CBDT vide circular 8/2014 clarify that the Partner’s share of profit in the partnership firm shall be always exempt under section 10(2A).
The clarification has been issued to remove the doubt that under no circumstances share of profit be taxed in the hands of its partner even though the partnership firm paying no tax on its profit on account of claiming deduction or exemption.
New Delhi, the 31st March 2014
Interpretation of Provisions of Section 10(2A)OF THE Income –tax Act,1961 in cases where income of the firm is exempt-clarification regarding.
A reference has been received in the board in connection with the interpretation of provision of Sections 10 (2A) of the income tax Act,1961 ,(Act) seeking clarifications as to what will the amount in exempt in hands of the partners of a partnership firm in case where the firm has claimed exemption /deduction under chapters III or VIA of the Act
2. The matter has been examined .Sub sec (2A) of Section 10 was inserted by the finance Act, 1992 w.e.f 01.04.1993 due to change in the scheme of taxation of the partnership firm .since assessment 1993 -94, 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 hand of total income. A partner is not liable to tax once again on his share in the said total income.
3. It is clarified that ‘total income’ of the firm for Sub sec (2A) of Sec 10 of the Act, interpretated contextually, includes income which is exempt or deductable under various provisions of the Act. It is, therefore, further clarified that the income of the firm is to be taxed in the hands of the firms only and the same can under no circumstances be taxed in the hands of its partner. Accordingly, the entire profit credited to the partners’ accounts in the firms 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 firms on accounts of any exemption or deductions as per the provision of the Act.