2021 (4) TMI 1351 - AT - Income Tax

Tribunal rules in favor of partners, exempts share income from firm.

S. Seethalakshmi, Srinivasan Nandhakumar, Versus The Income Tax Officer, Ward 1 (3), Tirupur.

The Tribunal overturned the Commissioner of Income Tax (Appeals) decision to uphold the addition of undisclosed income under section 10(2A) of the Income ... Undisclosed income - share of profit credited in the partner’s capital account - Eligibility of exemption under section 10(2A) - HELD THAT:- The firm in which the assessees are partners have provided for the depreciation in the books which are less than that of the depreciation allowable under section 32 of the Act. Further, by filing copy of the CBDT Circular No. 8/2014 dated 31.03.2014, assessee has submitted that the share of profit credited in the partner’s capital account shall be considered for exemption under section 10(2A) of the Act, in the individual hands of the partners, even if the taxable income of the firm is NIL in the hands of the firm and prayed for deleting the addition made in both the assessees case. Vide circular No.8 of 2014, dated 31.03.2014, the CBDT has reemphasized the interpretation of Provisions of section 10(2A) of the Act in cases where income of the firm is exempt. We find merit in the contention of the ld. Counsel for the assessee. The CBDT itself has accepted the proposition that the share income from the firm received by the partners is exempt under section 10(2A) of the Act and under no circumstances can be taxed in the hands of the partners. In view thereof, we set aside the orders of the ld. CIT(A) and delete the addition in the hands of both the assessees as undisclosed income. Appeals filed by the assessee are allowed. Issues: Appeal against addition of undisclosed income under section 10(2A) of the Income Tax Act, 1961.Analysis:1. The appeals were filed against the orders of the ld. Commissioner of Income Tax (Appeals) upholding the addition of undisclosed income in the hands of the assessees as per section 10(2A) of the Act for the assessment year 2016-17.2. The assessees, partners of a firm, claimed exemption under section 10(2A) for their share of profits, but the Assessing Officer concluded that they were eligible for exemption only for a lesser amount, resulting in an addition of undisclosed income.3. The Assessing Officer adjusted the net profit of the firm, leading to a difference in the claimed exempt income and the actual eligible amount, which was credited into the partners' current account.4. The ld. CIT(A) confirmed the assessment, stating that the excess claim of exemption allowed the assessees to increase personal capital without declaration of income, affecting their balance sheet.5. The assessee's counsel argued that the difference in book profit and taxable profit arose due to depreciation variations and inadmissible expenses, emphasizing that the CBDT Circular supported the exemption of the share of profit credited to partners under section 10(2A).6. Section 10(2A) of the Act was analyzed, highlighting that the share income from the firm received by partners is exempt and cannot be taxed in their hands as per the CBDT Circular.7. Considering the CBDT's clarification, the Tribunal set aside the ld. CIT(A)'s orders and deleted the addition of undisclosed income in the assessees' hands, allowing both appeals.This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the legal reasoning behind the decision to delete the addition of undisclosed income under section 10(2A) of the Income Tax Act, 1961.