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TMI Blog2014 (3) TMI 219X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - W.P. No. 18813 of 2013 (T-IT) - - - Dated:- 7-2-2014 - MRS. B.V. NAGARATHNA, J. For the Petitioner. : Sri. Venkataraman Sr. Counsel , Sri. A. Shankar and M. Lava For the Respondent : Sri. E.R. Indra Kumar, Sr. Counsel, Sri. E.I. Sanmathi, Sri. K.V. Aravind and Sri. N. Padmabhushan, Advocates JUDGEMENT The petitioner, a private limited company incorporated under the provisions of the Companies Act, has assailed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of income of the firm in the hands of the partner, which has not suffered tax in the hands of the firm. Consequently, the fourth respondent computed the assessment and considered the tax payable under Section 115JB of the Act. By disallowing exemption under sub-section (2A) of Section 10 of the Act, to an extent of Rs.47,27,28,981/-, the fourth respondent passed the Assessment Order under sub-section (3) Section 143 of the Act. It is also averred that in the case of the other partner namely, M/s.Prazim Trading and Investment Co. Pvt. Ltd., for the very same Assessment year the Assessing Officer at Mumbai has not disallowed the share of income from the partnership firm under sub-section (2A) of Section 10 of the Act. Having regard to the interpretation given to sub-section (2A) of Section 10 of the Act, particularly the explanation thereto by the third and fourth respondents, the petitioner has assailed the Assessment Orders and demand notices as well as the validity of the explanation to sub-section (2A) of Section 10 of the Act. 3. Statement of objection has been filed on behalf of the fourth respondent Assessing Officer contending that sub-section (2A) of Section 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding Investment Co. Pvt. Ltd., has disclosed the share of its profit in the partnership firm, in its books of account. But the petitioner, while computing the taxable income, has claimed deduction for the entire amount received as its share of profit invoking sub-section (2A) of Section 10 of the Act as exempted income. The Assessing Authority, therefore, considered as to whether the exemption in terms of sub-section (2A) of Section 10 of the Act is in respect of the share of profit released to the partner on the basis of the book profit of the partners or on the basis of taxable profit computed. That the explanation to sub-section (2A) of Section 10 categorically clarifies that the share of a profit of a partner has to be computed by dividing the taxable profit of the firm in such profit sharing ratio as mentioned in the partnership deed. This would entitle a partner to claim deduction under sub-section (2A) of Section 10 of the Act only on the amount received by the partner out of the taxable profits of the firm on such profit sharing ratio as stipulated in the partnership deed. While contending that there is no ambiguity whatsoever in sub-section (2A) of Section 10 as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partnership firm. When that amount is distributed to the partners in proportion to their share of profits in the partnership firm, having regard to sub-section (2A) of Section 10 of the Act, no tax is liable to be paid on receipt of such income in the hands of the partner. CONTENTIONS: 7. I have heard learned Senior Counsel, Sri.Venkataraman alongwith Sri A.Shankar, learned counsel for the petitioner and the learned Senior Counsel, Sri.E.R.Indrakumar and other counsel for the respondents. 8. Pointing out various errors in the interpretation placed by the Assessing Officer in the impugned Assessment Order, it is contended by the learned senior counsel for the petitioner that the Assessment Order is not concluded in terms of the object of sub-section (2A) of Section 10 of the Act. That the benefit of exemption on the aforesaid three sources of income are to be given in the hands of the partner under sub-section (2A) of Section 10 of the Act. That the Assessing Officer has failed to appreciate that income, which is exempted in the hands of the firm also stands exempted in the hands of the partner as profits of the firm after taxation is distributed to the partners of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t taxable in the hands of the partnership firm but when that amount is transferred as profit to the hands of the partner, it is a share in the profit of the firm, which is taxable. In fact, the firm has not been taxed on the aforesaid sources of income as the party paying that income would have paid the tax and when that income is distributed between the partners of the firm, the exemption cannot be claimed by the partner. He therefore, contended that there is no merit in this writ petition and that the petitioner may be directed to approach the appellate authority. HISTORICAL PERSPECTIVE: 10. Before considering the rival contentions of the parties, it would be useful to give a historical perspective to the issue raised in this writ petition. 11. Prior to 1-4-1993, Section 182 of the Act dealt with Assessment of registered firms. It prescribed that after assessing income of the firm; (i) the income tax payable by the firm itself would be determined and (ii) the share of each partner in the income of the firm would be included in his total income and assessed to tax accordingly. Under Section 158 of the Act, an order had to be passed determining total income of the firm a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be taxed as a separate entity. There was to be no distinction between registered and unregistered firms. Also, the share of the partner in the income of the firm was not to be included in computing his total income. Any salary, bonus, commission or remuneration, by whatever name called, which was due to or received by a partner was to be allowed by deduction subject to certain restrictions in the firms total income. The amendment came into effect from 01/04/1993 for the assessment year 1993-94 and subsequent assessment years thereafter. 