CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
Section 184 — Assessment as a firm
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Re-enacted in its present form by the Finance Act, 1992, w.e.f. 1 April 1993; the gateway to being "assessed as a firm" and to the deductibility of partner remuneration and interest under section 40(b).
Finance Act, 2026: No change to section 184. (The Finance Act, 2025 had separately enhanced the section 40(b) monetary limits and inserted section 194T — TDS on partner payments — both outside Chapter XVI but central to the working of this section.)
Scope: "Firm" includes a limited liability partnership (section 2(23)); the conditions of this section apply to LLPs accordingly.
Successor (ITA 2025): Re-enacted in the Income-tax Act, 2025 (conditions for assessment as a firm and for partner-payment deductions).
A. SECTION COMMENTARY
1. Object and scheme
Under the post-1993 scheme a partnership firm is a separate taxable entity charged at a flat rate, and the partner's share in the firm's total income is exempt in his hands under section 10(2A). To balance this, the firm is allowed to deduct interest, salary, bonus, commission and remuneration paid to its partners, subject to the ceilings in section 40(b). Section 184 is the threshold provision: it lays down the two conditions a firm must satisfy to be "assessed as a firm" and, in turn, to claim those partner-payment deductions. A firm that fails the conditions is still assessed (as a firm) but loses the deductions — and the disallowed amounts are correspondingly not taxed in the partners' hands (the closing words of sub-section (5), mirrored in section 185).
First, the partnership must be evidenced by an instrument; second, the individual shares of the partners must be specified in that instrument. Both are mandatory. The instrument requirement does not mean the partnership must have been born in writing — a partnership formed orally and later reduced to writing satisfies the condition (R.C. Mitter & Sons). "Specified" does not require shares to be set out in express fractions: it is enough that the instrument enables the shares — including, where relevant, shares in losses — to be ascertained (Mandyala Govindu & Co.). Underlying both conditions is the requirement of a genuine partnership: a sham or non-existent partnership is not a "firm" at all, however elaborate the deed (K.D. Kamath & Co. on the essential elements — agreement to share profits and mutual agency).
3. Certified copy with the return — section 184(2) and the Explanation
A certified copy of the instrument must accompany the return for the assessment year (from AY 1993-94) in which assessment as a firm is first sought. The Explanation prescribes who must certify the copy — all the partners (not being minors), and, where the return is filed after dissolution, all persons who were partners immediately before dissolution and the legal representative of any deceased partner. The requirement is procedural but its omission can be fatal to the firm's claim to partner-payment deductions, subject to the assessing officer's power to allow a defect to be cured.
Once a firm is assessed as a firm, it continues to be so assessed for every subsequent year so long as there is no change in its constitution or in the partners' shares as evidenced by the instrument on which assessment was first sought (sub-section (3)). Where such a change has taken place in the previous year, the firm must file a certified copy of the revised instrument with the return for the relevant year (sub-section (4)). The scheme thus dispenses with the annual application that the old registration regime required, replacing it with a one-time instrument and a duty to update on change.
Sub-section (5) overrides every other provision: where, for any year, there is on the firm's part any failure of the kind mentioned in section 144 (the conditions for a best-judgment assessment — non-filing of return, non-compliance with notices, etc.), the firm is assessed so that no deduction for any payment of interest, salary, bonus, commission or remuneration to a partner is allowed in computing business profits, and such payments are not chargeable in the partner's hands under section 28(v). This is a deterrent: a defaulting firm forfeits the partner-payment deductions even though it is otherwise assessed as a firm.
