The ITAT, Bangalore recently decided the case of M/s Mulberry Textiles LLP v. ITO [ITA No. 757/Bang/2022 dated January 3, 2023]. In this case, the Appellant, M/s Mulberry Textiles LLP, filed an income tax return for the financial year 2020-2021 and claimed exemption under Section 10(2A) of the Income Tax Act, 1961 (the IT Act) for the share of profit received from other partnership firms. However, the Revenue Department denied the exemption and the Appellant filed a rectification application under Section 154 of the IT Act, which was also rejected.
The issue before the ITAT was whether the Appellant was eligible for the exemption under Section 10(2A) of the IT Act for the share of profit received from other partnership firms. The Appellant argued that, as an LLP, it was to be treated as a firm under the IT Act, and as a firm can be a partner in other partnership firms, the Appellant was eligible for the exemption. On the other hand, the Revenue Department argued that the exemption would amount to double deduction.
The ITAT observed that the IT Act was very clear in stating that an LLP is to be treated as a firm and that a firm can be a partner in other partnership firms. The ITAT relied on the judgement of the Gauhati High Court in Radha Krishna Jalan v. CIT, which held that there is no scope for double taxation of an income by a partner of a firm, which is separately assessed to tax. The Hon’ble Gauhati High Court had further stated that when an income is already assessed in the hands of the firm, it is not exigible to tax in the hands of the partner.
In light of these observations, the ITAT held that the Appellant was eligible for the exemption under Section 10(2A) of the IT Act for the share of profit received from other partnership firms. The relevant provision, Section 10(2A) of the IT Act, states that in computing the total income of a person, any income falling under the clause shall not be included, including 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.
The Explanation to the provision states that the share of a partner in the total income of a firm separately assessed as such shall be an amount that bears the same proportion to the total income of the firm as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits.
In conclusion, the ITAT, Bangalore held that an LLP is to be treated as a firm under the IT Act and, as such, a share of profit received by an LLP from other partnership firms is eligible for exemption under Section 10(2A) of the IT Act. This judgement will provide clarity and certainty to LLPs in similar situations and ensure that they are not subjected to double taxation.
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