2024 (3) TMI 1005 - AT - Income Tax

Exemption u/s 10(26) - Exemption to individual members of Scheduled Tribes - Whether a partnership firm consisting of individual partners would be entitled to the same exemption u/s 10(26) of the Income Tax Act 1961 as any or all of the partners would be in their individual capacity? - As submitted that the partners in the firm were related to each other and both the partners belong to Khasi tribe whose income was exempt u/s 10(26) - HELD THAT - As under the Income Tax Act a firm has been specifically included in the definition of person and is treated at par with every artificial juridical person. Under the Income Tax Act a partnership firm is a separate and distinct person assessable to Income Tax. There are separate provisions relating to the rate of Income Tax deduction and allowances etc. in relation to a firm as compared to an individual. The benefits in the shape of deductions or exemptions available to an individual are not transferrable or inter-changeable to the firm nor the vice versa. The firm in general law may not be treated as a separate juristic person however under the Income Tax Act it is assessable as a separate and distinct juristic person. The Income Tax Act is a special legislation therefore the interpretation given in general law cannot be imported when the special law defines the firm as a separate person assessable to Income Tax. Therefore the contention of the Ld. Counsel that section 2(23) of the Income Tax Act gives meaning to firm partner and partnership as defined in the Indian Partnership Act 1932 in our view does not in any way effect take-away or exclude the firm from the definition of person as defined u/s 2(31) of the Income Tax Act. Under the relevant provisions of the Indian Partnership Act 1932 the partnership firm has been defined as a relationship between the persons who have agreed to share the profits of the business carried on by all or any of them acting for all and the persons who have entered into partnership with one another is called individually partners and collectively a firm. The contention of the ld. AR is that the partnership is a relation between persons and that partnership is not a person in itself. The aforesaid contention of the ld. AR in the light of the specific definition given of the word person u/s 2(31) of the Income Tax Act and in view of the discussion made above in our view is misconceived and not tenable. Even under the Negotiable Instruments Act a firm is treated at par with a company. In explanation to section 141 of the Negotiable Instruments Act it is provided that company means any body corporate and includes a firm or other association of individuals; and director in relation to a firm means a partner in the firm . The hon ble Supreme court in S.P. Mani and Mohan Dairy v. Dr. Snehalatha Elangovan 2022 (9) TMI 846 - SUPREME COURT has held that for the purpose of Section 141 of the NI Act a firm comes within the ambit of a company. Therefore the status of the firm is to traced under the respective special statutes and not under the general law. In the case in hand even though the partners of the firm are brothers in one case and Husband and wife in another case but their relation does not affect either the status of the partnership firm nor its taxability in any manner. Partnership arises out from a legal contract of sharing profits of a business and in that case even in a case of partnership Firm having partners of a Khasi family only the mother or wife as the case may be being the head named as Kur would not be having any dominant position. All the partners subject to the terms of the contract between them will have equal status and rights inter se and even equal duties and liabilities towards firm. The profit of the partnership firm are shared as per the agreement/capital contributed by the partners. Neither the capital nor the profits of the firm can be held to be the joint property of the family. There is no obligation on the partners being related or to say members of the same family to contribute the profits to the other family members or any other obligation towards them. There is a separate proforma of information required in case of firm as compared to an individual. The individual members of the Scheduled Tribe whose income is exempt under the Income Tax Act are even not supposed to file the Income Tax Return subject to the fulfilment of the relevant conditions as prescribed under law. Though a firm may consist of partners who belong to the exempted category of Scheduled Tribe in their individual capacity however there will be not any mechanism available to the Assessing Officer to know that such a firm consists of the individuals whose income is exempt or not. Thus under the Income Tax Act the exemption of 10(26) of the Act is available to the individual members of the Scheduled Tribe and that this benefit cannot be extended to a firm which has been recognized as a separate assessable person under the Income Tax Act. The advantages and disadvantages conferred under the Act on separate class of persons are neither transferrable nor inter-changeable. The scope of the beneficial provisions cannot be extended to a different person under the Act even after liberal interpretation as it may defeat the mechanism and process provided under the Income Tax Act for assessment of different class/category of persons. Proposed questions are answered in negative by holding that a partnership firm being a separate assessable person under the Income Tax Act would not be entitled to the same exemption u/s 10(26) as any or all of the individual partners would be in their individual capacity and further that the ratio decidendi in the judgment of Mahari Sons ( 1991 (12) TMI 51 - GAUHATI HIGH COURT ) in context of a Khasi family would not be applicable in case of a partnership firm though consisting solely of partners who in their individual capacity are entitled to exemption u/s 10(26) of the income Tax Act 1961. All the captioned appeals of the two assessee-partnership firms are hereby dismissed.

Summary

Issues Involved:
1. Whether a partnership firm consisting of individual partners is entitled to the same exemption u/s 10(26) of the Income Tax Act, 1961 as any or all of the partners would be in their individual capacity.
2. Whether the ratio decidendi in the judgment of Hon'ble Gauhati High Court in CIT v Mahari & Sons (1992) 195 ITR 630 (Gau) in context of 'Khasi Family' is applicable in the case of a partnership firm constituted solely of individuals who are entitled to exemption u/s 10(26) of the Income Tax Act, 1961 in their individual capacity.

Summary:

Issue 1: Exemption u/s 10(26) for Partnership Firms
The Tribunal held that a partnership firm is a separate and distinct "person" under the Income Tax Act and is assessable as a separate legal entity. The benefits available to individual partners cannot be conferred upon the partnership firm. The Tribunal emphasized that under the Income Tax Act, a firm is treated as a separate legal entity for assessment purposes, distinct from its partners. Therefore, the exemption u/s 10(26) of the Act, which is available to individual members of Scheduled Tribes, cannot be extended to a partnership firm.

Issue 2: Applicability of Mahari & Sons Judgment
The Tribunal examined the judgment in CIT v Mahari & Sons, where the Gauhati High Court had extended the exemption u/s 10(26) to a Khasi family assessed as a Body of Individuals (BOI). The Tribunal concluded that the ratio decidendi of Mahari & Sons is not applicable to a partnership firm. The Tribunal reasoned that a partnership firm, even if consisting of members of the same family, is created by contract and not by status, and thus, the firm's income is assessable separately from the individual partners' income.

Conclusion:
The Tribunal dismissed the appeals, holding that a partnership firm is not entitled to the exemption u/s 10(26) of the Income Tax Act, 1961, even if its partners are individually eligible for the exemption. The Tribunal also held that the judgment in Mahari & Sons does not apply to partnership firms. The Tribunal's decision was based on the interpretation that a partnership firm is a separate assessable entity under the Income Tax Act, distinct from its partners.