2025 (6) TMI 502 - AAR - GST

Threshold exemption under Rule 86B of the CGST Rules 2017 - cumulative income tax paid by a partnership firm and its partners can be aggregated to satisfy the exemption or not - no single partner has paid more than Rs. 1 lakh individually but the firm and partners together have - HELD THAT - Rule 86B imposes restriction that the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent of total tax liability where the value of taxable supply other than exempt supply and zero-rate supply in a month exceeds fifty lakh rupees. In the present case it is found that the taxpayer himself submitted in his application that their monthly turnover is more than fifty lakh rupees. Therefore as per the per Rule 86B restriction to use amount available in electronic credit ledger upto ninety-nine percent of total tax liability is applicable on the taxpayer - it is found that neither the individual partner nor the firm has paid income tax more than Rs. 1 lakh during the last two financial years. Whether the total income tax paid by the firm and its partners together can be considered for the exemption under Rule 86B? - HELD THAT - Ongoing through the provisions of Rule 86B ibid it is found that there is no provision of exemption for such conditions in the said rule where exemption can be consider for total income tax paid by the partners and the firm together. The exemption as per Rule 86B(a) is not applicable on the taxpayer. Hence we hold that the restrictions of Rule 86B on the use of amount available in electronic credit ledger is applicable on the taxpayer. Thus M/s Aadinath Agro Industries should use the amount available in electronic credit ledger to discharge his liability only up to ninety-nine per cent of total tax liability of the month as their monthly tax liability exceeds fifty lakh rupees and neither the individual partner nor the firm has paid more than Rs. one lakh income tax during the last two financial years. Conclusion - i) The cumulative income tax paid by the firm and its partners cannot be considered for exemption under Rule 86B. ii) If no single partner has paid more than Rs. 1 lakh in tax the exemption under Rule 86B does not apply even if the aggregate tax paid by the firm and partners exceeds Rs. 1 lakh.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) were:

- Whether the cumulative income tax paid by a partnership firm and its partners can be aggregated to satisfy the exemption threshold under Rule 86B of the CGST Rules, 2017.

- Whether a partnership firm qualifies for exemption from the restrictions imposed by Rule 86B if no single partner has paid income tax exceeding Rs. 1 lakh individually, but the aggregate tax paid by the firm and its partners exceeds Rs. 1 lakh.

These issues arose in the context of the applicability of Rule 86B, which restricts the use of Input Tax Credit (ITC) to discharge more than 99% of output tax liability for taxpayers whose monthly taxable turnover exceeds Rs. 50 lakh, subject to certain exemptions based on income tax payments.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Can the total income tax paid by the firm and its partners be considered for exemption under Rule 86BRs.

Relevant Legal Framework and Precedents:
Rule 86B of the CGST Rules, 2017 restricts the utilization of ITC for certain taxpayers with high turnover, mandating a minimum cash payment of 1% of output tax liability. The proviso to Rule 86B exempts persons where the proprietor, karta, managing director, or any two partners have paid income tax exceeding Rs. 1 lakh in each of the last two financial years. The Income Tax Act, 1961 and the Partnership Act, 1932 govern the taxation and legal status of partnership firms and their partners.

Court's Interpretation and Reasoning:
The AAR examined the language of Rule 86B, which explicitly refers to "any of its two partners" having paid more than Rs. 1 lakh income tax individually. The rule does not provide for aggregation of tax paid by the firm and its partners. The authority noted that the exemption is triggered only if at least two partners individually satisfy the tax payment threshold.

Key Evidence and Findings:
The applicant submitted detailed income tax payment records for the firm and its partners for FY 2022-23 and FY 2023-24. The aggregate tax paid by the firm and partners exceeded Rs. 1 lakh in both years; however, no individual partner paid more than Rs. 1 lakh in either year. The firm itself did not pay any income tax, as profits are generally taxed in the hands of partners.

Application of Law to Facts:
The authority applied the literal interpretation of Rule 86B and found no provision allowing aggregation of tax paid by the firm and partners. Despite the economic interdependence of partners and the firm, the legal framework treats them as separate taxable entities for this purpose. The authority observed that neither the firm nor any individual partner met the Rs. 1 lakh threshold individually.

Treatment of Competing Arguments:
The applicant argued that partnerships are economic units with interlinked tax liabilities, and that cumulative tax payments should be considered to avoid undue hardship and align with the legislative intent to exempt genuine taxpayers. They cited principles of liberal interpretation in favor of taxpayers and compared treatment of companies and directors. However, the authority emphasized the clear wording of the rule and absence of any express provision for cumulative consideration.

Conclusion:
The authority concluded that the total income tax paid by the firm and its partners cannot be aggregated for exemption under Rule 86B. The exemption applies only if any two partners individually paid more than Rs. 1 lakh in each of the last two financial years.

Issue 2: If no single partner has paid more than Rs. 1 lakh in tax, but the firm and partners together have, does the exemption still applyRs.

Relevant Legal Framework and Precedents:
Same as Issue 1, focusing on the interpretation of the proviso to Rule 86B.

Court's Interpretation and Reasoning:
The authority reiterated that the exemption condition is not satisfied by cumulative tax payments. The phrase "any of its two partners" clearly requires individual partners to meet the threshold. The authority observed that allowing aggregation would contradict the plain language and create ambiguity.

Key Evidence and Findings:
The tax payment data showed no individual partner crossing the Rs. 1 lakh threshold. The firm's tax payments were zero, as the partnership income is taxed in partners' hands.

Application of Law to Facts:
Applying the rule strictly, the exemption does not apply. The firm is therefore subject to the restrictions under Rule 86B.

Treatment of Competing Arguments:
The applicant's argument for a purposive interpretation to avoid penalizing genuine taxpayers was considered but not accepted, as the rule's language was unambiguous. The authority noted that the legislative intent to curb fraudulent ITC claims justified strict application.

Conclusion:
The exemption does not apply if no single partner has paid more than Rs. 1 lakh individually, regardless of cumulative tax payments.

3. SIGNIFICANT HOLDINGS

"Rule 86B imposes restriction that the registered person shall not use the amount available in electronic credit ledger to discharge his liability towards output tax in excess of ninety-nine per cent of total tax liability, where the value of taxable supply other than exempt supply and zero-rate supply, in a month exceeds fifty lakh rupees."

"The restriction shall not apply, if any of its two partners of the firm have paid more than one lakh rupees as income tax under the Income-tax Act, 1961 in each of the last two financial years."

"There is no provision of exemption for such conditions in the said rule where exemption can be considered for total income tax paid by the partners and the firm together."

Core principles established include:

• The exemption under Rule 86B is triggered only by individual partners meeting the income tax payment threshold, not by cumulative payments.
• The partnership firm and its partners, despite economic interdependence, are treated as separate taxable entities for the purpose of Rule 86B exemption.
• The rule's language is to be interpreted literally where unambiguous, even if it results in stricter compliance for partnerships.
• The legislative intent to prevent fraudulent ITC claims justifies the strict application of the restriction.

Final determinations on each issue were:

• The cumulative income tax paid by the firm and its partners cannot be considered for exemption under Rule 86B.
• If no single partner has paid more than Rs. 1 lakh in tax, the exemption under Rule 86B does not apply, even if the aggregate tax paid by the firm and partners exceeds Rs. 1 lakh.