Partnership Firm Registration in Delhi

Overview of Taxation for Proprietorships in India

In India, proprietorships are taxed as individual taxpayers under the Income Tax Act. The business income is added to the proprietor's total income and taxed according to the applicable individual tax slabs. Proprietors typically file their income tax returns using:

• ITR-3: For individuals and HUFs having income from a proprietary business or profession
  
• ITR-4 (Sugam): For those opting for the presumptive taxation scheme under sections 44AD, 44ADA, or 44AE
  

Taxpayers can choose between the old tax regime (with deductions and exemptions) or the new one (with lower tax rates but no exemptions).

Do Proprietorship Firms Need to File Income Tax Returns?

Yes, proprietors are legally obligated to file ITRs if their total income exceeds the basic exemption limit, which for FY 2024-25 is:

• ₹2.5 lakh for individuals below 60 years
  
• ₹3 lakh for senior citizens (60-80 years)
  
• ₹3.5 lakh for super senior citizens (above 80 years)
  

Even if the income is below the exemption limit, filing returns is necessary to carry forward business losses, to claim TDS refunds and if there are any foreign assets or income involved.

Importance of Filing Income Tax Returns for Proprietorship Firms

Beyond legal compliance, filing ITR offers several advantages:

• Financial Credibility: Enhances your chances of securing loans, credit lines, or business investments
  
• Business Growth: Essential for bidding in tenders and expanding operations
  
• Avoiding Penalties: Non-filing attracts penalties and interest under the Income Tax Act
  
• Refund Claims: Enables claiming refunds on excess TDS deducted
  

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Tax Audit for Proprietorship

A tax audit is a review of accounts to ensure accuracy and compliance with tax laws. For proprietorships, audit requirements apply if:

• Turnover exceeds ₹1 crore (business)
  
• Gross receipts exceed ₹50 lakh (profession)
  
• Turnover exceeds ₹10 crore if 95% of payments and receipts are digital
  

Non-compliance with tax audit provisions can attract a penalty under Section 271B, which can be up to 0.5% of turnover or a maximum of ₹1.5 lakh.

Presumptive Taxation Scheme: A Simplified Option for Small Proprietors

To ease compliance for small taxpayers, the Income Tax Act offers presumptive taxation schemes:

• Section 44AD: For small businesses with turnover up to ₹2 crore (to be extended to ₹3 crore from AY 2025-26 if cash transactions are below 5%)
  
• Section 44ADA: For professionals with receipts up to ₹50 lakh
  
• Section 44AE: For those involved in the business of transportation
  

ITR Guidelines for Proprietorship Firms – Union Budget 2024–25 Insights

The Union Budget 2024 brought several important changes aimed at easing compliance, promoting transparency, and offering relief to taxpayers, especially for salaried individuals and businesses.

Here's a quick overview of key updates relevant to individual taxpayers and proprietorships:

1. Increased Standard Deduction Under the New Tax Regime

To offer more relief to salaried individuals, the standard deduction under the new tax regime has been increased from ₹50,000 to ₹75,000.

2. Reduced TDS Rates on Specified Payments

The budget has also reduced the Tax Deducted at Source (TDS) rates on certain specified payments to improve ease of doing business and simplify compliance for both payers and recipients. This change will benefit small and mid-sized businesses by easing their cash flow and lowering the burden of upfront tax deduction.

3. Government Scheme for First-Time Entrepreneurs

The Union Budget 2024 introduced a new loan scheme to support first-time entrepreneurs. The scheme aims to promote inclusive entrepreneurship and boost India’s startup ecosystem.

Proprietorship Tax Rate & Surcharge AY 2025-26 | FY 2024-25

Under the New Regime

Under the Old Tax Regime

Deadline for Proprietorship ITR Filing

• Non-audited firms: July 31st of the assessment year (AY)
  
• Audited firms: October 31st of the assessment year (AY)
  

For AY 2025-26:

• Non-audited deadline: July 31, 2025
  
• Audited deadline: October 31, 2025
  

List of Documents Needed for Proprietorship Income Tax Return Filing

• PAN card of the proprietor
  
• Aadhaar card
  
• Bank account statements
  
• Profit & Loss statement
  
• Balance sheet
  
• GST returns (if registered)
  
• TDS certificates (Form 16A/26AS)
  
• Sales invoices and purchase bills
  
• Expense receipts
  
• Investment proofs for claiming deductions (under the old regime)
  

How to File an Income Tax Return for a Proprietorship (Step-by-Step Guide)

Here's a simple, step-by-step guide to help you file accurately and on time:

Step 1: Choose the Right ITR Form

• ITR-3: For proprietors with regular business or professional income
  
• ITR-4: For those opting for the Presumptive Taxation Scheme under Sections 44AD, 44ADA, or 44AE
  

Step 2: Prepare Financial Information

• Compile key documents
  
• Calculate your total income and tax liability
  
• Claim eligible deductions (only under the old regime).
  