6. Interplay — sections 40(b), 28(v), 10(2A), and the Finance Act, 2025 changes
Section 184 is the gateway; section 40(b) is the meter. Even a fully compliant firm gets the partner-payment deductions only up to the section 40(b) ceilings; amounts within the ceiling are deductible for the firm and taxable for the partner under section 28(v), while amounts disallowed in the firm's hands are not taxed again in the partner's hands. Two Finance Act, 2025 changes (outside Chapter XVI but operationally inseparable from section 184) should be read with this section: the enhanced section 40(b) remuneration limits, and the new section 194T requiring TDS on salary, remuneration, commission, bonus and interest paid by a firm to a partner with effect from 1 April 2025. Practitioners advising on "assessment as a firm" must now check both the section 184 conditions and the section 194T withholding obligation.
7. Continuity of the old registration jurisprudence
Although the annual registration regime is gone, the concepts in present section 184 — "instrument of partnership", "individual shares specified", and the unstated but indispensable requirement of a genuine partnership — are the same concepts the courts construed for decades under section 26A of the 1922 Act and old sections 184-186. That jurisprudence (R.C. Mitter & Sons, Mandyala Govindu & Co., K.D. Kamath & Co.) therefore continues to inform the construction of the present conditions, and is cited below on that footing.
B. STATUTORY POSITION (verbatim text)
The text of section 184, as it stands in the Act (FA-2025 base), is set out below.
184. (1) A firm shall be assessed as a firm for the purposes of this Act, if—
(i) the partnership is evidenced by an instrument; and
(ii) the individual shares of the partners are specified in that instrument.
(2) A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993 in respect of which assessment as a firm is first sought.
Explanation.—For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.
(3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought.
(4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.
(5) Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.
C. AUTHORITIES
Section 184 in its present form (post-1993) is comparatively lightly litigated on its own terms; the governing principles on its core concepts come from the registration jurisprudence under the 1922 Act and the old Chapter, which continues to apply, supplemented by the modern section 40(b) line on partner-payment deductions. Tribunal coverage exists but is fact-specific; the leading and binding authorities are set out below.
Cluster 1 — "Evidenced by an instrument" / genuineness of the partnership
The first gateway condition and the underlying requirement of a real partnership.
R.C. Mitter & Sons v. CIT (1959) 36 ITR 194 (SC)
Issue: Whether the words "constituted under an instrument of partnership" required the firm to have been created by a written instrument, or whether an orally-formed firm later reduced to writing qualified.
Held: "Constitute" bears its wider meaning — it includes both creating a partnership and giving legal form to one already created. A firm formed by word of mouth and afterwards clothed in legal form by reducing its terms to writing satisfies the requirement of an instrument of partnership.
Relevance to s.184: The same expression governs present section 184(1)(i). The instrument need not pre-date the partnership; what matters is that, for the relevant period, the partnership is evidenced by a written instrument.
Issue: Whether a partnership was genuine where one partner (K.D. Kamath) held exclusive control of the business and the others lacked an independent power to act.
Held: The two essential conditions of partnership are (i) an agreement to share profits and losses, and (ii) mutual agency — the business being carried on by all or any of them acting for all. Unequal control or concentration of management in one partner does not by itself negate partnership, so long as those two elements are present. The firm was genuine and entitled to registration.
Relevance to s.184: Genuineness is the unspoken precondition of "a firm" in section 184; Kamath supplies the test for it.
Court / status: Supreme Court; leading authority on the constitution of a genuine firm.
Cluster 2 — "Individual shares of the partners are specified"
Issue: Whether the instrument must expressly set out the partners' shares (including shares in losses) in fractional terms for the firm to qualify.
Held: "Specify" means to mention, describe or define — not necessarily to set out in express fractions. The assessing authority must, however, be able to ascertain the partners' shares (and, where profit-shares differ, the shares in losses) from the instrument. An application cannot be rejected merely because shares are not expressly stated in fractions, provided they are ascertainable; but if the shares (in particular, in losses) cannot be ascertained at all, the condition is not met.
Relevance to s.184: Directly construes "individual shares of the partners are specified" in section 184(1)(ii).
Court / status: Supreme Court; the leading authority on the "specified shares" condition.
Once the section 184 gateway is passed, the quantum of partner-payment deductions turns on section 40(b); the leading construction is below.
