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2009 (1) TMI 297 - AT - Income TaxTaxability of share of profit in the hands of partner - Applicability of provisions of s.14A or 10(2A) - Nature of salary received by a partner - Whether partnership firm is merely a compendium of partners having no independent legal personality for the purpose of IT 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? - convenience between the partners - assessee contended that in s.14A the words used were does not form part of total income under this Act and not does not form part of total income of the assessee under the IT Act hence the AO had inserted the words of the assessee between the words income which does not form part of the total income and under this Act which could not be done by the AO and since the income had been taxed in the hands of the firm hence incomes by way of salary or share of profit were not incomes which did not form part of the total income under the IT Act. HELD THAT - The Hon ble Supreme Court in three Judge Bench decision in case of CIT vs. A.W. Figgies Co. Ors. 1953 (9) TMI 2 - SUPREME COURT held that as per the law partnership firm had no legal existence apart from its partners however under the IT Act position was somewhat different hence technical view of the nature of a partnership under English law or Indian law could not be taken in applying the law of income-tax. Thus in this case in our humble opinion the Hon ble Supreme Court recognized the dichotomy between the general partnership law and IT Act and if a situation was taken care of by specific provisions of IT Act then such provisions were to prevail over the provisions of general law. In the case of Hon ble Supreme Court (three Judge Bench) in Dulichand Laxminarayan vs. CIT 1956 (2) TMI 4 - SUPREME COURT it is again noted that when the provisions of income-tax itself defined the firm or partnership as contemplated under Indian Partnership Act 1932 and no other specific provisions existed as regard to the legal status of a partnership firm the Hon ble Supreme Court decided the issue on the basis of provisions of general law i.e. Indian Partnership Act 1932 which was also held so by the Hon ble Supreme Court in the case of CIT vs. A.W. Figgies Co. Ors. In our opinion a partnership firm is a separate entity than that of its partners under the IT Act and if there exists any specific provision in the income-tax law modifying the partnership law then such 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 present case there exist specific provisions for computing the income of the partnership firm as well as that of its 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 IT Act is a separate assessable entity and therefore partners vis-a-vis partnership firm would stand on the same footing of shareholders vis-a-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 s. 14A would be applicable in computing the total income of such partner in respect of his share in the profits of such firm. Nature of salary received by a partner - Though the nature of salary received by a partner was held by the Hon ble Supreme Court in the case of R.M. Chidambaram Pillai 1976 (11) TMI 2 - SUPREME COURT to retain the same character as of the income of partnership firm yet the legislature has treated it differently for the purpose of assessment. This may be explained with reference to the provisions of s. 10(2A) vis-a-vis s. 28(v). The salary received by a partner from the firm which is allowed as deduction in the hands of the firm has to be taxed as business income of the partner in the hands of the partner. Sec.10(2A) provides for exclusion of share in the profit of a partnership firm from the total income in the hands of the partner but salary received by the partner from the firm is to be assessed as deemed business income in the hands of such partner in view of specific provisions of s.28(v) and is taxable. Thus in our view the nature of salary vis-a-vis share of profit is of no significance now hence this contention of the assessee does not help the cause of the assessee in any manner. That New scheme as applicable from AY 1993-94 was merely a scheme of assessment and it did not change the various facets of partnership firm as per general law. However in our view the scheme of assessment is not merely a procedural aspect but it also includes computation of income of partnership firm as well as of its partners. This view is well supported by the decision of Hon ble Supreme Court in the case of C.A. Abraham vs. ITO Anr. 1960 (11) TMI 20 - SUPREME COURT held that expression assessment included both the computation as well as declaration and imposition of tax liability and the machinery for enforcement thereof. Applicability of provisions of s. 14A - HELD THAT - Provisions of s.14A are applicable and in our view the impugned expenditure can be considered as incurred by the assessee for earning salary as well as share in profits of the partnership firm. AO has disallowed proportionately with reference to share of profits and salary. However in our view the same has to be worked out as per the provisions of r. 8D of the IT Rules 1962 as the said rule has been held to be retrospective by the Special Bench of the Tribunal in the case of ITO vs. Daga Capital Management (P) Ltd. 2008 (10) TMI 383 - ITAT MUMBAI hence we direct the AO to rework out the quantum of expenditure as per this rule which is to be disallowed. Thus appeal filed by the assessee is partly allowed for statistical purposes.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Allocation of expenses between taxable and exempt income. 3. Applicability of Rule 8D of the Income Tax Rules, 1962. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The assessee, a partner in a legal profession partnership firm, received salary and share in profit from the firm. The assessee claimed expenses against these incomes and showed a net loss. The AO questioned the applicability of Section 14A regarding the set-off of such expenses, arguing that the expenses were incurred in relation to exempt income (share of profit from the firm). The AO allocated 75% of the total expenses towards the exempt income and disallowed Rs. 10,70,864 under Section 14A. The CIT(A) confirmed this disallowance, rejecting the assessee's argument that Section 14A should only apply if the income did not form part of the total income of the assessee under the IT Act. The CIT(A) emphasized that the provisions of any section, when applied to an assessee, are directed towards that assessee only. 2. Allocation of Expenses between Taxable and Exempt Income: The assessee contended that the salary received from the partnership firm retained the character of profit of the firm and was fully taxed in the hands of the firm. Therefore, it could not be said that these incomes were exempt from tax. The assessee relied on the Supreme Court decision in CIT vs. R.M. Chidambaram Pillai, arguing that the partnership firm was not independent from its partners and that salary received by a partner retained its character of profit of the firm. However, the Tribunal held that the partnership firm is a separate entity under the IT Act, and the income charged in the hands of the firm cannot be treated as non-exempt income in the hands of a partner. Consequently, the provisions of Section 14A were applicable in computing the total income of the partner in respect of his share in the profits of the firm. 3. Applicability of Rule 8D of the Income Tax Rules, 1962: The Tribunal noted that the AO had disallowed expenses proportionately with reference to share of profits and salary. However, it held that the disallowance should be worked out as per the provisions of Rule 8D of the IT Rules, 1962, which has been held to be retrospective by the Special Bench of the Tribunal in the case of ITO vs. Daga Capital Management (P) Ltd. The Tribunal directed the AO to rework the quantum of expenditure as per Rule 8D, allowing the assessee an opportunity of being heard. Conclusion: The appeal filed by the assessee was partly allowed for statistical purposes, with the Tribunal directing the AO to rework the disallowed expenditure as per Rule 8D of the IT Rules, 1962. The Tribunal upheld the applicability of Section 14A, emphasizing the separate legal entity status of the partnership firm under the IT Act.
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