• Verify TDS credits and advance tax paid.
  

Step 3: Log into the Portal

• Visit the Income Tax e-Filing portal
  
• Log in using your PAN and password.
  

Step 4: Submit the Return

• Select Assessment Year 2025–26 and the appropriate ITR form (ITR-3 or ITR-4)
  
• Enter all relevant details—income, deductions, taxes paid, etc
  
• Validate and submit the return
  
• E-verify using Aadhaar OTP, bank account, or DSC
  

Step 5: Download

• Download the acknowledgement (ITR-V) and save it for your records.
  

Conclusion

Running a proprietorship already comes with a long to-do list, and filing your income tax return might feel like just another box to check. But here’s the truth: Filing your ITR on time helps you stay on the right side of the law, but it also unlocks serious advantages like improved loan eligibility, smoother business expansion, and better financial credibility.

That’s why choosing the right ITR form (like ITR-3 or ITR-4), keeping your documents ready, and understanding your tax regime can save you a lot of future headaches.

Don’t wait until the last minute- start organising your financials today and file your ITR on time to stay ahead, stay compliant, and build a more credible, growth-ready business.

Frequently Asked Questions

Procedure for Conversion into a Public Limited Company

Converting a private limited company into a public limited company in India is governed by the Companies Act, 2013, and involves a formalised legal process. Here’s a step-by-step guide:

1. Convene a Board Meeting

• Pass a board resolution to approve the proposal for conversion.
• Approve amendments to the Memorandum of Association (MoA) and Articles of Association (AoA).
• Schedule an Extraordinary General Meeting (EGM) for shareholder approval.

2. Issue Notice for EGM

• Send notices to all shareholders, directors, and auditors at least 21 days before the meeting.
• The notice should include the agenda, draft resolutions, and explanatory statements.

3. Hold the Extraordinary General Meeting (EGM)

• Pass a Special Resolution to approve the conversion from private to public.
• Approve necessary alterations in the MoA (removal of “Private”) and AoA (removal of restrictive clauses on share transfer and member limits).

4. Filing with Registrar of Companies (RoC)

Submit the following forms with the Ministry of Corporate Affairs (MCA) portal:

• MGT-14: Filing of special resolutions within 30 days of passing them.
• INC-27: Application for conversion, along with certified copies of resolutions, amended MoA/AoA, and EGM minutes.

5. Scrutiny and Approval by RoC

The Registrar reviews the application and, upon satisfaction, issues a Fresh Certificate of Incorporation reflecting the change in company status from private to public.

Related Read: Private Company Vs Public Company: Key Differences Explained

Post-Conversion Requirements

Once the company has been converted into a public limited company, several post-conversion formalities must be completed to align with regulatory and operational standards:

1. Update Statutory Documents

• Obtain a new PAN reflecting the updated company name.
• Revise all statutory records, financial statements, and company stationery (letterheads, invoices, website, etc.).

2. Inform Bankers and Financial Institutions

• Update your company’s status with existing banks and financial institutions.
• Amend authorised signatories if required.

3. Intimate Regulatory Authorities

• Notify relevant authorities such as tax departments, GST authorities, and regulatory bodies, if applicable.

4. Compliance with Public Company Norms

• Increase the number of directors to a minimum of 3 (as required for a public company).
• Appoint independent directors and comply with applicable listing regulations (if planning for a stock exchange listing).
• Adhere to enhanced disclosure norms, audit requirements, and corporate governance standards.

5. Prepare for Capital Raising (Optional)

• If planning an IPO, start preparing for SEBI compliance, drafting offer documents, and engaging with merchant bankers.

Frequently Asked Questions (FAQs)

What Is a Dormant Company?

Under the Companies Act, 2013, a dormant company refers to an entity that is temporarily inactive, with no significant accounting transactions during a financial year. The definition of a dormant company encompasses companies that are:

• Incorporated for future projects
  
• Established to hold assets or intellectual property
  
• Not engaged in any significant financial transactions
  

To be eligible for dormant company status, a company must meet the following criteria:

• No significant accounting transactions during the last two financial years
  
• No filing of financial statements and annual returns with the Registrar of Companies (ROC) in the preceding two financial years
  

It's important to note that a company can remain dormant for a maximum of five consecutive financial years. After this period, the company must either commence operations or apply for an extension of dormant status with the ROC.