CIT v. Anil Hardware Store / M/s Durga Dass Devki Nandan v. ITO (2011) 331 ITR 53 (HP) — "authorised" not "quantified"
Issue: Whether remuneration to working partners is deductible under section 40(b)(v) only if the partnership deed quantifies the amount or lays down the precise method of quantification (as CBDT Circular No. 739 dated 25-3-1996 required).
Held: Section 40(b)(v) requires only that the payment of remuneration be authorised by, and be in accordance with, the partnership deed, and that it not exceed the statutory ceiling; it does not require the deed to fix the amount or the exact method. CBDT Circular No. 739, to the extent it imposed a quantification requirement not found in the statute, was held to be invalid; a deed authorising remuneration up to the section 40(b) limit is sufficient.
Relevance to s.184: Illustrates that, the section 184 gateway being satisfied, deductibility of partner remuneration is governed by the language of section 40(b); over-reading the deed requirement is impermissible.
Court / status: High Court (Himachal Pradesh); widely followed at the Tribunal. Note: some High Courts have taken a stricter view on deeds that neither quantify nor lay down any basis, so the deed should still authorise remuneration with reference to the section 40(b) ceiling.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the Income-tax Act, 1961 (local Act print, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; no statutory word has been altered. The new scheme of firm taxation (firm as a separate taxable entity, abolition of registration) operates from assessment year 1993-94; sections 182, 183 and 186 stand omitted by the Finance Act, 1992, w.e.f. 1-4-1993. The Finance Act, 2026 makes no amendment to any section of Chapter XVI. Citations are stated as reported; orders of the Tribunal and High Courts are flagged as such. Where a section has not been judicially construed on its own terms, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.
CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
Section 184 — Assessment as a firm
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Re-enacted in its present form by the Finance Act, 1992, w.e.f. 1 April 1993; the gateway to being "assessed as a firm" and to the deductibility of partner remuneration and interest under section 40(b).
Finance Act, 2026: No change to section 184. (The Finance Act, 2025 had separately enhanced the section 40(b) monetary limits and inserted section 194T — TDS on partner payments — both outside Chapter XVI but central to the working of this section.)
Scope: "Firm" includes a limited liability partnership (section 2(23)); the conditions of this section apply to LLPs accordingly.
Successor (ITA 2025): Re-enacted in the Income-tax Act, 2025 (conditions for assessment as a firm and for partner-payment deductions).
A. SECTION COMMENTARY
1. Object and scheme
Under the post-1993 scheme a partnership firm is a separate taxable entity charged at a flat rate, and the partner's share in the firm's total income is exempt in his hands under section 10(2A). To balance this, the firm is allowed to deduct interest, salary, bonus, commission and remuneration paid to its partners, subject to the ceilings in section 40(b). Section 184 is the threshold provision: it lays down the two conditions a firm must satisfy to be "assessed as a firm" and, in turn, to claim those partner-payment deductions. A firm that fails the conditions is still assessed (as a firm) but loses the deductions — and the disallowed amounts are correspondingly not taxed in the partners' hands (the closing words of sub-section (5), mirrored in section 185).
2. The two gateway conditions — section 184(1)
First, the partnership must be evidenced by an instrument; second, the individual shares of the partners must be specified in that instrument. Both are mandatory. The instrument requirement does not mean the partnership must have been born in writing — a partnership formed orally and later reduced to writing satisfies the condition (R.C. Mitter & Sons). "Specified" does not require shares to be set out in express fractions: it is enough that the instrument enables the shares — including, where relevant, shares in losses — to be ascertained (Mandyala Govindu & Co.). Underlying both conditions is the requirement of a genuine partnership: a sham or non-existent partnership is not a "firm" at all, however elaborate the deed (K.D. Kamath & Co. on the essential elements — agreement to share profits and mutual agency).
