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Section 326 Income Tax Act 2025: What If a Firm Fails to Comply With Section 325?

Section 326 sets out the tax consequences when a partnership firm fails to comply with the conditions for assessment as a firm under Section 325. The consequences affect both the firm's deduction for payments to partners and the treatment of those payments in the partners' hands.

Applicable law: Income-tax Act, 2025 (Act 30 of 2025), as amended by the Finance Act, 2026; Chapter provisions on assessment of firms. The Act generally took effect on 1 April 2026.
Contents

What does Section 326 provide?

The statutory heading is Assessment when section 325 not complied with. Section 326 begins with an overriding clause: irrespective of anything contained in any other provision of the Act, where a firm does not comply with Section 325 for any tax year, the two consequences in clauses (a) and (b) apply.

Which conditions under Section 325 must a firm satisfy?

Section 325 provides the framework for assessment as a firm. Under Section 325(1), the partnership must be evidenced by an instrument and the individual shares of partners must be specified in that instrument.

Section 325 also addresses the certified copy of the partnership instrument accompanying the return when assessment as a firm is first sought, certification by the relevant partners, continuity of status when the constitution and shares remain unchanged, and filing a revised instrument when changes occur. Section 325(6) separately prescribes consequences for the failures referred to in Section 271.

Section 326 applies where the firm does not comply with Section 325 for a tax year. It is therefore important to identify the precise non-compliance and the relevant return and partnership records.

What are the consequences under Section 326?

Section 326(a): No deduction for specified payments to partners

The firm cannot deduct any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made to any partner while computing its income chargeable under the head Profits and gains of business or profession.

The provision concerns the specified payments made by the firm to its partners. It does not, by its own wording, say that every ordinary business expenditure is disallowed.

Section 326(b): Corresponding treatment in partners' hands

The same interest, salary, bonus, commission or remuneration is not chargeable to income-tax under Section 26(2)(g) in the hands of the partners of that firm. This is a specific statutory treatment of the partner payments described in Section 326.

Key distinction: Section 326(a) addresses the firm's computation of business income; Section 326(b) addresses the treatment of the specified receipts in the partners' hands under Section 26(2)(g).

Relevant statutory definitions and expressions

Firm: Under Section 2(45), the term has the meaning assigned by 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.
Partnership instrument: The instrument evidencing the partnership and specifying individual partners' shares, as required by Section 325(1).
Tax year: The year for which compliance and assessment are examined under the Act. Section 326 expressly applies on a tax-year basis.
Profits and gains of business or profession: The head of income for which Section 326(a) disallows the listed payments to partners in the firm's computation.
Assessment: Section 2(13) states that assessment includes reassessment and recomputation.

Practical illustration

Suppose a partnership firm pays Rs. 4,00,000 as remuneration and Rs. 1,00,000 as interest to its partners in a tax year, but fails to comply with Section 325. Under Section 326(a), the aggregate Rs. 5,00,000 is not deductible in computing the firm's business income. Under Section 326(b), those payments are not chargeable under Section 26(2)(g) in the partners' hands. This example illustrates only Section 326 and does not determine the firm's final taxable income or all other tax consequences.

Compliance checklist for partnership firms

  • Maintain an executed partnership instrument identifying the partners and their individual shares.
  • Ensure the certified instrument accompanies the return when first seeking assessment as a firm under Section 325.
  • Retain certification by the persons required under Section 325(3).
  • Where constitution or profit-sharing changes, furnish the certified revised instrument as required by Section 325(5).
  • Reconcile partner interest and remuneration with the partnership instrument, accounts and income-tax return.

Frequently asked questions

Does Section 326 disallow partner salary and interest?

Yes. Where the firm does not comply with Section 325 for the tax year, Section 326(a) disallows deductions for the listed payments to partners.

Are those payments taxable to the partners under Section 26(2)(g)?

No. Section 326(b) expressly states that the specified payments are not chargeable under Section 26(2)(g) in the partners' hands.

Does Section 326 apply to commission and bonus paid to partners?

Yes. The statutory list includes interest, salary, bonus, commission and remuneration, by whatever name called.

Is Section 326 the same as Section 325(6)?

No. Section 325(6) specifically deals with failures mentioned in Section 271. Section 326 addresses non-compliance with Section 325 for a tax year. Both contain related consequences, but their stated triggers differ.

Statutory source and related provisions

This article is based on Sections 325 and 326 of the Income-tax Act, 2025, as amended by the Finance Act, 2026. Read the precise statutory wording for application to individual facts.

Official Income-tax Act 2025 (amended PDF)Section 325: Assessment as a firmIncome-tax Act 2025 index

Last reviewed: 12 November 2026. General statutory information, not a substitute for case-specific advice.