CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
Section 185 — Assessment when section 184 not complied with
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Recast by the Finance Act, 1992 (w.e.f. 1-4-1993) and again by the Finance Act, 2003 (w.e.f. 1-4-2004) to its present form.
Finance Act, 2026: No change.
Successor (ITA 2025): Re-enacted (consequence of non-compliance with the firm-assessment conditions).
A. SECTION COMMENTARY
1. The consequence of non-compliance
Section 185 prescribes what happens when a firm does not comply with section 184 for an assessment year. Notwithstanding any other provision, the firm is "so assessed" that no deduction for any payment of interest, salary, bonus, commission or remuneration to a partner is allowed in computing its business profits, and such payments are correspondingly not chargeable to tax in the partner's hands under section 28(v). The provision is the mirror image of section 184(5): both deny the partner-payment deductions, and both switch off the matching charge in the partner's hands so that the same sum is not taxed twice.
2. A change of consequence after Finance Act, 2003
An important shift must be noted. As originally recast in 1992, non-compliance carried the consequence that the firm could not be "assessed as a firm" in the beneficial sense. From assessment year 2004-05, the Finance Act, 2003 substituted the present text: the non-compliant firm continues to be assessed as a firm, but simply loses the partner-payment deductions. The penalty for non-compliance today is therefore the denial of deductions, not a change in the firm's status or rate. Decisions interpreting the pre-2004 text on "loss of status" must be read with this change in mind.
Section 185 has no independent set of conditions; it operates only by reference to a failure to comply with section 184. The construction of "compliance" — a genuine partnership, an instrument evidencing it, specified shares, the certified copy, and updating on change — is therefore drawn from section 184 and the jurisprudence collected there. Where the gateway is passed, section 185 has no role and the deduction question is governed by section 40(b).
B. STATUTORY POSITION (verbatim text)
The text of section 185, as it stands in the Act, is set out below.
185. Notwithstanding anything contained in any other provision of this Act, where a firm does not comply with the provisions of section 184 for any assessment year, 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 185 is parasitic on section 184; it has generated little case law of its own, the substantive disputes being fought on the section 184 conditions and on section 40(b). The authorities under section 184 (R.C. Mitter & Sons, Mandyala Govindu & Co., K.D. Kamath & Co., and the section 40(b) line) govern compliance and are the operative authorities here. The position is stated candidly.
Section 185 bites only on a failure to comply with section 184; the meaning of compliance is settled by the section 184 authorities.
R.C. Mitter & Sons v. CIT (1959) 36 ITR 194 (SC) and Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1 (SC)
Principle: Compliance turns on a partnership evidenced by an instrument (R.C. Mitter & Sons) whose terms allow the partners' individual shares to be ascertained (Mandyala Govindu & Co.). A genuine partnership is presupposed (K.D. Kamath & Co.). Where these are present, section 184 is complied with and section 185 has no application; where they are absent, section 185 denies the partner-payment deductions.
Court / status: Supreme Court; applied to section 185 by reference.
M/s Durga Dass Devki Nandan v. ITO (2011) 331 ITR 53 (HP)
Principle: Where the firm has complied with section 184, partner remuneration authorised by the deed within the section 40(b) ceiling cannot be disallowed for want of express quantification; CBDT Circular No. 739 was held invalid to that extent. Conversely, genuine non-compliance with section 184 attracts the section 185 disallowance.
Court / status: High Court (Himachal Pradesh); widely followed.
Candour: No Supreme Court decision construes the present (post-2004) text of section 185 directly; the section operates through section 184 and section 40(b), whose authorities are set out above.
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 185 — Assessment when section 184 not complied with
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Recast by the Finance Act, 1992 (w.e.f. 1-4-1993) and again by the Finance Act, 2003 (w.e.f. 1-4-2004) to its present form.
Finance Act, 2026: No change.
Successor (ITA 2025): Re-enacted (consequence of non-compliance with the firm-assessment conditions).
A. SECTION COMMENTARY
1. The consequence of non-compliance
Section 185 prescribes what happens when a firm does not comply with section 184 for an assessment year. Notwithstanding any other provision, the firm is "so assessed" that no deduction for any payment of interest, salary, bonus, commission or remuneration to a partner is allowed in computing its business profits, and such payments are correspondingly not chargeable to tax in the partner's hands under section 28(v). The provision is the mirror image of section 184(5): both deny the partner-payment deductions, and both switch off the matching charge in the partner's hands so that the same sum is not taxed twice.
2. A change of consequence after Finance Act, 2003
An important shift must be noted. As originally recast in 1992, non-compliance carried the consequence that the firm could not be "assessed as a firm" in the beneficial sense. From assessment year 2004-05, the Finance Act, 2003 substituted the present text: the non-compliant firm continues to be assessed as a firm, but simply loses the partner-payment deductions. The penalty for non-compliance today is therefore the denial of deductions, not a change in the firm's status or rate. Decisions interpreting the pre-2004 text on "loss of status" must be read with this change in mind.
3. Relationship with sections 184 and 40(b)
Section 185 has no independent set of conditions; it operates only by reference to a failure to comply with section 184. The construction of "compliance" — a genuine partnership, an instrument evidencing it, specified shares, the certified copy, and updating on change — is therefore drawn from section 184 and the jurisprudence collected there. Where the gateway is passed, section 185 has no role and the deduction question is governed by section 40(b).
B. STATUTORY POSITION (verbatim text)
The text of section 185, as it stands in the Act, is set out below.
185. Notwithstanding anything contained in any other provision of this Act, where a firm does not comply with the provisions of section 184 for any assessment year, 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 185 is parasitic on section 184; it has generated little case law of its own, the substantive disputes being fought on the section 184 conditions and on section 40(b). The authorities under section 184 (R.C. Mitter & Sons, Mandyala Govindu & Co., K.D. Kamath & Co., and the section 40(b) line) govern compliance and are the operative authorities here. The position is stated candidly.
Cluster 1 — Compliance with section 184 (the trigger for section 185)
Section 185 bites only on a failure to comply with section 184; the meaning of compliance is settled by the section 184 authorities.
R.C. Mitter & Sons v. CIT (1959) 36 ITR 194 (SC) and Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1 (SC)
Principle: Compliance turns on a partnership evidenced by an instrument (R.C. Mitter & Sons) whose terms allow the partners' individual shares to be ascertained (Mandyala Govindu & Co.). A genuine partnership is presupposed (K.D. Kamath & Co.). Where these are present, section 184 is complied with and section 185 has no application; where they are absent, section 185 denies the partner-payment deductions.
Court / status: Supreme Court; applied to section 185 by reference.
Cluster 2 — Deduction denied / restored on facts (section 40(b) line)
M/s Durga Dass Devki Nandan v. ITO (2011) 331 ITR 53 (HP)
Principle: Where the firm has complied with section 184, partner remuneration authorised by the deed within the section 40(b) ceiling cannot be disallowed for want of express quantification; CBDT Circular No. 739 was held invalid to that extent. Conversely, genuine non-compliance with section 184 attracts the section 185 disallowance.
Court / status: High Court (Himachal Pradesh); widely followed.
Candour: No Supreme Court decision construes the present (post-2004) text of section 185 directly; the section operates through section 184 and section 40(b), whose authorities are set out above.
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.