Chapter XVII - Special Provisions Relating to Certain Persons
Section 325
Section 325: assessment as a firm
Section 325 lays down the paperwork conditions a partnership must satisfy to be assessed "as a firm" for tax purposes, rather than in some other capacity - centred on having a written partnership instrument that specifies each partner's share, filed with the firm's return.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) A firm shall be assessed as a firm for the purposes of this Act, if—
(a) the partnership is evidenced by an instrument; and
(b) 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 tax year in respect of which assessment as a firm is first sought.
(3) For the purposes of sub-section (2), 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.
(4) Where a firm is assessed as such for any tax 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.
(5) Where any such change had taken place in the tax year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for such tax year, and all the provisions of this section shall apply accordingly.
(6) Irrespective of anything contained in any other provision of this Act, where, in respect of any tax year, there is on the part of a firm any such failure as is mentioned in section 271,—
(a) 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
(b) such payment shall not be chargeable to income-tax under section 26(2)(g).
Introduction
Section 325 sets the conditions for assessing a partnership as a firm under the Act, including the documented partnership and information requirements.
A firm’s assessed status can continue across years, subject to changes and compliance with the section.
Key takeaways
Instrument and stated shares
Assessment as a firm requires a partnership evidenced by an instrument that specifies each partner’s individual share.
Status normally carries forward
Once assessed as a firm, that status continues for later tax years while constitution and shares remain unchanged.
Specified compliance failure affects deduction
A failure of the kind in section 271 can disallow the stated partner payments in computing the firm’s income.
Conditions for firm-status assessment
A firm is assessed as a firm for the Act's purposes if: the partnership is evidenced by an instrument; and the individual shares of the partners are specified in that instrument.
A certified copy of that partnership instrument must accompany the firm's return of income for the tax year in respect of which firm-status assessment is first sought.
The copy must be certified in writing by all partners (excluding minors) or, where the return is made after dissolution of the firm, by all persons (excluding minors) who were partners immediately before dissolution, and by the legal representative of any deceased partner.
Continuity across years
Once a firm is assessed as such for a tax year, it is assessed in the same capacity for every subsequent year, provided there is no change in the firm's constitution or the partners' shares as evidenced by the instrument on which firm-status assessment was first sought.
If such a change occurs during a tax year, the firm must furnish a certified copy of the revised partnership instrument with its return for that year, and Section 325's requirements apply accordingly.
Consequence of a failure specified in section 271
Irrespective of any other provision of the Act, where a firm has, for a tax year, a failure of the kind mentioned in section 271: no deduction is allowed, in computing income chargeable under "Profits and gains of business or profession", for any payment of interest, salary, bonus, commission or remuneration (by whatever name called) made by the firm to a partner; and such payment is not chargeable to income-tax under section 26(2)(g).
Step-by-step flow for assessment as a firm under Section 325
- 1
Is the partnership evidenced by an instrument that specifies the partners' individual shares?
- No: The firm cannot be assessed as a firm under Section 325(1).
- Yes: Go to the next step.
- 2
Is this the first tax year in which assessment as a firm is sought?
- Yes: A certified copy of the instrument must accompany that year's return (Section 325(2)). Go to step 3.
- No: The firm continues in the same capacity if there is no change in constitution or shares (Section 325(4)). Skip to step 4.
- 3
Who certifies the copy?
All partners other than minors; after dissolution, all persons (other than minors) who were partners just before dissolution, and the legal representative of a deceased partner (Section 325(3)).
- 4
Did the constitution or the shares change in the tax year?
If so, a certified copy of the revised instrument is filed with that year's return (Section 325(5)).
- 5
Is there a failure mentioned in Section 271 for the tax year?
Then no deduction is allowed for interest, salary, bonus, commission or remuneration paid to any partner in computing business income, and such payment is not chargeable in the partner's hands under Section 26(2)(g) (Section 325(6)).
Practical checklist
Do
- Keep the signed partnership deed and evidence of the partners’ shares.
- Report any change in the firm’s constitution in the prescribed manner.
Avoid
- Assume an oral understanding alone always meets the documentary condition for firm assessment.
Illustrative example
Worked example: effect of a Section 271 failure on partner payments
Hypothetical facts (illustration only, not a real taxpayer): A firm with a written deed specifying shares has been assessed as a firm since it first filed a certified copy. For one tax year, its income before partner payments is an assumed ₹20,00,000. It pays partners an assumed salary of ₹6,00,000 and interest of ₹1,00,000. That year it fails to comply with a notice under Section 268(1), a failure mentioned in Section 271.
Continuing status
There is no change in constitution or shares, so the firm is still assessed as a firm (Section 325(4)).
Without the failure
Subject to the other provisions of the Act, business income would be ₹20,00,000 − ₹6,00,000 − ₹1,00,000 = ₹13,00,000.
With the failure
Under Section 325(6)(a), the ₹7,00,000 of partner salary and interest is not deducted, so business income is ₹20,00,000.
Partners
Under Section 325(6)(b), the ₹7,00,000 is not chargeable in the partners' hands under Section 26(2)(g).
Outcome
- The firm's business income rises from ₹13,00,000 to ₹20,00,000 for that year.
- The partners are not taxed on the ₹7,00,000 under Section 26(2)(g).
Frequently asked questions
What must a firm do to be assessed as a firm rather than some other status?
Under Section 325(1) and (2), the partnership must be evidenced by a written instrument specifying each partner's individual share, and a certified copy of that instrument must accompany the firm's return of income for the year firm-status is first sought.
Does a firm need to refile its partnership instrument every year?
No - Section 325(4) carries forward firm-status assessment year after year automatically, as long as there is no change in the firm's constitution or the partners' shares. If there is a change, Section 325(5) requires a certified copy of the revised instrument with that year's return.
What happens if a firm has a compliance failure under section 271?
Under Section 325(6), the firm loses the deduction for any interest, salary, bonus, commission or remuneration paid to partners, and that payment also stays outside the partners' taxable income under section 26(2)(g).
Need help applying this provision to your situation?
Get help with partnership firm tax assessmentLast updated 9 October 2026