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Before: Shri Duvvuru RL Reddy & Shri S. Jayaraman
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
Both the appeals filed by different assessees are directed against different orders of the ld. Commissioner of Income Tax (Appeals) 3, Coimbatore, both dated 09.10.2019 relevant to the assessment year 2016- 17. The only effective ground raised in both the appeals of the assessee is that the ld. CIT(A) erred in upholding the addition of ₹.8,26,531/- in the hands of both the assessees as undisclosed income.
Brief facts relating to the addition of undisclosed income, both the assessees are partner of the firm M/s. ESS ENN Exports with 50% share. During the year, the net profit as per profit and loss account of ESS ENN Exports was ₹.1,47,87,173/- out of which, each assessees share amounting to ₹.73,93,586/- (50%) was claimed as exempt income under section 10(2A) of the Income Tax Act, 1961. This was credited into the partner’s current account in the firm. While working out the taxable income as per the Act in the computation statement, the profit was determined at ₹.1,31,34,107/- and each assessee’s share as per the computation comes to ₹.65,67,055/-. After considering the submissions of the assessee, the Assessing Officer concluded the assessment that the assessees are eligible for exemption under section 10(2A) of the Act only for an amount of ₹.65,67,055/- against the claim of ₹.73,93,586/- which was credited into the current account of the firm and accordingly, the difference of ₹.8,26,531/- was assessed as income from other sources and brought to tax in respect of both the assessees. On appeal, the ld. CIT(A) confirmed the assessment.
On being aggrieved, both the assessees are in appeal before the Tribunal.
4. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. In the assessment order, the Assessing Officer came to a conclusion that the net profit declared in the profit and loss account was ₹.1,47,87,173/- and all inadmissible expenses were added to this net profit including depreciation of ₹.18,32,300/- debited in P&L account. The profit is arrived at ₹.1,82,96,540/- and all admissible expenditure including depreciation of ₹.36,62,433/- allowable under section 32 of the Act were reduced from the profit and total income was arrived at ₹.1,31,34,107/-. This total income was arrived in the hands of the firm and this total income does not require for any addition or deletion. If this total income is distributed to partners as per their profit sharing ratio of 50%, each partner would be entitled to received ₹.65,67,055/- as an exempted income, whereas, the assessees have claimed the exempt income at ₹.73,93,586/- and thus, the Assessing Officer taxed the excess claim of ₹.8,26,531/- which was credited into the partners’ capital account. While confirming the above addition of ₹.8,26,531/-, the ld. CIT(A) has observed that the taxable payable by the firm was worked out from the total income arrived at after adjusting the eligible depreciation as per the Act. If this total income is distributed to the partners as per their profit sharing ratio of 50%, each partner would be entitled to receive only ₹.65,67,055/- as an exempted income. Further, the profits are credited to a partner’s account and partner can plough it back into the business. It is more of a book entry as no cash was generally drawn out of the firm. It was further observed that the excess claim of exemption of ₹.8,26,531/- under section 10(2A) of the Act gives an opportunity to the assessees to increase, the personal capital, without any declaration of income without suffering taxation. The personal balance sheet of the assessee would reflect a balance of ₹.4,45,42,733/- instead of ₹.4,37,16,202/-.
Before us, while reiterating the submissions as made before the authorities below, the ld. Counsel for the assessee has submitted that the variation between the book profit and taxable profit of the firm arises only because of the difference between book depreciation and allowable depreciation and some inadmissible expenses. It was further submission that neither the Partnership Act, 1932 nor any other Act has mandated the partnership firms to provide for the depreciations on the fixed assets in the books, nor has prescribed any rates for the same. Hence, the firm in which the assessees are partners have provided for the depreciation in the books which are less than that of the depreciation allowable under section 32 of the Act. Further, by filing copy of the CBDT Circular No. 8/2014 dated 31.03.2014, the ld. Counsel for the assessee has submitted that the share of profit credited in the partner’s capital account shall be considered for exemption under section 10(2A) of the Act, in the individual hands of the partners, even if the taxable income of the firm is NIL in the hands of the firm and prayed for deleting the addition made in both the assessees case.
We have gone through the provisions of section 10(2A) of the Act, which runs as under: (2A) In the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm. Explanation.—For the purposes of this clause, 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 bears to such profits ; 7. Vide circular No.8 of 2014, dated 31.03.2014, the CBDT has reemphasized the interpretation of Provisions of section 10(2A) of the Act in cases where income of the firm is exempt and the same reads as under: “A reference has been received in the Board in connection with the interpretation of provisions of section 10(2A) of the Income tax Act, 1961 (‘Act’) seeking clarification as to what will be the amount exempt in the hands of the partners of a partnership firm in cases where the firm has claimed exemption/deduction under Chapter III or VI A of the Act. 2. The matter has been examined. Sub section (2A) of section 10 was inserted by the Finance Act, 1992 w.e.f. 1-4-1993 due to a change in the scheme of taxation of partnership firms. Since assessment year 1993-94, a firm is assessed as such and is liable to pay tax on its total income. A partner is not liable to tax once again on his share in the said total income. 3. It is clarified that ‘total income’ of the firm for sub section (2A) of section 10 of the Act, as interpreted contextually, includes income which is exempt or deductible under various provisions of the Act. It is, therefore, further clarified that the income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Accordingly, the entire profit credited to the partners’ accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act.
This may be brought to the notice of all concerned.”
We find merit in the contention of the ld. Counsel for the assessee. The CBDT itself has accepted the proposition that the share income from the firm received by the partners is exempt under section 10(2A) of the Act and under no circumstances can be taxed in the hands of the partners. In view thereof, we set aside the orders of the ld. CIT(A) and delete the addition of ₹.8,26,531/- in the hands of both the assessees as undisclosed income.
In the result, both the appeals filed by the assessee are allowed. Order pronounced on the 09th April, 2021 in Chennai.