3. Certified copy with the return — section 184(2) and the Explanation
A certified copy of the instrument must accompany the return for the assessment year (from AY 1993-94) in which assessment as a firm is first sought. The Explanation prescribes who must certify the copy — all the partners (not being minors), and, where the return is filed after dissolution, all persons who were partners immediately before dissolution and the legal representative of any deceased partner. The requirement is procedural but its omission can be fatal to the firm's claim to partner-payment deductions, subject to the assessing officer's power to allow a defect to be cured.
4. Continuation and change — section 184(3) and (4)
Once a firm is assessed as a firm, it continues to be so assessed for every subsequent year so long as there is no change in its constitution or in the partners' shares as evidenced by the instrument on which assessment was first sought (sub-section (3)). Where such a change has taken place in the previous year, the firm must file a certified copy of the revised instrument with the return for the relevant year (sub-section (4)). The scheme thus dispenses with the annual application that the old registration regime required, replacing it with a one-time instrument and a duty to update on change.
5. Failure attracting best-judgment — section 184(5)
Sub-section (5) overrides every other provision: where, for any year, there is on the firm's part any failure of the kind mentioned in section 144 (the conditions for a best-judgment assessment — non-filing of return, non-compliance with notices, etc.), the firm is assessed so that no deduction for any payment of interest, salary, bonus, commission or remuneration to a partner is allowed in computing business profits, and such payments are not chargeable in the partner's hands under section 28(v). This is a deterrent: a defaulting firm forfeits the partner-payment deductions even though it is otherwise assessed as a firm.
6. Interplay — sections 40(b), 28(v), 10(2A), and the Finance Act, 2025 changes
Section 184 is the gateway; section 40(b) is the meter. Even a fully compliant firm gets the partner-payment deductions only up to the section 40(b) ceilings; amounts within the ceiling are deductible for the firm and taxable for the partner under section 28(v), while amounts disallowed in the firm's hands are not taxed again in the partner's hands. Two Finance Act, 2025 changes (outside Chapter XVI but operationally inseparable from section 184) should be read with this section: the enhanced section 40(b) remuneration limits, and the new section 194T requiring TDS on salary, remuneration, commission, bonus and interest paid by a firm to a partner with effect from 1 April 2025. Practitioners advising on "assessment as a firm" must now check both the section 184 conditions and the section 194T withholding obligation.
7. Continuity of the old registration jurisprudence
Although the annual registration regime is gone, the concepts in present section 184 — "instrument of partnership", "individual shares specified", and the unstated but indispensable requirement of a genuine partnership — are the same concepts the courts construed for decades under section 26A of the 1922 Act and old sections 184-186. That jurisprudence (R.C. Mitter & Sons, Mandyala Govindu & Co., K.D. Kamath & Co.) therefore continues to inform the construction of the present conditions, and is cited below on that footing.
B. STATUTORY POSITION (verbatim text)
The text of section 184, as it stands in the Act (FA-2025 base), is set out below.
184. (1) A firm shall be assessed as a firm for the purposes of this Act, if—
(i) the partnership is evidenced by an instrument; and
(ii) the individual shares of the partners are specified in that instrument.
(2) A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993 in respect of which assessment as a firm is first sought.
Explanation.—For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.
(3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought.
(4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.
(5) Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession" and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.
C. AUTHORITIES
Section 184 in its present form (post-1993) is comparatively lightly litigated on its own terms; the governing principles on its core concepts come from the registration jurisprudence under the 1922 Act and the old Chapter, which continues to apply, supplemented by the modern section 40(b) line on partner-payment deductions. Tribunal coverage exists but is fact-specific; the leading and binding authorities are set out below.
Cluster 1 — "Evidenced by an instrument" / genuineness of the partnership
The first gateway condition and the underlying requirement of a real partnership.
R.C. Mitter & Sons v. CIT (1959) 36 ITR 194 (SC)
Issue: Whether the words "constituted under an instrument of partnership" required the firm to have been created by a written instrument, or whether an orally-formed firm later reduced to writing qualified.
