ITAT: Partnership Profit Share Not Taxable Due to Firm's Tax Non-Payment

Court Name : ITAT Mumbai

Parties : Jayesh Tokershi Shah Vs DCIT

Decision Date : 01 July 2023

Judgement ref : ITA No. 1108/MUM/2023

Imagine you're a partner in a firm. The firm hasn't paid its taxes, and now the tax authorities are coming after you, claiming that your share of the partnership profit is taxable. You're left wondering, "Can my share of the partnership profit be taxed because the firm didn't pay its taxes?"

This was the question at the heart of a case that went before the Income Tax Appellate Tribunal (ITAT). The ITAT ruled in favor of the partner, stating that the partner's share of the partnership profit is not taxable due to the firm's non-payment of taxes.

The ITAT noted that under the Income Tax Act, a partner's share in the profits of a firm is exempt from tax. This exemption applies regardless of whether the firm has paid its taxes or not. The ITAT also observed that the tax authorities cannot shift the tax liability from the firm to the partner.

This ruling is a significant one for partners in firms. It provides clarity on the tax treatment of partnership profit shares and underscores the principle that a partner's tax liability is separate from the firm's tax liability. So, the next time the tax authorities come knocking, you'll know exactly where you stand.

ORDER

PER OM PRAKASH KANT, AM

This appeal has been preferred by the assessee against order

dated 09.02.2023 passed by the Ld. Commissioner of Income-tax

(Appeals)-11, Pune [in short ‘the Ld. CIT(A)’] for assessment year

2016-17, raising following grounds:

1. That in the facts and circumstances of the case and in

law, the Ld. CIT(A) erred in upholding the addition made by

the Ld. AO amounting toRs. 1,85,05,05 Rs. 6,16,83,505/- on

account of alleged unexplained cash credit us. 68 of the Act.

2. Without prejudice to above, in the facts and circumstances

of the case and in law, the Ld.CIT(A) failed to appreciate that

the alleged income, if any, can only be taxed in the hands of

the partnership firm and not in hands of the partner i.e.

assessee.

3. Without prejudice to above, in the facts and circumstances

of the case and in law, the Ld.CIT(A) failed to appreciate that

share of profit is always exempt in hands of the partner i.e.

assessee.

2. Briefly stated facts of the case are that the assessee was

partner in partnership firms and for the year under consideration

filed return of income declaring total income of Rs.11,42,500/-. In

the scrutiny proceedings, the Assessing Officer observed share of

partnership firm namely M/s Monarch & Qureshi Builders

amounting to Rs.6,16,83,505/-, which was claimed as exempt by

the assessee. It was stated by the assessee that during the course of

survey, the said firm declared an income of Rs. 12,33,67,010/-

under Income Declaration Scheme (IDS), 2016 and amount of

Rs.6,16,83,505/- was assessee’s share as partner was credited out

of declared profit. The Assessing Officer observed that said firm did

not pay due taxes income under IDS-2016 and no reversal of share

of profit was done by the assessee in the capital account. Further,

the Assessing Officer observed that assessee did not revised return

of income also therefore issued show cause to the assessee as to

why the said share of the income should not be treated as

unexplained cash credit. It was explained by the assessee that

during the course of survey conducted on 28.09.2016 at the

premises of the said firm M/s Monarch & Qureshi Builders made a

declaration of Rs.12,33,67,010/- under IDS-2016 for assessment

year 2015-16 but due taxes of said declaration could not be paid by

the said partnership firm. The assessee submitted that out of said

share of profit of Rs.6,16,83,505/- and amount of Rs.3,76,74,930/-

was reversed on 30.12.2016. It was further contended by the

assessee a share of profit in the partnership should not be

considered as unexplained cash credit as the said amount was

income to the partnership firm and ought to be considered in the

hands of the partnership firm only. The Ld. Assessing Officer

however rejected the contention of the assessee and held the said

amount of unexplained cash credit u/s 68 of the Act. Before the Ld.

