assessment of firm, Income Tax

[Ritesh Jha]

1. Suppose the partnership firm(comprising of three partners A,B,C ; PSR=1:1:1) has profit of 330000 in py2010-11,cf loss is 300000(PSR =1:1:1),one of them retired in the current year on 31/12/2010,so his share of profit for the current year becomes 82500.Now loss of the retired partner cant be carried forward but can the excess loss of retired partner i.e. 17500(100000-82500) of other partners be set off against profit of other remaining partners in the current year???????

2.Also whether sec 78 would apply to change in constitution due to change in psr as the wordings used in sec 78 is retired or deceased partner.

Posts / Replies

[ROHAN THAKKAR]

Dear Ritesh Jha,

The change due to retirement or demise of a partner will affect the carry forward loss of the firm since the loss to the extent of the retired or deceased partner has to be reduced for carrying forward to the subsequent year. [Section 78 of the Income Tax Act]

In your question, P, S & R are partners. One of them, say P retires in the current year on 31-12-2010.

Current year income of the firm = Rs 3,30,000 of which P’s share comes to Rs 82,500 based on the accounts prepared.

In the last year, the firm had a loss of Rs 3,00,000.

Thus, the share loss of P comes to Rs 1,00,000 of which only Rs 82,500 will be allowed to be set off and remaining loss of Rs 17,500 will go lapse.

As far as second question is concerned, change in constitution per se will not attract provision of section 78. Provision of section 78 will be attracted only if there is change in constitution which has resulted in retirement of any of the partner or any of the partner has deceased. In this regard, wordings of section 78 is as under:

Section 78 (1): Where a change has occurred in the constitution of a firm, nothing in this Chapter shall entitle the firm to have carried forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year.

Change in constitution may arise because of admission of partner, change in profit sharing ratio. However, such things are not covered by section 78.

Regards,

Rohan Thakkar

rohan@rthakkar.com

 

 

[Ritesh Jha]

Thank You. Regards, Ritesh Jha

[Ritesh Jha]

sir suppose that there is no partner retirirng or dying in the previous year,so still will the section 78(1) be applicable????

[ROHAN THAKKAR]

Dear Sir,

If no partners are retiring or dying in the previous year, then section 78 will not have any effect. 

Section 78 (1): Where a change has occurred in the constitution of a firm, nothing in this Chapter shall entitle the firm to have carried forward and set off so much of the loss proportionate to the share of a retired or deceased partneras exceeds his share of profits, if any, in the firm in respect of the previous year.

Change in constitution may arise because of admission of partner, change in profit sharing ratio. However, such things are not covered by section 78.

Regards,

Rohan Thakkar

rohan@rthakkar.com

[Ritesh Jha]

thank you