Held: "Constitute" bears its wider meaning — it includes both creating a partnership and giving legal form to one already created. A firm formed by word of mouth and afterwards clothed in legal form by reducing its terms to writing satisfies the requirement of an instrument of partnership.
Relevance to s.184: The same expression governs present section 184(1)(i). The instrument need not pre-date the partnership; what matters is that, for the relevant period, the partnership is evidenced by a written instrument.
Court / status: Supreme Court; foundational, followed.
K.D. Kamath & Co. v. CIT (1971) 82 ITR 680 (SC)
Issue: Whether a partnership was genuine where one partner (K.D. Kamath) held exclusive control of the business and the others lacked an independent power to act.
Held: The two essential conditions of partnership are (i) an agreement to share profits and losses, and (ii) mutual agency — the business being carried on by all or any of them acting for all. Unequal control or concentration of management in one partner does not by itself negate partnership, so long as those two elements are present. The firm was genuine and entitled to registration.
Relevance to s.184: Genuineness is the unspoken precondition of "a firm" in section 184; Kamath supplies the test for it.
Court / status: Supreme Court; leading authority on the constitution of a genuine firm.
Cluster 2 — "Individual shares of the partners are specified"
The second gateway condition.
Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1 (SC)
Issue: Whether the instrument must expressly set out the partners' shares (including shares in losses) in fractional terms for the firm to qualify.
Held: "Specify" means to mention, describe or define — not necessarily to set out in express fractions. The assessing authority must, however, be able to ascertain the partners' shares (and, where profit-shares differ, the shares in losses) from the instrument. An application cannot be rejected merely because shares are not expressly stated in fractions, provided they are ascertainable; but if the shares (in particular, in losses) cannot be ascertained at all, the condition is not met.
Relevance to s.184: Directly construes "individual shares of the partners are specified" in section 184(1)(ii).
Court / status: Supreme Court; the leading authority on the "specified shares" condition.
Cluster 3 — Deduction of partner remuneration / interest (section 40(b) interplay)
Once the section 184 gateway is passed, the quantum of partner-payment deductions turns on section 40(b); the leading construction is below.
CIT v. Anil Hardware Store / M/s Durga Dass Devki Nandan v. ITO (2011) 331 ITR 53 (HP) — "authorised" not "quantified"
Issue: Whether remuneration to working partners is deductible under section 40(b)(v) only if the partnership deed quantifies the amount or lays down the precise method of quantification (as CBDT Circular No. 739 dated 25-3-1996 required).
Held: Section 40(b)(v) requires only that the payment of remuneration be authorised by, and be in accordance with, the partnership deed, and that it not exceed the statutory ceiling; it does not require the deed to fix the amount or the exact method. CBDT Circular No. 739, to the extent it imposed a quantification requirement not found in the statute, was held to be invalid; a deed authorising remuneration up to the section 40(b) limit is sufficient.
Relevance to s.184: Illustrates that, the section 184 gateway being satisfied, deductibility of partner remuneration is governed by the language of section 40(b); over-reading the deed requirement is impermissible.
Court / status: High Court (Himachal Pradesh); widely followed at the Tribunal. Note: some High Courts have taken a stricter view on deeds that neither quantify nor lay down any basis, so the deed should still authorise remuneration with reference to the section 40(b) ceiling.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the Income-tax Act, 1961 (local Act print, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; no statutory word has been altered. The new scheme of firm taxation (firm as a separate taxable entity, abolition of registration) operates from assessment year 1993-94; sections 182, 183 and 186 stand omitted by the Finance Act, 1992, w.e.f. 1-4-1993. The Finance Act, 2026 makes no amendment to any section of Chapter XVI. Citations are stated as reported; orders of the Tribunal and High Courts are flagged as such. Where a section has not been judicially construed on its own terms, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.