Partners barred from deducting share income in partnership firms under Income-tax Act

The High Court held that partners are prohibited from claiming deductions on share income from partnership firms under section 32AB of the Income-tax Act. The court found the rectification order valid as the original assessment allowing the deduction was an apparent mistake for overlooking the proviso. The respondent, a limited company, was deemed ineligible for deduction on share income from partnerships. The court reinstated the rectification order, ruling in favor of the Revenue on the issue of eligibility for deduction under section 32AB.

---

---

Issues involved:
The judgment addresses two main issues:
1. Validity of rectification order u/s 154 by the Assessing Officer regarding the withdrawal of relief granted under section 32AB of the Income-tax Act, 1961 on share income received from partnership firms.
2. Eligibility of the respondent for deduction under section 32AB on share income received from partnership firms.

Issue 1: Validity of Rectification Order u/s 154:
The Tribunal held the rectification proceedings invalid as the issue was debatable and not an apparent mistake. However, the High Court decided to first address the issue on merits before determining the validity of the rectification order. The respondent, engaged in steel production and a partner in three firms, was granted relief under section 32AB during assessment. The relief was later partly withdrawn in rectification proceedings, excluding share income from partnership firms. The High Court found that the proviso to section 32AB expressly prohibits partners from claiming deduction on share income from firms. The court held that the original assessment allowing the deduction was a mistake apparent, as the officer overlooked the proviso. Citing precedent, the court emphasized that overlooking a mandatory provision of law, as in this case, constitutes a mistake apparent under section 154.

Issue 2: Eligibility for Deduction under Section 32AB:
The respondent, a limited company, claimed deduction under section 32AB on its own eligible profit along with share income from partnership firms. The proviso to the section explicitly states that deduction for eligible business profits of a firm can only be claimed by the firm and not individual partners. The High Court ruled that the respondent was ineligible for deduction on share income from partnership firms, as the proviso prohibits partners from claiming such deductions. The court emphasized that the express prohibition in the proviso cannot be circumvented by combining ineligible share income with eligible business profits. Consequently, the court held in favor of the Revenue on the issue of eligibility for deduction under section 32AB.

Separate Judgment:
The High Court, comprising Judges C. N. Ramachandran Nair and K. M. Joseph, delivered the judgment. The court allowed the appeal by canceling the Tribunal's order and reinstating the rectification order issued by the Assessing Officer under section 154 of the Act.

---