a private limited company in Gurgaon and a Partnership firm. The LLP is defined as a partnership formed and registered under the LLP act. LLP has a separate identity from its partners. The income tax rate on LLP is the same as on a Partnership firm. Currently, a flat 30 per cent income tax is charged on the income of an LLP or partnership firm. The partnership firm can only have 20 partners, whereas LLP has no limits of partners, i.e LLP can have unlimited partners. There are several judgments pronounced by the various stating that the Association of Persons would not form a partnership firm unless they carry on a business.

Nature of Business:

While preparing the partnership deed it is important to incorporate the clause of ‘Nature of business’ that the partnership firm of LLP would carry on in the firm. The business income is chargeable to income tax under section 28 of the income tax act 1961, under the head Profit and Gain from Business and Profession. The partners may do business activity in the firm not mentioned in the partnership deed.


The incorporation of a partnership firm is an important decision. While taking decisions you should also have other options like company registration in Gurgaon, and LLP registration in Gurgaon. Income tax rates and the compliance of private limited companies, LLP, or partnership firm is an important factors. The rate of income tax on private limited companies is lower than on LLP and partnership firms. However, complaints in the partnership are lesser than in LLP and Private limited companies. It is advisable to sit with your income tax consultant in Gurgaon or a chartered accountant in Gurgaon before taking any decision. They will tell you the pros and cons of all the entities.

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