CBDT identifies Issues to keep in Mind by AO for Assessment of Firms [Read Circular]

The Central Board of Direct Taxes (CBDT) has identified certain issues to be kept in mind by the Assessing Officers for the assessment of firms.

“Instances have been noticed where the interest in the partnership deed was stated to be below twelve per cent, yet, the same was allowed at the rate of twelve per cent by the AO. Such mistakes should be avoided. Further, in case the rate prescribed in the partnership deed is in excess of twelve percent, the excess should be disallowed in the assessment. The AO is also required to ascertain whether payment of interest is duly authorized by the partnership deed or not. Further, while calculating interest payable to the partners for purposes of section 40(b)(iv) of the Act, ADs are taking different yardsticks for calculating interest viz. opening balance of capital, the closing balance of capital, fixed capital or current capital etc. In this regard, section 40(b )(iv) of the Act prescribes that payment of interest to partners should be authorized by and be in accordance with the partnership deed. Therefore, while framing assessment, ADs should refer to the terms of the partnership deed for the purpose of computation of interest on capital payable to a partner,” the CBDT circular said.

The circular further said that while computing remuneration payable to the working partners under section 40(b)(v) of the Income Tax Act, the remuneration should not exceed a particular aggregate amount which is based upon the figure of ‘book profit’.

While framing assessments in case of firms claiming carry forward and set off of losses, Assessing Officers are requested to verify such claims taking into consideration provisions of section 78 of the Act which disallow such a carry forward and set off in case of a change in the constitution of the firm or on succession, it said.

Regarding the issue concerning possible action against the tax auditor for furnishing incomplete information in the Tax-Audit Report and effective utilization of information in the Tax Audit Report by the Assessing Officers, the CBDT reiterated that directions given earlier viz. Instruction No. 09/2008 dated 31.07.2008 of CBDT should be followed scrupulously by the field authorities.