13. The Finance Act, 1992, thus, brought about a radical change in the assessment of the partnership firm and its partners. The practice of taxation at two stages was done away with. A firm was to be taxed as a separate unit and there was no distinction between a registered firm and an unregistered firm. After deducting the payments made to the partners, the balance income of the firm was taxed in the hands of the firm. Partners were not liable to be taxed in respect of the share of the income of the firm. However, payments made by the firm to the partners such as remuneration, commission, interest etc., were chargeable to income tax in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner . Relying on that section, it has been held by the Hon'ble Supreme Court that after an assessment of the firm is made, when a notice of demand is issued requiring the demand of tax liability, the stage of assessment is left behind and also distinction between the firm and partners, the liability of the partners being joint and several, recovery could be made from any of the partners. (b) In Jagatram Ahuja v. Commissioner of Gift Tax, Hyderabad [(2000) 8 SCC 249], the Hon'ble Supreme Court compared the status of a partner in relation to a partnership firm to that of a coparcener in Hindi Joint Family. The Court observed that as in the case of a Hindu Joint Family, the coparceners do not have exclusive rights on any specific property of the family and the property is allotted specifically in terms of their shares at a partition. The same is the position in case of a partner of a firm. No partner of a firm can claim exclusive or specific right in any specific asset of the property of a firm. Coparceners have definite share in the Hindu undivided family, just a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. In the development of partnership taxation under English law also it is well settled that a partnership generally has no legal status or existence independently of the individual partners of which it is composed. The rights and liabilities of a partnership are nothing more than the aggregate of the rights and liabilities of the individual partners. Therefore, in theory, it is possible to dissect the partnership accounts and make an apportionment of overall expenses and gross receipts amongst the individual partners in order to determine their respective net incomes. But under the Income Tax Act, 1918, it was provided that where a trade was carried on by two or more persons jointly, the tax was to be computed and stated jointly and in one sum and was to be treated as separate and distinct from any other tax chargeable on those persons. These provisions were re-enacted and altered in Section 111 of the Income and Corporation Taxes Act, 1988. But with the introduction of the Finance Act, 1994, the individual assessment of each partner of the firm has been by reference to his share of the partnership profits. Under sub-section (3) of Section 111 of that Act, a person's share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. Scope of total income: Section 5:- (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section(6) of section 6, the income which accrues or arises to him outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income received in respect of units from the specified company: Provided that this clause shall not apply to any income arising from transfer of units of the Administrator of the specified undertaking or of the specified company or of a mutual fund, as the case may be. Explanation- For the purposes of this clause,- (a) Administrator means the Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002); (b) Specified company means a company as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002); xxxxxxxxx Section 10(38): - any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where- (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No.2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter: Provided that the income by way of long-term capital gain of a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and simple meaning is to be adopted. If more than one meaning can fairly be attributed to them, then considerations of policy or even convenience may be admitted. At the same time, the same words may often receive a different interpretation in different parts of the same Act for words used with reference to one set of circumstances may convey an intention quite different from what the same set of words used with reference to any set of circumstance would or might be produced . 