Income Tax Filing for Partnership Firms

Registering a Partnership is the right choice for small enterprises as the formation is straightforward and there are minimal regulatory compliances.

The Partnership Act has been in existence in India since 1932, making partnerships one of the oldest types of business entities in India. A partnership firm can even be registered after it is formed. There are as such no penalties for non Registration of a Partnership firm.

But unregistered Partnership firms are denied certain rights under section 69 of the Partnership Act that majorly deals with the effects of non Registration of Partnership firms.

The income tax defines a Partnership firm as “Persons who have entered into a partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”. Hence, a firm that does not have a registration certificate from the registrar is an unregistered Partnership firm.

Under the Income Tax Act, 1961, a partnership firm is liable to pay the following tax percentages: – 

• 30% income tax 
• 12% surcharges where taxable income is above one crore rupees 
• Up to 12% on interest of capital is allowed 
• Health and Education Cess 4% of tax including surcharges 

It is to be noted that a partnership firm has a different legal identity from that of its partners, unlike proprietorships. It is also important to know that for the purposes of paying income tax for a partnership firm it is immaterial whether the firm is registered or not. Just like LLPs and private limited companies, a partnership firm is also required to pay alternate minimum tax which cannot be less than 18.5% of the adjusted total income.

When calculating the income tax that needs to be paid, one must pay heed to the available deductible incomes. They are as follows:

• Remunerations or interest paid to the partners of the firm which are not in accordance with the terms of the partnership.
• Salaries, bonuses, remunerations, commissions paid to the non-working partners of the firm.
• If remuneration paid to partners are in accordance with the terms of the partnership deed but such transactions were made or was in relation to anything that pre-dates the partnership deed.

For the purpose of filing tax returns for a partnership firm, one must use the Form ITR-5. The form ITR-5 is used to file tax returns for the partnership firm itself and not for the partners of the firm. One must not confuse form ITR-5 and ITR-3. Similar to all other income tax return filings, ITR-5 can be filed online via the income tax departments online portal. 

Also, it needs to be noted that while filing these returns, one does not need to attach any supporting documents along with it. These documents need to be submitted to the Income Tax Department only if they are specifically asked for. 

It is compulsory for a firm to file income tax return electronically with or without digital signature. The firm can also file income tax return under Electronic Verification Code. However, a partnership firm is compelled to do e-filing of its income tax returns when the partnership firm is required to get an audit. While filing the income tax returns, the partners must have a class 3 digital signature for verification of the filing process.

The deadline for filing an income tax for a partnership firm is dependent upon whether the firm is required to be audited or not. The deadlines for filing income tax return are as follows:

• Where the firm is not required to be audited – the income tax returns must be filed by 31st July. 
• Where the firm is required to be audited  – the firm has to file its income tax returns by 31st October

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.