Innocuously simple..

A brand new interpretation is making rounds in the corridors of Revenue. Something which was seen as pretty obvious and neglected has started showing its real form thanks to the two orders passed by the gentleman writing this post. Let us take a situation. A partnership firm has ten lakhs of business profits and is also availing deduction of 100% under section 80-IB of the Income-tax Act, 1961. So, the deduction is ten lakhs and the total income is, therefore, nil. However, the firm, in all its wisdom, has chosen to credit the partner’s capital account by five lakh Rs. as the partner has fifty percent share. Now, the partner claims this five lakhs as exempt under section 10(2A) of the Act. Innocuously correct? Seems so! Let’s examine.

Section 10(2A) of the Act exempts not the share of business profit but the share in total income of the firm. The share in total income of firm in the the instant case is nil as the total income itself is nil. However, the partner has a credit in its capital account of five lakhs Rs. Zero is the amount whic is exempt and hence the entire five lakhs is the income of the partner. And this interpretation is further supported by the explanation below the clause, which clearly distinguishes between share of profit of firm and share in total income of the firm. It is a literal interpretation which cannot be discarded unless the ramifications are manifestly unjust or absurd. Distancing from this literal interpretation will amount to an amendment in the Act itself, which, as far as Assessing Officer is concerned, cannot be done.

And let me tell you friends, this interpretation will do wonders. Best wishes.

P.S. This discovery is not mine.

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