Tax exemption available to individual partners as members of schedule tribes in North-East India cannot be extended to partnership firm – being a separate assessable “person”

The Taxpayer (Hotel Centre Point)[1]  was a partnership firm running a hotel business, consisting of two partners who were brothers from the Khasis tribe, a Scheduled Tribe in Meghalaya, and thus were entitled to exemption under Section (S.) 10(26) of the Income Tax Laws (ITL) in their individual capacity. 

The Taxpayer claimed that since the firm is not a separate juridical person and its partners are entitled to exemption under S.10(26), the firm should also benefit from it, considering the close familial relationships between the partners and the matriarchal structure of the Khasi tribe. However, the Tax Authority denied the exemption, stating that the firm was a separate legal entity chargeable to Income-tax and that the exemption under S. 10(26) was available to individual members of recognized Scheduled Tribes and not to a partnership firm which was a separate entity under the ITL.

The First Appellate Authority upheld the Tax Authority's order, and, on further appeal, the Division Bench of Gauhati Tribunal agreed there was no infirmity in the decision. However, on further appeal by the Taxpayer, the Meghalaya High Court set aside the Tribunal's order and remanded the matter back to the Tribunal for fresh consideration by a Special Bench (SB) of the Gauhati Tribunal.

Nevertheless, even on reconsideration, the SB ruled against the Taxpayer. It held that the ITL recognizes a partnership firm as a separate and distinct ”person” assessable to Income-tax, with separate provisions relating to tax rates, deductions, and allowances. It distinguished the decision of Gauhati High Court (HC) in case of CIT vs. Mahari & Sons[2]  which extended the benefit of exemption under S.10(26) to “Khasi Family”. In that case, the HC considered the peculiar characteristics of ”Khasi Family” and held that exemption is available to it being an Association of Person (AOP) of a particular species. Under the ITL, different type of AOPs are entitled to different type of benefits in the shape of allowances, deductions and exemptions subject to meeting the prescribed conditions. In contrast, such type of test or distinction is not applicable in case of firms under the ITL. Provisions under the ITL for taxability of firms as defined under Indian Partnership Act make no distinction between such firms on the basis of their constitution i.e., whether consisting of partners being relatives or not and thus, the dictum given in Mahari & sons (supra), cannot be imported in case of partnership firms.

The Tribunal referenced the Indian Partnership Act to support their decision that although firm is a compendious expression for relationship between the partners, a firm and its partners are distinct entities for tax assessment, and the partnership is not merely an extension of its partners. The Tribunal emphasized the distinction in Indian tax law between individual taxpayers and partnership firms, reinforcing the principle that the scope of beneficial tax provisions for individuals cannot be extended to different legal entities. Unlike Khasi family where relationship between the individuals is based on birth or family relationship with concepts of family, jointness, family property, etc, the partnership relation is based on contract between the partners and no obligation arises out of the family status or relationship, inter se between the partners. 

^{[1] [2024] 160 taxmann.com 604 (Guwahati - Trib.)
[2] [1993] 67 Taxman 449 (Gau)}