Section 14A of IT Act applicable in respect of share of profit from partnership firm
Nov 12, 2009 Income Tax Case Laws
SUMMARY OF CASE LAW
A partnership firm is a separate entity than that of its partners under the Income-tax Act and therefore, partners vis-à-vis partnership firm would stand on the same footing of shareholders vis-à-vis company; accordingly , income charged in the hands of partnership firm cannot be treated as being a non-exempt income in the hands of a partner of such firm and, therefore, provisions of section 14A would be applicable in computing the total income of such partner in respect of his share in the profits of such firm.
CASE LAW DETAILS
Decided by: ITAT, MUMBAI BENCHES `H’, In The case of: Dharmasingh M. Popat v. ACIT, Appeal No.: ITA No. 7534/Mum./2004, Decided on: January 6, 2009
RELEVANT PARAGRAPH
7. We have considered the submissions made by both parties, material on record and orders of authorities below. The first question which is to be decided by us is whether partnership firm is merely a compendium of partners having no independent legal personality for the purpose of Income Tax Act and, hence, share of profit is not an exempt income in the hands of partner for the reason that the firm has paid tax thereon.
8.1 In this regard, it is to be noted that scheme of assessment/taxation of partnership firm and partners has undergone change on a number of occasions. Initially payment of salary, bonus or commission etc. by the firm to the partners was not allowable as an expenditure and share in the profits of a partnership firm was also taxable in the hands of partners subject to certain relief/rebates. Subsequently, w.e.f. A.Y. 1993-94, the scheme of assessment for partnership firm is treated as an independent entity in a limited sense like a company for the purposes of Income Tax Act, 1961. The expenditure by way of remuneration, interest, commission etc paid to partners is also allowable in the hands of partnership firm subject to certain ceilings and share in the profit of a partnership firm is not taxable in the hands of partners, however, the interest and salary etc. allowed in the hands of partnership firm is taxable as business income in the hands of partners to that extent. It is also pertinent to note that provisions of Section 40(b) pre suppose the allowability of such expenditure u/s. 28(1) or 37(1) and further expenditure like rent paid to partner is allowable without any restriction of course subject to provisions of section 40A(2) of the Act.
8.6 Again it is seen that no specific provisions existed under the Income-tax Act, 1961 as regard to the issue whether distribution of assets among partnes on dissolution of firm would amount to transfer or not and in that situation, the Hon’ble Supreme Court held tht as per the General Law, partnership firm as such had no rights in assets of the firm even before dissolution, hence, how there could be a question of extinguishment of firm’s right in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the Act.
8.9 Thus, in our humble view, the conclusion which emerges from the above discussion is that though the partnership firm is not a separate entity as per general law, however, for a specific purpose it may be treated as independent of its partners under the provisions of Income-tax Act, 1961. to Put it differently, the concept of partnership firm, being a compendium of its partners is subject to the tax law modifying such concept of partnership law which means that if there exist no provision in the tax laws for a particular situation, then, the provisions of partnership law would be the guiding factor for adjudication of that issue.
9.14 Thus, as can be seen from the aforesaid three decisions, in our humble view, the current judicial thought is leaning towards the concept of a separate legal entity of Partnership firm than that of its partners for the purposes of Income Tax Act, 1961. This position leads us to the next path i.e what is the current legislative thought on this subject as manifested in the prevailing relevant provisions under the Income Tax Act, 1961 which can be summarized as under:-
9.17 According, having regard to judicial opinion as elaborated hereinabove and also the legislative change s in the Act, in our opinion, a partnership firm is a separate entity than that of its partners under the Income Tax Act and if there exist any specific provision shall be applied and if the tax law is silent on a specific issue, then a reference will have to be made to the provisions of partnership law for the adjudication of the same and in the present case, provisions of law sufficiently take care of the issue involved herein, hence, the issue is to be decided accordingly. In the prevent case, there exist specific provisions for computing the income of the partnership firm as well as that of it’s partners, hence, total income of both is liable to be computed firm as well that of it’s partners, hence, total income of both is liable to be computed in accordance with such provisions. We further hold that since partnership firm, for the purpose of Income-tax Act is a separate assessable entity and therefore, partners vis-à-vis partnership firm would stand on the same footing of shareholders vis-à-vis company. Accordingly, income charged in the hands of partnership firm can not be treated as being a non-exempt income in the hands of a partner of such firm and, therefore, provisions of section 14-A would be applicable in computing the total income of such partner in respect of his share in the profits of such firm.
Tags: case law, income tax act, income tax act 1961, independent entity, ita, legal personality, partnership firm, profits, remuneration, section 14a, taxation
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