Assessee can’t be Taxed on Undisclosed Income which is already Taxed in the hands of Partnership Firm: ITAT [Read Order]

In Maheshbhai Shantibhai Patel & Ors. vs. ITO, the Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) held that the assessee couldn’t be taxed on the undisclosed income where the undisclosed income is already found to be taxed in the hands of the partnership firm.

Upon a search conducted at a Partnership Firm, Savvy Infrastructure Co. several incriminating materials were discovered. In the course of the proceedings, one of the partner confessed that an amount of Rs.69 Lakhs received as profits of the partners was not disclosed by him or his family members. The said partner also asserted, in the capacity as partner, that undisclosed income so found has been disclosed in the hands of the partnership firm. The Assessing Officer (A.O.) on enquiry found that the Partnership Firm had not disclosed the undisclosed income of Rs.69 Lacs nor has paid any taxes on them. The AO observed that the assessee and other family members are liable to pay taxes for the share of undisclosed income received from the partnership firm. The AO accordingly added Rs.9.75 lakhs to the total income of the assessee-partner as unaccounted profit. The appellants approached the Commissioner of Income Tax (CIT(A)) for relief. However, the appeal was dismissed. Thereupon, the appellant filed an appeal before the ITAT.

The Counsel for the appellant argued that the additions made by the lower authorities were not sustainable on the grounds, that the undisclosed income had arisen in the hands of the partnership firm and not partners, and therefore, the undisclosed income could have been possibly taxed only in the hands of the partnership firm. It was thus contended that the assessee had been wrongly taxed for the income belonging to other entities.

The Departmental Representative (D.R) contended that it was not evident that the amount forms part of undisclosed income offered by the partnership firm before the Settlement Commission or not and that the onus was on the assessee to demonstrate the disclosure purportedly made.

The Bench comprising of Judicial Member Madhumita Roy and Accountant Member Pradip Kumar Kedia observed that the undisclosed income once already considered for taxation in the hands of the partnership firm could not be taxed once again in the hands of the partner.

“It is true that income is required to be taxed in the hands of right person only. However, we also bear in mind that the partnership firm is only a creature of agreement and partners are intrinsically connected contractually under the Partnership Act. Partners (assessees herein) hold mutual agency on behalf of the firm and are liable and responsible for the acts of the assessee firm. A firm is merely a compendious expression for its partners. This apart, the undisclosed income of the partnership firm ultimately goes to the partners by way of share of their undisclosed income. Therefore, a strict adherence of taxability that too of an undisclosed income in the hands of the partnership firm as insisted upon, would not, in our view, change the ground reality. Besides, the inclusion of undisclosed income in the hands of partnership firm in exercise of powers vested under erstwhile provisions 153(3) is also plausible.” said the bench.