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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.
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