Taxability of Share of Profit received by Partner from Partnership Firm under Income Tax Act of India
Section 10 deals with exempt income which does not form part of total income.
As per section 10(2A), share of profit received by partners from a firm is not taxable in the hands of partner. A partner receives 3 types of income from his firm:
a) Salary/Remuneration/Commission/Bonus – Taxable in the hands of partner as his business income
b) Interest on Capital – Taxable in the hands of partner as his business income
c) Share of Profit – Exempt in the hands of partner u/s 10(2A)
Share in the total income of the firm= Total income of the firm x share of partner in the profit of the firm as per the partnership deed/Total profit of the firm
Case Laws related to the taxability of firm
Section 10(2A), 14A & 263 of IT Act, 1961— Disallowance — Sec. 14A deals with the expenditure incurred in relation to income not includable in total income. However, the proviso has come into existence only w.e.f. 11th May, 2011 but s.14A was brought in by Finance Act to 2001 with retrospective effect from 1st April, 1962. In the present case, the assessment year is 1995-96 and order under s.263 is dt. 29th Dec., 1999. Therefore, as on the date of order of CIT under s.263 proviso to s.14A was not even in existence. Hence, proviso to s.14A does not apply to this case. — Mahesh G. Shetty & Ors. vs. CIT (2011) 238 CTR 440 (Kar.)
S. 10(2A), 14A & 28(v) of IT Act, 1961, r. 8D of IT Rules 1962—Business expenditure—Income charged in the hands of a partnership firm cannot be treated as being a non-exempt income in the hands of a partner of such firm and, therefore, provisions of s. 14A would be applicable in computing the total income of such partner in respect of his share in the profits of such firm—Dharmasingh M. Popat vs. ACIT. [2010] 2 ITR (Trib) 586 (ITAT-Mumbai)
Business Expenditure—Sec. 10(2A), 14A, 28(v)—IT ACT, 1961—VISHNU ANANT MAHAJAN v. ASSISTANT COMMISSIONER OF INCOME-TAX. [2012] 16 ITR (Trib) 621 (ITAT-AHMEDABAD)
Reference: – As Per 10(2A) of the Income Tax Act 1961
Incomes not included in total income.
- In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—
(2A) 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.
- —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.
Reference: – As Per 5 of the Income Tax Act 1961
Scope of total income.
5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or
(c) accrues or arises to him outside India during such year :
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.