Partnership Firm

The law relating to a partnership firm in India is prescribed in the Indian Partnership Act of 1932. This Act lays down the rights and duties of the partners between themselves and other legal relations between partners and third persons, which are incidental to the formation of a partnership. Thus, the Act establishes the position of a partner as well as a partnership firm vis-à-vis third parties, in legal and contractual relations arising out of and in the course of the business of a partnership firm.

What is partnership?

A partnership is a relationship between individuals who have agreed to share the profits of a business carried on by all or any one of them acting for all as stated in Section 4 of the Indian Partnership Act. Therefore, a partnership consists of three essential elements. A partnership must be a result of an agreement between two or more individuals. The agreement must be built to share the profits obtained from the business. The business must be run by all or any of them representing the rest. All these conditions must coexist before a partnership can come into existence.

Essential Elements of a Partnership

Some key elements are required for the formation of a Partnership. They are listed below with a brief explanation.

An Agreement

A partnership is the result of an agreement between two or more persons. It should be noted that this sort of deal can arise only from a contract and not from status. This is why a partnership is distinguishable from a Hindu Undivided Family carrying on the family business. The reason is that this kind of alliance is a creation only out of a mutual agreement. Thus, the nature of a partnership is voluntary and contractual. An agreement from which a partnership relationship arise may be express. It may also be implied from the Partnership Act done by the partners and from a consistent course of conduct being followed, showing a mutual understanding between them. This agreement may be oral or in writing.

Sharing Profit of Business

When it comes to sharing the profits of the business, two propositions are to be considered. Firstly, there must be a business that exists. For this purpose, the term ‘business’ would generally mean every trade, occupation, and profession. The existence of a company is crucial. The motive of a business is the “acquisition of gains” that leads to the formation of a partnership. So, there can be no partnership where there is no intention to carry on a business and to share the profits obtained from the same. For example, co-owners who share the rent derived from a piece of land are not considered partners as a business does not exist. Similarly, no charitable institution or club may be called a partnership. However, a Joint Stock Company may be floated as a partnership for non-economic purposes. Secondly, there must be an agreement concerning the sharing of profits. For example, A and B buy certain bales of cotton which they agree to sell on their joint account and to share the benefits equally. In such a situation, A and B are partners in respect to the business they have planned out. However, an agreement to share the losses is not an essential element that is considered. However, in the event of damages, unless agreed otherwise, these must be borne in a profit-sharing ratio.

Running the Business

The third requirement for a partnership is that the business must be carried on by all the partners or by one or more of the partners acting for all. This is the crucial principle of the partnership law. An act of one partner in the course of the business of the firm is, in fact, an act of all partners. A partner carrying on a business is the principal as well as the agent for all the other partners. Therefore, it should be noted that the real test of a partnership is a mutual agency rather than sharing of profits. If the element of interactive agency is absent, then there will be no partnership. Sharing of benefits is the only Prima Facie evidence which can be rebutted by stronger evidence. This, this prima facie evidence can be countered by proving that there is no mutual agency.

Distinction between Partnership and Firm

Individuals who have entered into a partnership with one another are called Partners individually. The partners may be called collectively as the name under which the business is carried on is called the name of the Firm. A partnership is merely an abstract legal relationship between the partners. A firm is a concrete object signifying the collective entity for all the partners. Thus, a partnership is an invisible bind that holds the partner together, and a firm is the visible form of this partnership which is, therefore, bound together.

The tax rate for a Partnership firm

What is the tax rate for a partnership firm?

A partnership firm is required to file a partnership firm income tax return under the Income Tax Act,1961. Partnership firms are liable to pay income tax at the rate of 30% of total income. Besides, a partnership firm is liable to pay an income tax surcharge of 12% if the total income exceeds Rs.1 crores. Additional to the income tax and surcharge a partnership firm must pay the Health and education cess of 4%

Alternative minimum tax

Similar to a private limited company or LLP, partnership firms are also required to pay alternate minimum tax at the rate of 18.5% of "adjusted total income". Alternate minimum tax would be increased by the applicable surcharge, education cess, and secondary and higher education cess.

The income tax calculation for Partnership firms

What are the allowed deductibles?

While calculating the payable income tax an individual must check the available deductible income.The following are not allowed as deductions:-
• Remunerations or interest paid to the partners of the firm is not under the terms of the partnership.
• Salaries, bonuses, remunerations, commissions paid to the non-working partners of the firm.
• If remuneration paid to partners is following the terms of the partnership deed but such transactions
   were made or were concerning anything that pre-dates the partnership deed.

How to File Tax Returns for a Partnership Firm?