CIT(A), the assessee contended that income of Rs.12,33,67,010/-

declared under the IDS-2016 can only be in the hands of the

partnership firm and not in the hands of the assessee because

share of profit from the partnership firm was always exempt in the

hands of the partners irrespective of payment taxes by the

partnership firm. The Ld. CIT(A) rejected the contention of the

assessee and held as under:

“13. I have examined the facts of the case and the

submissions made by the appellant. It is an undisputed fact

that no, income of Rs. 12,33,67,010/- has been declared in

the income tax return of the film namely Ms Monarch and

Qureshi Builders. On the other hand on 01/04/2015, the

capital account of the appellant maintained by the said firm

has been credited with an amount of Rs. 6,16.83,505/-. It is

also not under dispute that till date this entry has not been

reversed by the firm in the accounts. It is also a matter of fact

that out of this amount credited on 01/04/2015. the

appellant has Withdrawn Rs. 3,76,74;9301- in cash on

30/12/2016. Till date, the appellant has not explained as to

how the Capital account has been credited on account of

profit share of the firm even though no such profit has been

declared by the partnership firms in its retuch of income or Pi Account.

14. The appellant has claimed that such credit entry cannot

be taxed as unexplained cash credit us 68 of the Act,

although no reason for same has been mentioned in the

submission filed by the appellant. In this connection, it may

be mentioned that the sec. 68 of the Act reads as under:

"68.Where any sum is found credited in the books of

an assessee maintained for any previous year, and

the assessee offers no explanation about the nature

and source thereof or the explanation offered by him is

not, in the opinion of the Assessing Officer,

satisfactory, the sum so credited may be charged to

income tax as the income of the assessee of that

previous year.

15. In the present case an amount of Rs. 6,16,83,505/- has

been credited in the capital account of the assessee on

01/04/2015. Further, the said credit entry is not a mere

book entry because out of this amount, the appellant has

utilized Rs. 3,76,74,930/- by way of cash withdrawal on

30/12/2016. Therefore, the said credit entry of Rs.

6,16,83,505/- clearly falls within the ambit of sec. 68 of the

Act. It is a well settled legal position that in case of a credit

entry, the primary onus of explaining the nature and source

of said credit entry, is on the assessee and the assessee is

required to prove the identity of creditor, genuineness of

transaction and the creditworthiness of the creditor by way

of filing the supporting documents. In the present case, the

appellant has not explained as to how the amount of

Rs.6,16,83,505/- was credited in his capital account even

though no corresponding profit was shown by the

partnership firm. It may also be mentioned that till date the

appellant has not filed any financial statements of M/s

Monarch and Qureshi explaining as to how credit entry on

account of profit has been made in the capital account of

partners, without showing corresponding profit in the P/L

Account. In such situation, the genuineness as well as source

of this credit entry stands unproved.Accordingly, the

appellant has failed to discharge his primary onus as casted

on him us 68 of the Act. It is a well settled legal position that

if an assessee fails to discharge his primary onus us 68 of

the Act, the Assessing Officer is justified in treating the credit

as unexplained cash credit taxable u/s 68 of the Act.

16. The appellant has taken an argument that the profit of

Rs. 12,33,67,010/- is taxable in the hands of the partnership

firm and not in the hands of the partners. On the other hand,

the partnership firm has filed appeal against the assessment

order passed in its case. Thus, the appellant is taking

contradictory stand. This flip-flop approach of the appellant

cannot be accepted. The appellant has further contended

that the entries in the books of accounts are not conclusive in

determining the taxability of a transaction. While there is no

dispute about this legal position, however, in the present

case, the amount of Rs.6.16;83,5051-is not being taxed

merely on the basis of entries in the books-of accounts. As

explained earlier in this order, after crediting this amount in

the capital account, the appellant has withdrawn a

substantial amount of Rs. 3,76,74,930/- in cash for his use.

Further, the balance amount is still outstanding as credit in

his capital account. These facts clearly suggest that it is not

a mere book entry which is being taxed in the hands of the

appellant.