Is a Dormant Company Allowed To Trade?

A dormant company is not allowed to conduct significant business transactions, such as:

• Buying or selling goods and services
  
• Engaging in revenue-generating operations
  
• Undertaking any other form of trade
  

However, a dormant company can carry out certain essential activities, including:

• Paying fees and fulfilling compliance requirements under the Companies Act or other applicable laws
  
• Maintaining its registered office and records
  
• Allotting shares to shareholders
  

Engaging in active trading or substantial business transactions may lead to the loss of dormant company status. Therefore, it is crucial for business owners to ensure that their dormant company remains compliant with the prescribed regulations.

A Brief Overview of Dormant Status Under the Companies Act 2013

Section 455 of the Companies Act 2013 introduced the concept of dormant companies to provide a legal framework for businesses that wish to temporarily suspend their operations while maintaining their legal status. This provision allows companies to:

• Preserve their assets and intellectual property
  
• Reduce compliance costs during periods of inactivity
  
• Keep their company name reserved for future projects
  

Meaning of Inactive Company

An inactive company, as per the Companies Act 2013, is a company that:

• Has not conducted any significant financial transactions during the last two financial years
  
• Has not filed financial statements and annual returns with the ROC for the preceding two financial years
  

Reasons for Obtaining the Status of a Dormant Company

There are several reasons why a company may choose to obtain dormant company status:

• To preserve the company name for future business ventures
  
• To hold assets or intellectual property without actively engaging in business operations
  
• To reduce compliance costs and regulatory burdens during periods of inactivity
  
• To facilitate business restructuring or strategic planning
  
• To maintain legal status while the promoters or directors are unavailable due to personal reasons, such as illness, travel, or sabbatical
  

Top 5 Benefits of Opting for Dormant Company Status

1. Reduced Compliance Requirements: Dormant companies are subject to significantly fewer compliance obligations under the Companies Act 2013. This includes exemptions from holding frequent board meetings, appointing auditors, and filing detailed annual returns.
   
2. Cost Savings: By reducing compliance requirements, dormant companies can save on administrative expenses, such as auditor fees, legal costs, and filing charges. This can be particularly beneficial for small businesses and start-ups looking to minimise overhead costs.
   
3. Brand Name Protection: Registering as a dormant company allows businesses to protect their brand name and prevent others from registering a similar name. This is crucial for companies that have invested in building a strong brand identity and want to preserve it for future use.
   
4. Flexibility for Future Business Plans: Dormant company status provides businesses with the flexibility to reactivate their operations when the time is right. This can be particularly useful for companies that are waiting for market conditions to improve or for key personnel to return from extended absences.
   
5. Simplified Annual Filings: Dormant companies are required to file a simplified version of the annual return, known as Form MSC-3. This form requires less detailed information compared to the annual returns filed by active companies, reducing the administrative burden on business owners.
   

By weighing the benefits of dormant company status against the specific needs and goals of their business, entrepreneurs can make informed decisions about whether this legal structure is suitable for their situation.

Mandatory Requirements for Obtaining Dormant Status

To be eligible for dormant company status under Section 455 of the Companies Act 2013, a company must fulfil certain mandatory requirements:

1. No Significant Accounting Transactions: The company must not have carried out any significant accounting transactions during the financial year for which dormant status is sought. This excludes transactions related to the allotment of shares, payment of fees to the ROC, and maintenance of the company's office and records.
2. No Outstanding Liabilities: The company must not have any outstanding loans, whether secured or unsecured, or any other outstanding liabilities. If there are any outstanding unsecured loans, the company must obtain a no-objection certificate from the lenders before applying for dormant status.
3. No Pending Regulatory Actions: There should be no pending inspections, inquiries, or investigations against the company by any regulatory authorities. Additionally, no prosecution proceedings should be initiated against the company under any law.
4. Up-to-date Statutory Filings: The company must have filed all its pending returns, including annual returns and financial statements, with the ROC before applying for dormant status.
5. Shareholder Approval: The company must obtain approval from its shareholders through a special resolution passed at a general meeting. Alternatively, the company can obtain the consent of at least 3/4th of its shareholders by value through a written resolution.

