Partners not liable to pay taxes on share of profits received from firm even if such profits included exempted income

Partners are entitled to claim exemption under Section 10(2A), on the share of profit received from the firm even if it includes that income which was exempted in the hands of the firm under various provisions of Section 10.

Facts:

a)  The assessee, a private Ltd. company, was partner in the partnership firm. Its case was selected for scrutiny and the show-cause notice was issued to it as to why exempt income of the firm would not be excluded while computing the exemption to the assessee under Sec.10(2A);

b)  Assessee challenged the explanation to Section 10(2A) on the ground that it was discriminatory and in violation of Articles 14 and 265 of the Constitution.

c)  Further, a declaration was sought by the assessee that it was entitled to claim exemption under Section 10(2A) in respect of its total share of profit received as partner of the firm which would include the income exempted from tax in the hands of the firm.

The High Court held as under:

1)  Although the dividends income and income derived from mutual funds were not includible in the taxable income of the firm yet they were nevertheless part of its profits;

2)  The expression total income of a firm in the Explanation to section 10(2A) would not mean taxable income of the firm but gross total income of a firm which included exempted income as well;

3)  The Assessing Officer had lost sight of this aspect and had held that ‘total income’for the purpose of Explanation to Sec. 10(2A), as defined in Section 2(45), would mean the total amount of income as referred to in Sec. 5,computed in the manner laid down in the Act;

4)  Therefore, the AO was not right in holding that the income which was excluded from the total income of the firm under Sec. 10, would have to be taxed in the hands of the partners on the reasoning that only income which was taxed in the hands of the firm would be exempted from tax in the hands of the partner;

5)  The Explanation to section 10(2A) would not call for any striking down in the hands of this Court. The Explanation could not be given a literal interpretation, so as to defeat the object of the amendment made to the Act. The object of the amendment was to make it clear that the distribution of profits and gains of a firm in the hands of the individual partners shall not be considered to be income of the partners and therefore, not includable while computing the total income of the partner under the Act;

6)  Thus, the assessee was entitled to claim exemption under Section10(2A), on the share of profit of the firm,inclusive of the income, which is exempted under sub-sections (34), (35) and (38) ofSection 10, as the total income referred to in Section 10(2A), includes exempted income of the partnership firm. - Vidya Investment & Trading Co. (P.) Ltd. v. Union of India [2014] 43 taxmann.com 1 (Karnataka)