19. If the language of a statute is clear, it must be enforced though the result may seem unfair and inconvenient. The Court cannot cut down the plain words so as to limit the application of the statute in accordance with public policy which prevailed before the statute was passed. At the same time, statutes have to be construed as far as possible to avoid absurdity. This is called the provision against absurdity. The presumption against absurdity is part of the larger principle that statute has to be construed in a manner to give it validity rather than invalidity - ut res magis valeat quam pereat. In the case of possible alternative meanings, one which would lead to an absurdity and one which would avo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing an explanation, one has to see whether it is in line with the main section, so as to promote the object of that section. Some times, an explanation is added to include something within or to exclude something from the ambit of the main enactment or the connotation of some word occurring in it. An explanation, normally, should be read so as to harmonise with and clear up any ambiguity in the main section and should not be so construed as to widen the ambit of the section. It is also possible that an explanation may have been added in a declaratory form to retrospectively clarify a doubtful point in law and by way of abundant caution. 24. While applying the aforesaid principles, to taxation statutes, it has been observed as under in various decisions of the Hon'ble Supreme Court:- In R.M. Chindmbaram Pillai (supra) His Lordship Krishna Iyer J., has said that first principles plus the bare text of the statute furnish the best guidelight to understanding the message and meaning of the provisions of law. Thereafter, the sophisticated exercises in precedents and booklore. This should be the approach in the instant case. (a) In K.P. Varghese v. Income-Tax Officer, Ern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to the literal construction . In this case, the Court was considering the meaning of the expression income , in Section 16(3) of the Act, to include loss. (c) In Goodyear India Ltd., v. State of Haryana and another [1991 (188) ITR 402], also, it is observed that a reasonable construction of the taxing statute should be followed and literal construction not ought to be adopted, if that defeats the manifest purpose and object of the statute. (d) In Tata Power Company Ltd. v. Reliance Energy Ltd., [(JT) 2009 (8) SC 562], the Hon'ble Supreme Court has held that chapter headings and marginal notes are parts of the statute and they can be used as an aid of the construction when there is any ambiguity in the statute. 25. Sub-Section (45) of Section 2 defines the expression Total Income to mean the total amount of income referred to in Section 5 computed in the manner laid down in the Act. Chapter III of the Act deals with incomes which do not form part of total income. The expression total income in Section 2(45) has to be examined in the context of the expression total income in Chapter III. In Chapter III, incomes which do not form part of total income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply only when the context requires and not otherwise. Therefore, the Division Bench stated that the placement, language and setting of Section 10A cannot mean total income computed in accordance with the provisions of the Act. This aforesaid reasoning squarely applies to Section 10 as well which is also part of Chapter III of the Act. Further, Section 14 provides for classification of income under various heads for the purpose of charge of income-tax and computation of total income, subject to twin conditions: Firstly, income is subject to charge of income-tax and secondly, income is includable in ' total income'. But, Section 10 which is in Chapter-III of the Act, is in the nature of exemption and as such, is neither subject to charge of Income-tax nor includable in the ' total income'. Therefore, the twin conditions of Section 14 do not apply to Section 10 of the Act and relief under Section 10 has to be given before computation of ' total income' in Chapter IV. The exemption has to be first considered and then, the process of computation of profits and gains of business or profession would commence. Sub-section (2A) of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded , which is found in Section 10, refers to incomes which do not form part of total income . The latter expression is not used in Chapter-IV of the Act, which provides for the method of computation of income under which the assessee is allowed deductions by way of expenses, allowances, rebates etc. Delineating on the distinction between a deduction and income not includable in total income, this Court held that an income which is not part of total income is not subject to any deduction which can be claimed under Chapter VI-A of the Act. For instance agricultural income is an item referred to in Section 10(1) of the Income-tax Act. Agricultural income is not subject to any other deduction because that income is not includable in total income . This Court further stated that the expression ' not includable' means not capable of being included. It cannot refer to an amount which already formed part of the total income. It refers to the classes of income, which Chapter III directs, ' shall not be included' in the total income of the assessee'. Thus, Incomes which are enumerated in Chapter III of the Act, are incomes which are exempt from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss laid down by the Act, the status of income, profits and gains emerges. The tax is on income and not on gross receipts. It was further held that agricultural income is not only exempt from tax under the Income-tax Act but the scheme of the Act it is also to be excluded from computation of the total income. Income covered by Sections 10 and 11, which is not chargeable to tax, does not fall under Section 14 and under the various computation sections, Section 15 to Section 59. Exempted income is tax-free income. On the other hand, deduction under Chapter VI-A is for income which forms part of total income but is free of tax. 26. Thus, what emerges from the aforesaid rulings is that, the expression total