ITAT Explains the Law on Exemption for Partners’ Share of Profit in the Income of the Firm [Read Order]

The Kolkata bench of the Income Tax Appellate Tribunal (ITAT), in Vinod Agarwal vs Pr.C.I.T.Central, has explained the law on income tax exemption for partners’ share of profit in the income of the firm in detail.

Assessee in the instant case is partner of a Firm named as M/s.Avantika Advisory Services LLP, carried on the business of consultancy services dealing in shares, securities, commodities, currencies etc. and also dealing in property and real estate. During the assessment year the assessee had shown a sum of Rs.4,84,89,051 as share of profit received from the said partnership firm, and also claimed exemption under Section 10(2A) of Income Tax Act 1961.

During the course of assessment proceedings a notice under section 142(1) of the Act was issued by the Assessing Officer (AO) regarding to the said income. In response to the notice, the assessee has furnished all the details regarding the receipt and also the partnership firm before the AO. After analyzing the facts the AO accepted the claim of the Assessee for exemption under section 10(2A) of the Act as he did not make any addition of this sum in the order of assessment.

But CIT was of the view that aforesaid orders of the AO were erroneous and prejudicial to the interest of the revenue and accordingly he issued a show cause notice under section 263 of the Act. In response to the notice assessee argued before the authority that section 10(2A) of the Act which provides that the income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Accordingly, the entire profit credited to the partners’ accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act.

However, the authority refused to accept the submission of the assessee and accordingly disallowed the claim of the assessee. Aggrieved by the order of the authority assessee was on appeal before the tribunal.

After considering the available materials on record the tribunal bench comprising of Judicial Member N.V.Vasudevan and Accountant Member Dr.A.L.Saini refused the order of the lower authority and also allowed the claim of the assessee on exemption as per the aforementioned section of the act.

The division bench further observed that the income of a Firm is to be taxed in the hands of the Firm only and the same can, under no circumstance, be taxed in the hands of its partners and the provisions of section 10(2A) of the Act which clarified that ‘total income’ of the firm for sub section (2A) of section 10 of the Act, it has been clarified that Section.10 (2A) of the Act includes income which is exempt or deductible under various provisions of the Act which are clearly specified in the CBDT circular. The circular further clarified that the entire profit credited to the partners’ accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act.

While allowing the appeal filed by the assessee the bench also clarified that the above mentioned circular indicate that the share of profit in the hands of the partners is independent of the profits of the firm which is finally distributed among the partners even if the income of the firm chargeable to tax becomes NIL on account of exemption or deduction, it does not mean that the income before claiming exemption will be taxed in the hands of the partners. the bench said.