Income Tax - CBDT clarifies on exempted income of Firm Section 10(2A)
AS per Section 10(2A) of the Income Tax Act, in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm, is not included in the total income.
Explanation.- For the purposes of this clause, the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits.
Now, a doubt was raised before the Board as to what will be the amount exempt in the hands of the partners of a partnership firm in cases where the firm has claimed exemption/deduction under Chapter III or VI A of the Act.
A firm is assessed as such and is liable to pay tax on its total income. A partner is not liable to tax once again on his share in the said total income.
CBDT clarifies that 'total income' of the firm for sub section (2A) of Section 10 of the Act, as interpreted contextually, includes income which is exempt or deductible under various provisions of the Act. It is, therefore, further clarified that the income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Accordingly, the entire profit credited to the partners accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act.
This is one Circular which would certainly be welcomed by the Trade.
CBDT Circular No. 8/2014, Dated: March 30, 2014