Section 10(2A) of the Income Tax Act:
Section 10 of the Income Tax Act deals with the different exemptions provided to assessees belonging to various categories of income earned by them. Section 10(2A) of the Income Tax Act, as amended, states that if a person is a partner of a firm which is separately assessed, his share in the profits of the firm are exempt from tax. The entire amount is exempt and not a part of it.
For the purposes of this provision, the share of a partner in the profits of a firm which is separately assessed shall be an amount which has to the profits of the firm the same proportion as his share in the profits of the firm according to the clause contained in the partnership deed dealing with such profits.
When is the exemption allowed?
Exemption is allowed in cases where the partnership firm of which the assessee is a partner is separately assessed. Exemption under this section is not given if the firm is not separately assessed.
Earnings except the share of profit received from such partnership firm like remuneration, etc. are taxable like any other kind of income.
Which incomes are exempt?
The term ‘total income of the firm’ for the purposes of sub section 10 (2A) of the Income Tax Act is interpreted contextually. Such income includes income normally exempted or deducted under different provisions of the Income Tax Act. It is stated that the income of a firm should be taxed in the hands of the firm only and not under any circumstances the income can be taxed in the hands of the partners of the firm.
The total amount of profit which goes to the accounts of the partners in the firm is exempt from tax in the hands of the partners, even if there is no income of the firm which is chargeable to tax due to any exemption or deduction according to the provisions of the income Tax Act.
New circular issued by the CBDT:
The CBDT has issued a new Circular being No. 08/2014 dated 30.03.2014 which refers to the income of a partnership firm which is NIL due to any exemption allowed as per Chapter III or any kind of deduction under Chapter VI-A of the Act. The circular declares that the partners can claim an exemption under section 10(2A) of the Act regarding their share in the profits of the firm.
The CBDT has clearly stated that the profits received by business partners from the firm would be exempt in their hands even if the firm has no tax liability due to any exemption or deduction as per the Act.