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Section 325 Income Tax Act 2025: When Is a Firm Assessed as a Firm?

Section 325 lays down the documentary and continuing conditions for assessment of a partnership firm as a firm, including the partnership instrument, partners' individual shares, certified copies and reporting changes.

Applicable law: Income-tax Act, 2025 (Act 30 of 2025), as amended by the Finance Act, 2026; generally effective from 1 April 2026. Statutory heading: Assessment as a firm.

What does Section 325 say?

The following is the text of Section 325 from the supplied consolidated Act:

325. (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).

What conditions must a firm satisfy?

1. Written evidence of partnership — Section 325(1)

The partnership must be evidenced by an instrument and that instrument must specify each partner's individual share. An informal understanding without the required instrument does not meet these express conditions.

2. Certified copy with first return — Section 325(2)

For the first tax year in which the firm seeks assessment as a firm, a certified copy of the partnership instrument must accompany its return of income.

3. Who certifies the copy? — Section 325(3)

Ordinarily, all partners other than minors must certify the copy in writing. Where the return is filed after dissolution, certification is required from those who were partners immediately before dissolution (other than minors) and from the legal representative of a deceased partner, where applicable.

4. Continuing assessment — Section 325(4)

Once the firm is assessed as a firm, that capacity continues in later tax years if the constitution and partners' shares remain unchanged from the instrument supporting the first assessment.

5. Revised deed after a change — Section 325(5)

Where the firm's constitution or partners' shares change during the tax year, a certified copy of the revised instrument must be furnished with that year's return. The requirements of Section 325 then apply accordingly.

What happens if the firm fails to comply?

Under Section 325(6), where a firm commits a failure of the kind mentioned in Section 271, deductions for interest, salary, bonus, commission or remuneration paid to partners are disallowed in computing its business or professional income. The corresponding payments are not chargeable under Section 26(2)(g). This is a specific statutory consequence and should not be confused with the separate rule under Section 326 for non-compliance with Section 325.

Important distinction: Section 325(6) expressly refers to a failure mentioned in Section 271. Section 326 separately addresses a firm's failure to comply with Section 325. Both provisions can affect the treatment of payments to partners, but their triggering conditions differ.

Relevant statutory definitions

Firm — Section 2(45): Has the meaning assigned under Section 4 of the Indian Partnership Act, 1932, and includes a limited liability partnership as defined in Section 2(1)(n) of the Limited Liability Partnership Act, 2008.
Legal representative — Section 2(65): Has the meaning assigned under Section 2(11) of the Code of Civil Procedure, 1908.
Instrument of partnership: The document evidencing the partnership and setting out individual shares of the partners, as required by Section 325(1).
Constitution of the firm: In this context, the composition of the partnership; changes to that composition or to partners' shares matter for Sections 325(4) and (5). Section 327 separately addresses changes in constitution.

Practical example

Suppose A and B form a partnership under a written deed showing profit-sharing ratios of 60% and 40%. They submit a copy certified by both partners with the firm's first return seeking assessment as a firm. If their constitution and shares remain unchanged, Section 325(4) provides for assessment in the same capacity in subsequent years. If C joins and the shares are revised, the firm must furnish a certified copy of the revised partnership instrument with the return for the tax year in which the change occurs.

Checklist for partnership firms

  • Ensure the partnership is evidenced by an instrument.
  • Specify each partner's individual share in the instrument.
  • Provide a properly certified copy with the first relevant return.
  • Keep a revised instrument ready when the constitution or shares change.
  • Review Sections 271, 325(6) and 326 before claiming deductions for partner payments.

Frequently asked questions

Is a partnership deed required for assessment as a firm?

Section 325(1) requires an instrument evidencing the partnership and specifying each partner's individual share.

Must the partnership instrument be filed every year?

Section 325(2) requires a certified copy when assessment as a firm is first sought. Section 325(5) requires a certified revised instrument for a tax year in which the constitution or partners' shares change.

Who signs the certified copy after dissolution?

Section 325(3) specifies certification by the persons who were partners immediately before dissolution, excluding minors, and by the legal representative of a deceased partner where applicable.

What is the consequence of a Section 271 failure?

Section 325(6) denies the firm deductions for specified payments to partners and provides corresponding treatment under Section 26(2)(g).

Source and related provisions

Read Section 325 with Sections 324 (charge of tax in case of a firm), 326 (assessment when Section 325 is not complied with), 327 (change in constitution) and 271 (specified failure).

Official Income-tax Act, 2025 (amended 2026)Income-tax Act 2025 index

Last reviewed: 12 November 2026. General information; the statutory text governs.