For Partnership income tax return filing should be done through Form ITR-5. This form ITR-5 is used to partnership firm income tax returns and not the tax returns for the partners. Like all other income tax forms, ITR 5 is an attachment-less form and there is no requirement to submit any documents or statements along with the partnership firm tax returns. However, the taxpayers must save the records about business and produce the same before the tax authorities when requested. ITR-5 can be filed online with the income tax department's online portal. The documents need to be submitted only when they are asked for. While filing the Partnership firm tax returns the partners must have class 2 digital signatures for verification of the filing process.

Procedure for filing Income tax returns of a partnership firm.

The income tax return of a partnership firm can be filed online through the income tax website or manually. If the income tax return is filed online then a class 2 digital signature will be required for the partner of the firm. Also, online income tax return filing is mandatory for partnership firms required to obtain an audit. In case of manual filing, the assessee must print out two copies of Form ITR-V. One copy of ITR-V signed by the assessee has to be sent by ordinary post to Post Bag No. 1, Electronic City Office, Bengaluru–560100 (Karnataka). The other copy should be retained by the assessee for his/her record.

Audit Requirement for Partnership Firms

Partnership firms that satisfy any of the conditions below would be required to get accounts audited:
• Carrying on business and total sales exceed Rs.1 crore in the previous year.
• Carrying on a profession and gross receipts in profession exceed Rs.50 lakhs in any previous year.
• Besides, there are other conditions applicable that could make an audit mandatory for a partnership firm.

If a partnership firm entered into international transactions or specified domestic transactions a report must be furnished in Form No. 3CEB under section 92E. For partnership firms required to furnish Form 3CEB, the deadline for filing a tax return is 30th November.

Partnership Firm Tax Return Due Date

The due date for filing the partnership tax return filing is dependent on whether the firm is required to be audited or not. When the firm is not required to be audited the income tax returns should be filed by 31st July. When the firm is not required to be audited then the firm has to file its income tax returns by 30th September. However, the cost of compliance is lesser as compared to the companies. Unlike companies, partnerships need not conduct meetings or maintain a register. Hence, it should be noted non - compliance can be costlier than meeting compliances.

Types of Partnership

There are two types of partnership which are as follows.

Partnership at will

A partnership by will is a partnership where there is no provision made by contract between the partners for the duration of their partnership, or the determination of their partnership.

Particular Partnership

A particular partnership is when a person becomes a partner with another individual in a particular business enterprise or for a particular business venture or undertaking, such as the construction of a road, laying a railway line, etc. This sort of a partnership shall come to an end on the completion of the task for which it was initially formed.

Types of Partners

The different classes of partners can be derived based on the extent of liability in a partnership firm.

Active/ Actual/ Ostensible Partner

When a partner of a partnership firm,
1. has become a partner by an agreement.
2. actively participates in the conduct of the partnership. The partner of the firm acts as a representative of other partners for all the acts carried out in the usual business lifecycle of the business. In the event of a retirement of a partner, the person must give a public notice to absolve himself of their liabilities for acts carried out by the other partners after his retirement.

Sleeping or Dormant Partner

A Sleeping or a Dormant Partner is a partner 1. who is a partner by agreement; 2. who does not actively take part in the conduct of the business. These partners share their profits and losses and are liable to third parties for the business carried out by the partnership firm. However, they are not required to give public notice of their retirement from the partnership firm.

Nominal Partner

A nominal partner is an individual who lends his name to the partnership firm. When this is done without having any real interest in the business, the person is a nominal partner. This kind of a partner is not entitled to share the profits of the firm. This partner has neither invested in the firm nor takes part in how the business is run at the firm. Although, such a partner is liable to third parties for all the actions taken by the firm. Partner in Profits only This is a partner who is entitled to have a share of the profits without being liable to the losses. This kind of a partner is liable to third parties only for acts of the gain.

Sub-Partner

A Sub-partner is a partner in a partnership firm who agrees to share his profits in a partnership firm with an outsider to the firm. A sub-partner does not hold any right against the firm nor is liable to any debts caused by the firm.

Incoming partners

This is a partner who is admitted as a partner into an already existing firm with the consent from all the other existing partners. Such a partner is not liable for any acts of the form taken before his entry as a partner to the firm.

Outgoing Partner

An outgoing partner is a partner who leaves the firm in which the rest of the partners continue to carry on the business. Such a partner remains liable to third parties for all the actions taken by the firm until a public notice concerning his retirement is given.

Partner by holding out

Partnership by holding out is also called as a partnership by estoppel. This is when an individual holds himself out as a partner or allows others to do so, the person is then stopped from denying the character he has assumed and upon the faith of which creditors may be presumed to have acted. When an individual represents himself or knowingly permits himself, to be represented as a partner in a partnership firm (when in fact he is not) he is liable, like a partner in the firm to anyone who on the faith of such representation, had given credit to the firm. An individual may themselves, by their words or conduct has induced other to believe that they are a partner or they may have allowed others to represent them a partner. The result in both the situations is identical.