income as defined in sub-section (25) of Section 2 of the Act is distinct from the expression total income used in Section 10 of the Act. Sub-section (45) of Section 2 defines total income in the context of Section 5 and as is computed in the manner laid down in the Act. Once the total income is determined, the tax would have to be paid in accordance with the rate envisaged. But what Section 10 states is that certain incomes do not form part of total income. In fact, the heading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives from the firm as his share of profits would have to be kept aside and not be taken into consideration for the purpose of computing the total income for the purpose of taxation under the Act. The explanation to sub-section (2A) of Section 10 only highlights this aspect. It states that the share of a partner in the total income of a firm separately assessed as such, shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed which bears to such profits. It provides that the share of the partner in the total income of the firm would not mean the share of the partner in the taxable income of the firm. The share of the partner in the profits of the firm which is after taxation of the firm, would also include that portion of the income on which the firm would not have paid any tax on account of the firm also having the benefit of certain provisions of Chapter-III but which would nevertheless be part of the profits of the firm. The provision and the explanation under consideration can be better understood if they ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 30. Further, 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 underlying reasoning is that the partnership firm would have already reckoned that income for computation of tax under the Act. Therefore, 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. Therefore, total income of the firm cannot be equated with taxable income of the firm, as contended by the respondents, but, gross total receipts of the firm. 31. The reason as to why the partnership firm would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 2 of the Act, means the total amount of income referred to in Section 5, computed in the manner laid down in the Act. The Assessing Officer was also not right in holding that subsequent to the amendment, there are two distinct entities, one being the firm and the other being the partners of the firm, who are sought to be taxed separately on distinct incomes at different rates with diverse deductions. He is also not right in stating that the whole entity of the firm is delinked from that of a partner while introducing the provisions of sub-section (2A) of Section 10 of the Act. 34. It is reiterated that the object of sub-section (2A) of Section 10 is to avoid double taxation vis- -vis, the profits of the firm, which is distributed in the hands of the partners. It does not mean that income which is taxed in the hands of the firm is taxable in the hands of the partners and on the same principle, when the income is not taxed in the hands of the firm, it becomes taxable in the hands of the partner. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t include the share of a partner in the total income of the firm, which is the profit of the firm. Infact, sub-section (v) to Section 28 of the Act was inserted with effect from 01/04/1993 precisely because of the amendment made to Section 10 of the Act by inserting sub-section (2A) and explanation thereof. Therefore, the Parliament has clearly made a distinction between certain incomes received by a partner from the firm and profits which are received by a partner from the firm. This is because the partners are not distinct from the firm though they may be distinct from the point of view of taxation. But in law, a partnership is a collective name of partners and the firm cannot be recognized as an entity distinct from the partners comprising it. 36. The analogy of a partner to partnership firm is found in a coparcener in relation to Hindu undivided family. Hindu undivided family is separately assessed to tax under the Act. Any sum received by a coparcener by an individual member of a Hindu undivided family where the income is paid out of the income of the family is not to be taxed once again in the hands of the individual member, otherwise, it would amount to double taxation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the partner. For this, three factors have to be considered:- (a) total income of the firm, (b) share of partners' profit in the firm, (c) business share profits of the firm. In this context, the total income of the firm is not the taxable income of the firm. The total income from business of the firm is Rs.1,63,65,79,390/-. In the instant case, the formula has to be applied to determine the eligible amount, which is as follows:- Eligible amount = Total income of the firm Share profit of the firm profits of the firm, which is:- Rs.1,63,65,79,390 48,39,31,164 1,61,31,03,881 and eligible amount is Rs.49,09,73,817, which has to be exempted under sub-section (2A) of Section 10 of the Act. The aforesaid calculation has been submitted by the Revenue in its written submissions as approximate figures. 40. In the result, the appeal is allowed in part in the following terms :- (1) The explanation to sub-section (2A) of Section 10 does not require any striking down as sought by the petitioner. That section has been interpreted in this order having regard to the object of the amendment and the principles of Partnersh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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