2011 (2) TMI 1583 - AT - Income Tax

Partner's Share Income Exempt from Double Taxation: ITAT Mumbai Decision

Hamid A Moochhala Versus Asst. Commissioner of Income Tax, Mumbai

The ITAT Mumbai allowed the appeal, ruling in favor of the assessee in a case concerning the disallowance of expenses under section 14A and the ... - Issues involved: Appeal against disallowance of expenses u/s 14A and applicability of section 14A to partner's share income from a firm.Disallowance of Expenses u/s 14A:The assessee claimed expenses against interest and remuneration income from a partnership firm. The AO disallowed a portion of the expenses u/s 14A, treating interest income separately. The CIT(A) upheld the disallowance based on a special bench Tribunal decision. The assessee contended that the issue was covered by ITAT decisions, citing the case of Shri Sudhir Kapadia. The ITAT, following the Sudhir Kapadia case, held that the share income of the partner retains the character of business income, exempt from double taxation, and thus, section 14A does not apply. Consequently, the disallowance of expenses was deleted, and the appeal was allowed.Applicability of Section 14A to Partner's Share Income:The ITAT relied on the Sudhir Kapadia case, where it was established that the share income of the partner from the firm retains the character of the firm's income, exempt from double taxation. As a result, section 14A was deemed not applicable to the partner, and the disallowance of expenses was overturned. The decision emphasized that the share income in the hands of the partner is not entirely tax-free, as it is already taxed in the hands of the firm, thereby avoiding double taxation. The ITAT directed the AO to allow the expenses claimed by the assessee, aligning with the Sudhir Kapadia precedent.Judgment Summary:The ITAT Mumbai heard an appeal challenging the disallowance of expenses u/s 14A and the applicability of section 14A to a partner's share income from a firm. The ITAT, referencing the Sudhir Kapadia case, ruled in favor of the assessee, stating that the share income retains the character of business income and is exempt from double taxation. Consequently, section 14A was deemed inapplicable, leading to the deletion of the disallowed expenses. The appeal was allowed, emphasizing the tax treatment of partner's share income in partnership firms.