How to File for Dormant Status: A Step-By-Step Guide

Filing for dormant company status involves a series of steps that must be followed in accordance with the provisions of the Companies Act 2013:

1. Convene a Board Meeting: The company's board of directors must convene a meeting to discuss and approve the proposal for obtaining dormant status. The board resolution should authorise the filing of the necessary application and documents with the ROC.
2. Obtain Shareholder Approval: The company must obtain approval from its shareholders either through a special resolution passed at a general meeting or through the written consent of at least 3/4th of the shareholders by value.
3. Prepare the Statement of Affairs: The company must prepare a statement of affairs, including a balance sheet and profit and loss account, as of the date of the application for dormant status. This statement should be verified by an affidavit from the company's directors.
4. File Form MSC-1: The company must file Form MSC-1 with the ROC, along with the necessary supporting documents, including the board resolution, shareholder approval, statement of affairs, and any other relevant documents as specified in the Companies Act 2013.
5. Pay the Prescribed Fees: The company must pay the prescribed fees for filing Form MSC-1, as specified in the Companies (Registration Offices and Fees) Rules, 2014.
6. Obtain Certificate of Dormant Status: Upon verification of the application and supporting documents, the ROC will issue a certificate of dormant status to the company in Form MSC-2.

It is important to note that the entire process of filing for dormant company status must be completed within 30 days of obtaining shareholder approval. Companies should seek the assistance of a qualified professional, such as a company secretary or chartered accountant, to ensure compliance with the prescribed procedures and timelines.

ROC Forms for Registering Dormant Company

• Form MSC-1: This form is used to apply for obtaining dormant company status. It must be filed with the ROC within 30 days of obtaining shareholder approval. The form requires details such as the company's name, registered office address, directors' particulars, and the reasons for seeking dormant status.
• Form MSC-3: This form is used to file the annual return of a dormant company. It must be filed within 30 days from the end of each financial year. The form requires details such as the company's financial position, shareholding pattern, and any changes in the directors' or registered office address.
• Form MSC-4: This form is used to apply for seeking the status of an active company. It must be filed with the ROC when a dormant company wants to commence business operations. The form requires details such as the company's name, registered office address, and the reasons for seeking active status.

Annual Compliance for Dormant Company

While dormant companies enjoy certain relaxations under the Companies Act 2013, they are still required to fulfil essential annual compliance tasks in four key areas:

1. Accounting and Financial Statements: Dormant companies must maintain proper books of accounts and prepare financial statements, including a balance sheet and profit and loss account, for each financial year. These financial statements must be approved by the board of directors and presented at the annual general meeting.
   
2. Statutory Audit: Dormant companies are required to appoint a statutory auditor to conduct an audit of their financial statements. However, dormant companies are exempt from the requirement of auditor rotation, which is mandatory for active companies.
3. Tax Return Filings: Dormant companies must file their income tax returns annually, even if they have not generated any income during the financial year. They are also required to comply with other applicable tax laws, such as the Goods and Services Tax (GST) and Tax Deducted at Source (TDS) provisions.
4. ROC Filings: Dormant companies must file an annual return in Form MSC-3 with the ROC within 30 days from the end of each financial year. This form requires details such as the company's financial position, shareholding pattern, and any changes in the directors' or registered office address.

By fulfilling these annual compliance requirements, dormant companies can ensure that they remain in good standing with the regulatory authorities and avoid any penalties or legal consequences.

Reactivation of a Dormant Company

A dormant company can be reactivated and commence business operations by following the prescribed procedure under the Companies Act 2013:

1. Convene a Board Meeting: The company's board of directors must convene a meeting to discuss and approve the proposal for reactivating the company. The board resolution should authorise the filing of the necessary application and documents with the ROC.
2. File Form MSC-4: The company must file Form MSC-4 with the ROC, along with the necessary supporting documents, including the board resolution and any other relevant documents as specified in the Companies Act 2013.
3. Pay the Prescribed Fees: The company must pay the prescribed fees for filing Form MSC-4, as specified in the Companies (Registration Offices and Fees) Rules, 2014.
4. Obtain Certificate of Active Status: Upon verification of the application and supporting documents, the ROC will issue a certificate of active status to the company in Form MSC-5.

Once the company has obtained the certificate of active status, it can commence business operations and is required to comply with all the provisions of the Companies Act 2013 applicable to active companies, including regular compliance requirements such as holding board meetings, filing annual returns, and appointing auditors.

Conclusion

Dormant company under Section 455 of the Companies Act 2013 is a strategic tool for businesses to preserve their legal identity while suspending operations. It allows companies to protect their brand name, reduce compliance costs, and maintain flexibility for future ventures. To benefit from this status, businesses must meet eligibility criteria and comply with statutory requirements. Seeking professional assistance is advisable to navigate the process effectively and avoid legal issues. This approach is ideal for future projects, asset holding, or temporary business pauses, offering a cost-effective solution for maintaining legal existence.

Frequently Asked Questions