In this article we will deal with the assessment of firms with one brief example,
 
 First question is What is a partnership firm?
 In entire income tax act,1961 partnership is not defined any where, therefore we can refer section 4 of Indian partnership act,1932
 
 "Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them."
 
Firms are assessed as a separate entity, as per section 2(31) definition of the person includes firm. Therefore assessment of the same is done separately.
 
Secondly, There are certain conditions which are required to be satisfied by partnership firm to be assessed as a firm and for claiming deductions of interest , salary to the partners. Conditions are mentioned in section 184 of the act,

1. In case where firm is assessed for the first time
   • The following conditions are required to be fulfilled by partnership firm to be assessed as a firm:
   1. Partnership should be evidenced by a registered deed: Partnership deed should be registered clearly explaining all the terms and conditions mutually decided between the partners of the said firm.
   2. Share of each partner must be specified in the deed: This is the essential condition as to how the profits of the firm are to be shared between the partners. Profit sharing ratio must be clearly specified.
      Profits include losses also. For fulfilling the condition as mentioned in section 184, the ratio of losses should also be stated clearly.
   3. Self-attested and certified copy of the deed must be filed: The first return of the firm should be accompanied with the certified copy of partnership deed. As per explanation to Section 184(2), the certified copy means that the copy of the deed is to be certified in writing by all the partners except minors.
       
2. In Subsequent Assessment years: Once the firm is assessed as a firm under the act for any assessment year, it shall be assessed in the same capacity for every subsequent assessment year, provided there is no change in the constitution of the firm or share of the partners. If there is any change in the constitution of the firm or sharing, then an amended deed should be filed with the return in the year of change.

If the required conditions are satisfied as mentioned in section 184 than the firm is eligible to claim deduction as specified in section 40(b).
 
Example: There are three friends namely Pushp Kumar Sahu, Adnan Ali, Pawan Kumar. These three started a business by forming a partnership firm by making an orally verbal agreement. But when they are required to file the return of the firm for the first time. They came to know that their partnership firm should be registered with the registrar of firms and valid deed should be executed clearly stating the profit and loss sharing ratio as it is the prerequisite condition for assessing as a firm under income tax act 1961 and filing return and claiming deductions of interest and remuneration to partners from book profits of the firms.

Thereafter consulting with the Chartered accountants. All the three partners agreed to register their firm with ROF and executed the valid deed clearly stating the profit and loss sharing ratio of the partners for claiming the benefit under the various provisions of income tax act, 1961.
 
 Written by: Pushp Kumar Sahu (C.A. Final Aspirant)