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2014 (3) TMI 219 - HC - Income TaxInclusion of exempted income of Firm in the hands of Partners - Constitutional validity of Explanation of section 10(2A) - Entitlement for exemption u/s 10(2A) of the Act - Weather the share of profit as partner of the firm income inclusive of the income, which is exempted from tax u/s 10 (34) and 10(35) of the Act Held that - The petitioner is entitled to claim exemption under sub-section (2A) of Section 10 of the Act, on the share of profit of the firm, inclusive of the income, which is exempted under sub-sections (34), (35) and (38) of Section 10 of the Act, as the total income referred to in sub-section (2A) of Section 10 of the Act, includes exempted income of the partnership firm Relying upon Malabar Fisheries Co. Versus Commissioner of Income-Tax, Kerala 1979 (9) TMI 1 - SUPREME Court - Any share of profits derived from a firm by a partner, is not includable in the total income of the partner as it is an exempted income - the partnership firm would have already reckoned that income for computation of tax under the Act thus, the explanation to sub-section (2A) of Section 10 of the Act must be read in consonance with the above interpretation - The expression total income of a firm in the explanation would not mean taxable income of the firm but gross total income of a firm in which certain incomes would not be assessable to tax or exempted income - But it would nevertheless, form part of the profits of the firm - total income of the firm cannot be equated with taxable income of the firm, but, gross total receipts of the firm. Scope of the Term Income u/s 10(2A) of the Act - Whether a declaration is sought to the effect that the total income referred in Section 10(2A) of the Act does not include income of the partnership firm which is exempted from tax - Held that - The explanation to Section 10(2A) does not require any striking down as sought by the petitioner The section has been interpreted in the order having regard to the object of the amendment and the principles of Partnership Law - The Assessment Order dated 28/03/2013 for the year 2010-11 and the Notice of Demand, issued under Section 156 of the Act are set aside - While dividing the profits of the firm between the partners of the firm, the income which is excluded from total income of the firm for the purpose of taxation of the firm would also have to be divided - the dividends paid by the company, or income derived from mutual funds or from transfer of equity shares are not includable in the income of the firm for the purpose of taxation, but are reflected in the return of income filed by the firm, the firm would not have paid any tax on those amounts but they are nevertheless part of the profits of the firm - While dividing the profits of the firm between the partners, those incomes which are not includable in the income to be considered for the purpose of taxation or exempted incomes, would have to be also divided as profits of the firm - when profits of the firm are divided amongst the partners of the firm, under sub-section (2A) of Section 10 of the Act, such income would not be includable in the total income of the partners of the firm in view of the amendments to the Act and this is with the object of avoiding double taxation. The Assessing Officer is also not right in holding that the incomes which are excluded from the total income of the firm by operation of various clauses of Section 10 and which form part of the share of profits of the firm would have to be taxed in the hands of the partners, as only income which is taxed in the hands of the firm is exempted from tax in the hands of the partner - The Assessing Officer has given a literal interpretation to the explanation to sub-section (2A) of Section 10 of the Act, which is contrary to the object of the amendment made to Section 10 of the Act - a reasonable construction of a taxing statute ought to be preferred over a literal construction, if the latter defeats the manifest purpose and object of the statute - Such a reasonable construction of the explanation to sub-section (2A) of Section 10 with respect to its placement in Chapter III, does not envisage taxation of the shares of profits of the firm at the hands of the partners. The explanation would not call for any striking down in the hands of this Court - It cannot be given a literal interpretation, so as to defeat the object of the amendment made to the Act - 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 - The share of a partner in the total income of a firm has to be excluded before arriving at the gross total income of the partner - While computing the profits of a partner of the firm, the share of a partner in the total income has to be excluded from the gross total itself and not in the total income of the partner as understood in sub-section (45) of Section 2 of the Act - Hence, the income eligible under sub-section (2A) of Section 10 would not enter into computation as the same is exempted income just as agricultural income or income received by an individual as a member of Hindu undivided family is exempted from computation of total income under sub section (45) of Section 2 of the Act Decided in favour of Assessee.
Issues Involved:
1. Validity of the Assessment Order and Notice of Demand. 2. Interpretation of sub-section (2A) of Section 10 of the Income-tax Act, 1961. 3. Constitutionality of the explanation to sub-section (2A) of Section 10. 4. Double taxation on the share of profits of a partnership firm. 5. Discrimination under Articles 14 and 265 of the Constitution. Issue-wise Detailed Analysis: 1. Validity of the Assessment Order and Notice of Demand: The petitioner, a private limited company, challenged the Assessment Order dated 28/03/2013 and the accompanying Notice of Demand for Rs. 21,84,85,240/-. The petitioner argued that the assessment disallowed the exemption under sub-section (2A) of Section 10 of the Income-tax Act, 1961, which should have been granted on the share of profits received from the partnership firm. The court quashed the Assessment Order and Notice of Demand, ruling that the petitioner is entitled to claim the exemption on its share of profit from the firm, including income exempted under sub-sections (34), (35), and (38) of Section 10. 2. Interpretation of sub-section (2A) of Section 10 of the Income-tax Act, 1961: The court examined the interpretation of sub-section (2A) of Section 10, which exempts a partner's share in the total income of a firm from being included in the partner's total income. The explanation to sub-section (2A) clarifies that the share of a partner in the total income of a firm should be computed based on the proportion of the partner's share in the profits of the firm. The court held that the "total income" of the firm refers to the gross total income, including exempted income, and not just the taxable income. This interpretation aligns with the objective of avoiding double taxation on the same income. 3. Constitutionality of the explanation to sub-section (2A) of Section 10: The petitioner challenged the explanation to sub-section (2A) of Section 10 on the grounds of discrimination and violation of Articles 14 and 265 of the Constitution. The court found no merit in this challenge, stating that the explanation merely clarifies the computation of a partner's share in the total income of the firm and does not introduce any discrimination. The court upheld the validity of the explanation, interpreting it in line with the objective of the amendment to avoid double taxation. 4. Double taxation on the share of profits of a partnership firm: The court emphasized that the purpose of sub-section (2A) of Section 10 is to prevent double taxation of the same income-first in the hands of the firm and then in the hands of the partners. The court clarified that the share of a partner in the firm's profits, which includes exempted income, should not be taxed again in the hands of the partner. This interpretation ensures that income exempted from tax in the hands of the firm remains exempted when distributed to the partners. 5. Discrimination under Articles 14 and 265 of the Constitution: The petitioner argued that the interpretation given by the Assessing Officer led to discrimination, as partners of a firm would be taxed on income that individuals receiving similar income directly would not be taxed on. The court dismissed this argument, stating that the correct interpretation of sub-section (2A) and its explanation ensures that there is no discrimination. The court concluded that the exemption applies equally to partners of a firm and individuals, thus upholding the principles of equality under Articles 14 and 265. Conclusion: The court allowed the petition in part, quashing the Assessment Order and Notice of Demand, and clarified that the petitioner is entitled to claim exemption under sub-section (2A) of Section 10 on its share of profit from the firm, including exempted income. The explanation to sub-section (2A) was upheld as valid, and the court emphasized the objective of avoiding double taxation and ensuring equality in tax treatment.
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