2025 (2) TMI 1129 - AT - Income Tax

Partner's profit share from LLP cannot be taxed twice under Section 68 when already assessed at LLP level

The ITO Ward-1 Palanpur Versus Nikeshkumar Shantilal Mehta

The ITAT Ahmedabad dismissed the Revenue's appeal against deletion of addition u/s 68 for undisclosed income. The assessee received profit share from M/s. ... Addition u/s 68 - undisclosed income in the hands of the assessee - CIT(A) deleted the addition on the ground that the income was already assessed in the hands of M/s. Ice Worth Reality LLP, and taxing the same in the hands of the partner would lead to double taxation, which is contrary to the provisions of the Act. HELD THAT:- It is an undisputed fact that the AO has already made an addition in the hands of M/s. Ice Worth Reality LLP on account of bogus LTCG from penny stock transactions. CIT(A), Ahmedabad, in the case of M/s. Ice Worth Reality LLP, has already deleted the said addition, holding that the LTCG transactions were not taxable. Since the same income has already been taxed at the LLP level and subsequently deleted in appeal, taxing it again in the partner’s hands would lead to double taxation, which is impermissible under the Act. Section 68 of the Act applies when an assessee fails to explain the source of a credit in his books of accounts. In this case, the assessee’s share of profit from M/s. Ice Worth Reality LLP is fully explained and recorded in the LLP’s books, which were assessed separately. Since the income was already disclosed at the LLP level, there was no unexplained credit in the partner’s books, and invoking Section 68 in the partner’s case was unjustified. AR has pointed out that the tax effect in the present appeal is below the revised monetary threshold of Rs. 60 Lacs for filing appeals before the Tribunal As per the CBDT’s policy, the Department is instructed not to file appeals before the Tribunal where the tax effect is below the prescribed limit unless the case falls within specific exceptions. The Revenue has not demonstrated that this case falls within any such exception. Thus, the appeal is liable to be dismissed on this ground alone. Decided against revenue. The issues presented and considered in the legal judgment are as follows:1. Whether the addition of Rs. 1,57,93,993/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, treating it as undisclosed income in the hands of the assessee, was justified.2. Whether the taxation of the same income in the hands of both the Limited Liability Partnership (LLP) and the partner would result in double taxation.3. Whether the appeal by the Revenue against the deletion of the addition by the Commissioner of Income Tax (Appeals) (CIT(A)) should be upheld.Issue-wise detailed analysis:The AO reopened the assessment for the Assessment Year 2015-16 based on information received regarding the LLP's alleged involvement in accommodation entries through penny stock transactions. The AO added Rs. 1,57,93,993/- as undisclosed income to the assessee, a partner in the LLP. The CIT(A) ruled in favor of the assessee, stating that the LLP's income had already been assessed separately, and taxing the same income in the partner's hands would lead to double taxation, contrary to the provisions of the Act. The CIT(A) relied on Section 10(2A) of the Act, which exempts a partner's share of profit from an LLP. The CIT(A) also found that the credit in the partner's account was fully explained from the LLP's books, making Section 68 inapplicable.The Tribunal considered the arguments presented by both parties. The Departmental Representative acknowledged that the addition in the hands of the assessee amounted to double taxation. The Authorized Representative of the assessee highlighted that the tax effect in the present appeal was below the prescribed limit for filing appeals before the Tribunal. The Tribunal noted that the AO's action of taxing the partner's share of income separately was contrary to the taxation framework under the Act and unsustainable. The Tribunal emphasized that the income had already been taxed at the LLP level and subsequently deleted in appeal, making the addition in the partner's hands unjustified.Significant holdings:The Tribunal dismissed the Revenue's appeal, stating that the addition of Rs. 1,57,93,993/- in the hands of the assessee was unsustainable. The Tribunal emphasized the clear scheme of taxation for LLPs and partners under the Act, where the LLP is taxed as a separate legal entity, and partners are exempt from tax on their share of profit. The Tribunal also highlighted the importance of avoiding unnecessary litigation and appeals that lack legal sustainability, urging the Revenue to exercise prudence in filing appeals only in genuine and debatable issues.In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the addition and dismissed the Revenue's appeal, citing the correct application of legal principles and the lack of merit in the Revenue's arguments.