Gujarat HC set aside Income Tax Reassessment Notice to Partners as there is no reason for Taxing Remuneration from Capital Account of Partnership Firm [Read Order]

The Gujarat High Court has set aside Income Tax reassessment notice to partners as there is no reason for taxing remuneration from the capital account of partnership firms.

It appears from the reasons recorded by the Income Tax Officer that the department intends to reopen the assessment on the ground that the writ applicant herein as one of the partners of the partnership firm, failed to show the remuneration and interest received from the partnership firm when the return of the writ applicant was processed under Section 143(1) of the Act on 06.03.2012. The case of the department is that the total remuneration and interest paid is to the tune of Rs.75,11,147/-.

Each of the partners have a share of 50% in the partnership firm. The writ applicant herein has been shown as a “Working Partner”. The writ applicant filed her objections dated 28.10.2018 pointing out that she had not received any income in the form of remuneration and interest from the partnership firm and therefore, there was no question of adding some income or showing such income in the return of income.

The objections raised by the writ applicant came to be disposed of vide the order dated 01.11.2018 on the ground that the writ applicant/assessee had received share of profit from the firm and such share received by the writ applicant/assessee as per the partnership deed would include the remuneration and interest which has not been debited from the profit and loss account of the firm.

The division bench of Justice J.B.Pardiwala and Justice Nisha M.Thakore noted that the AO had allowed the claim of the deduction for the remuneration/interest on the partners capital account however, the same was added back by the AO on the ground that it was not claimed as a deduction in the profit and loss account. The CIT Appeals directed to delete the addition made in the hands of the firm and further directed to tax the same in the hands of the partner of the firm. The aforesaid was not approved by the Tribunal taking the view that there was no good ground to tax the remuneration/interest on the capital in the hands of the partners and the CIT(Appeal) could be said to have exceeded its jurisdiction by issuing such directions to the AO for the dispute which was not arising from the order of the AO.

“In view of such findings recorded by the Appellate Tribunal, nothing survives in the present matter so far as the reopening of the assessment of the partner of the partnership firm is concerned,” the court said.

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