Firm Under Person

Firm Under Person: Understanding the Concept in Indian Income Tax Law

In Indian income tax law, the concept of “Firm under Person” is crucial for understanding the tax implications on individuals and firms. The term “firm” is defined as a partnership firm, while “person” includes individuals, Hindu Undivided Families (HUFs), companies, and other entities. This article aims to delve into the legal aspects of this concept, its implications, and the tax treatment under Indian law.

Definition of Firm and Person under Income Tax Law

Before delving into the concept of “Firm under Person,” it is essential to understand the definitions of “firm” and “person” as per Indian income tax law.

Firm:

Under section 2(23) of the Income Tax Act, 1961, the term “firm” is defined as “a partnership firm or limited liability partnership (LLP) which is engaged in business or profession.” It is important to note that the term “firm” only includes partnership firms and LLPs, and not any other forms of business entities.

Person:

The term “person” has a broader connotation under income tax law. It includes individuals, HUFs, companies, firms, association of persons (AOPs), body of individuals (BOIs), local authority, artificial juridical person, and any other entity capable of owning property or carrying on a business or profession.

Understanding the Concept of “Firm Under Person”

The concept of “Firm under Person” arises when a partnership firm or LLP is considered a separate entity for the purpose of taxation. However, the income of the firm is ultimately taxed in the hands of the partners or members of the LLP. This brings forth the concept of “Firm under Person,” where the firm is recognized as a separate entity, but its income is ultimately attributed to the partners or members.

Tax Implications and Treatment

Taxation of Partnership Firms:

In the case of a partnership firm, the firm’s income is assessed separately, and it is taxed at the rate applicable to firms. However, the share of profits or losses from the firm is ultimately attributed to the individual partners, and they are taxed accordingly. Each partner’s share of profit/loss from the firm is included in their individual income tax return and taxed as per the slab rates applicable to individuals.

Taxation of LLPs:

Similar to partnership firms, LLPs are also treated as separate entities for the purpose of taxation. The LLP’s income is taxed at the specific rate applicable to LLPs. However, the income attributable to the partners of the LLP is taxed in their hands, and they are required to include their share of profits/losses in their individual income tax return.

Computation of Income and Tax Liability

Partnership Firms:

The computation of income for a partnership firm involves preparing the firm’s profit and loss account, which includes various sources of income and allowable deductions. Once the firm’s income is determined, the share of profits or losses is distributed among the partners as per the partnership deed. Each partner is then liable to pay tax on their respective share of income at the applicable rates.

LLPs:

For LLPs, the computation of income involves preparing the income statement, which includes the firm’s income and allowable deductions. The share of profits or losses is then allocated to the partners in accordance with the LLP agreement. Each partner is then responsible for paying tax on their share of income as per the individual income tax rates.

Firm Under Person in the Context of Individual Taxpayers

Individual partners or members of a firm or LLP are required to include their share of profits/losses from the firm in their individual income tax return. This share of income is added to their other sources of income, such as salary, house property, capital gains, and other income, and taxed as per the applicable slab rates for individuals.

Deductions and Exemptions Available to Partners/Members

Deductions:

Individual partners/members are entitled to claim deductions available under the Income Tax Act, such as those for investments, insurance premiums, medical expenses, and other allowable expenses. These deductions can help reduce their overall tax liability on their share of income from the firm or LLP.

Exemptions:

Certain incomes, such as agricultural income and income from specified sources, may be exempt from tax. Individual partners/members can also avail of exemptions available under the Act, which can further reduce their tax liability on their share of income from the firm or LLP.

Conclusion

The concept of “Firm under Person” in Indian income tax law highlights the treatment of partnership firms and LLPs as separate entities, and the taxation of their income in the hands of individual partners or members. It is crucial for taxpayers to understand the tax implications and treatment of their share of income from the firm or LLP. Adhering to the legal principles and provisions under the Income Tax Act, 1961 is imperative to ensure compliance and accurate reporting of income from the firm or LLP. Partnering with tax professionals or legal experts can provide further insights and guidance on navigating the complexities of “Firm under Person” in Indian income tax law.