Income Tax Exemptions Available To ST Individuals Can't Be Extended To Partnership Firm: ITAT

The Guwahati Bench of the Income Tax Appellate Tribunal (ITAT) has held that the exemption under Section 10(26) of the Income Tax Act has been specifically conferred on members of the Scheduled Tribe residing in the specified area. The exemption cannot be extended to another separate and distinct "person," that is, the partnership firm, though such a firm consists of the individual partners who, in their individual capacities, are entitled to such an exemption.

The special bench of Rajpal Yadav (Vice President), Sanjay Garg (Judicial Member), and Dr. Manish Borad (Accountant Member) has observed that under the Income Tax Act, the exemption of 10(26) of the Act is available to the individual members of the Scheduled Tribe and that this benefit cannot be extended to a firm that has been recognized as a separate assessable person under the Income Tax Act. The advantages and disadvantages conferred under the Act on separate classes of persons are neither transferable nor interchangeable. The scope of the beneficial provisions cannot be extended to a different person under the Act, even after liberal interpretation, as it may defeat the mechanism and process provided under the Income Tax Act for the assessment of different classes or categories of persons.

The assessee partnership firm has been running a hotel business under the name and style of M/s Hotel Centre Point at Shillong. It consisted of two partners; both partners are brothers and belong to the Khasis tribe, which is enlisted as a Scheduled Tribe in the State of Meghalaya and is covered under Clause 25 of Article 366 of the Constitution of India. They are residents of Khasi Hills Autonomous District, which area is specified under Part-II of the Table appended to the 6th Schedule to the Constitution of India, and are thus entitled to exemption under Section 10(26) of the Income Tax Act in their individual capacity.

The claim of the assessee before the Assessing Officer has been that since a partnership firm in itself is not a separate juridical person and it is only a collective or compendious name for all of its partners having no independent existence without them, and since the partners of the assessee firm are entitled to exemption under Section 10(26), therefore, the same exemption is available to a partnership firm.

However, the assessing officer did not agree with the contention of the assessee. The AO observed that under Section 2(31), “person” includes a partnership firm. As per the provisions of Section 4(1), income tax shall be charged for any assessment year at the prescribed rates with respect to the total income of the previous year of every person. Under the Income Tax Act, a partnership firm is a separate legal entity chargeable to income tax. The exemption was available to individual members of the recognized Scheduled Tribes and not to a partnership firm, which is a separate entity under the Income Tax Act.

The CIT(A) observed that the Gauhati High Court has held that exemption available to a member of the Khasi Tribe will be available when income was earned by him not as an individual but as a group of individuals comprising the members of his family, and such joint income is assessable in the status of BOI (Body of Individuals).

Under the Income Tax Act, a partnership firm is a separate and distinct “person” assessable to income tax. There are separate provisions relating to the rate of income tax, deductions, allowances, etc. in relation to a firm as compared to an individual. The benefits in the form of deductions or exemptions available to an individual are not transferable or interchangeable with the firm, nor are they vice versa. In general, a firm may not be treated as a separate juristic person; however, under the Income Tax Act, it is assessable as a separate and distinct juristic person. The Income Tax Act is a special legislation; therefore, the interpretation given in general law cannot be imported when the special law defines the “firm” as a separate person assessable to income tax.

The tribunal held that there is no such mechanism available to the income tax authorities to know the status of each of the members of a family or HUF, or even in the case of a partnership firm. The partners in a firm may change during the year, replacing a non-exempted category partner with an exempted category partner.

Counsel For Petitioner: Sanjay Modi

Counsel For Respondent: Arun Bhowmick

Case Title: M/s Hotel Centre Point, Shillong Versus ITO

Case No.: I.T.A. Nos.348 to 350/GTY/2018

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