17. The appellant has further contended that the partnership

firm is incurring losses. In this connection, it may be

mentioned that if the firm is making losses in that case it is

all the more important for the appellant to explain the source

of huge cash which was withdrawn by the partners on

30/12/2016. However, same has not been explained by the

appellant. It may also be mentioned that till date the

appellant has not filed any financial statements of M/s

Monarch and Qureshi explaining as to how credit entry on

account of profit has been made in the capital account of

partners, without showing corresponding profit in the P/L

Account.

18. The appellant has further contended that the share of

profit of a partnership firm in the hands of the partners is

always exempt. This contention is of no help to the appellant

because as explained earlier in this order, it is an admitted

fact that no profit corresponding to Rs. 12,33,67,010/- has

been shown by the firm M/s Monarch and Qureshi Builders

in its return or P/L Account. Therefore, this contention of the

appellant cannot be accepted in view of specific facts of this

case.”

3. We have heard rival submission of the parties and perused the

relevant material on record. The issue in dispute is whether the

share of profit received from the partnership firm which was

claimed as exempt in the hands of the assessee, could be taxed u/s

68 of the Act merely for the reason that the said partnership firm

has not paid taxes on the said income of Rs.13,33,67,010/-

declared during the course of survey. Under the provisions of

section 10(2A) of the Act, any share of profit of the partnership firm

is exempted from the tax in hand of partner. The said share cannot

become unexplained in the hands of the assessee partner merely for

the reason that no tax was paid by the partnership firm. The Ld

Counsel submitted that appeal filed by the said firm against the

said addition is pending before the ld CIT(A). If that addition is

sustained by the appellate authorities in the hands of the

partnership firm, then whatever taxes has to be paid by the

partnership firm and the share of profit received by the assessee

would be exempted under the provisions of the Act. If said addition

for the income declared in the hands of the partnership firm is not

sustained then profit in the hand of the firm will reduce and

corresponding share of profit in the hands of the assessee shall

also be reduced but that will not raise any tax liability in the hands

of the assessee. In our opinion finding of the Ld. CIT(A) on the issue

in dispute is contrary to express provisions of the Act. Accordingly,

we set aside the finding of the Ld. CIT(A) on the issue in dispute

and direct the Assessing Officer to delete the addition made u/s 68

of the Act. The ground No. 1 to 3 of the appeal of the assessee are

accordingly allowed.

3.1 Before us, the Ld. Counsel of the assessee has filed an

additional ground challenging the jurisdiction of the Assessing

Officer on the ground that declared income of the assessee was less

than Rs.20,00,000/- and therefore, jurisdiction of the assessee lied

with the Income-tax Officer and not with the Assistant

Commissioner of Income-tax. Since, we have already allowed the

grounds of appeal challenging the merit of the addition and

therefore, this additional ground of appeal was merely rendered

academic and accordingly same is dismissed. The Ld. Counsel of

the assessee also submitted that it was an alternative prayer only.

Accordingly, the additional ground of appeal of the assessee is

dismissed as infructuous.

4. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 10/07/2023.

Sd/- Sd/-

(KAVITHA RAJAGOPAL) (OM PRAKASH KANT)

JUDICIAL MEMBER ACCOUNTANT MEMBER

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IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH “F” MUMBAI

BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER)

AND

MS. KAVITHA RAJAGOPAL (JUDICIAL MEMBER)

ITA No. 1108/MUM/2023

Assessment Year: 2016-17

Jayesh Tokershi Shah,

76, Laxmi Palace,

MathuradasRaod, Kandivali

(West),

Mumbai-400067.

Vs.

The DCIT, Central Circle-2,

Ashar IT Park, 6th floor, Road,

No. 16Z Wagle Industrial Estate,

Thane (West), Mumbai-400604.

PAN NO. AAHPS 5844 F

Appellant Respondent

Assessee by : Shri Akshay Jain

Revenue by : Shri Prakash Choughule, DR

Date of Hearing : 05/07/2023

Date of pronouncement : 10/07/2023