Judgment:
1. These are the two appeals filed by the assessee against the orders of the CIT (A) for the Assessment Years 1996-97 and 1997-98 dated 27/9/2000 and 10/8/2000 respectively. The common effective grounds of appeal in both the appeals are as under: - a) The CIT (A) erred in directing to allow exemption under Section 10(2A) read with Section 80HHC on share income from a partnership firm in which the assessee was not a partner.
b) The CIT (A) erred in directing to allow exemption Under Section 10(2A) relying on the decisions which either relate to pre-amendment position or not squarely applicable in the present case.
2. Since both the grounds of appeal are correlated and as the facts and circumstance in both the years under appeal are same, they all are being disposed of together for the sake of convenience.
3. The brief facts of the case are that Sri Radha Krishna Jallan is a partner in the firm known as M/S Rock International, Calcutta. In order to meet his capital contribution in the said partnership firm M/S Rock International, Sri Jallan entered into another sub-partnership styled M/s. Radhakishan Jallan (assessee) on 1/4/1995 by which his share of profit or loss representing 45% in the firm M/S Rock International had been assigned to the assessee -firm. The profit or loss of the assessee firm is shared by the following persons in the following proportions : -i) Sri Radha Krishna Jallan : 60%ii) Smt. Anguri Devi Jalan : 10%iii) Smt. Santa Jalan : 10%iv) Smt. Lata Jalan : 10%v) Smt. Shalini Jalan : 10% 4. In the computation of income filed along with the returns of income the assessee firm showed 45% share of profit from the partnership firm of Rock International as its income and claimed the same is exempted within the provisions of Section 10(2A) of the Income Tax Act, 1961.
The AO negated the assessee's claim in as much as according to him, M/S Radha Krishna Jallan the assessee-partnership firm was not a partner of M/S Rock International and, hence it is not entitled for exemption Under Section 10 (2A). For this the AO relied on the decision of the Hon'ble Supreme Court in the case of Dulichand Laxminarayan v. CIT [29 ITR 535] and also on the judgment of Hon'ble Rajasthan High Court in: the case of CIT v. Ali Sher Contractors (1985) Vol. 159 ITR 534. He also observed that the charge of tax on the assessee partnership did not amount to double taxation. Further he was of the view that since there is no double taxation there is no scope of allowing exemption Under Section 10(2A) to the assessee firm. The argument of the assessee that since the income of M/s. Rock International, Kolkata was entitled to deduction Under Section 80HHC, the share of its partners shall also be exempt from tax, was also found not acceptable by the AO as the nature of business of M/s. Rock International and the assessee firm is not the same in so far as M/s. Rock International is engaged in export business, the assessee firm is not. The assessee preferred an appeal against the order of AO to the CIT (A). The CIT (A) vide his elaborate order accepted the claim of the assessee firm that the share of income received by it was exempt Under Section 10(2A) as well as since the business income of the assessee firm was only share income from M/s.
Rock International, such income will retain its character as exempt income Under Section 80HHC. Being aggrieved by this order, the revenue is in appeal before us.
5. After hearing the rival submissions, we find that the genuineness of the assessee firm is not in doubt. It is an established position of law that a firm cannot be a partner in another firm as also pointed out by AO relying on the decision of Hon'ble Supreme Court in the case of Dulichand Luxmi Narayan (supra). It is also not in dispute that because of an agreement the assessee firm got a superior title over the share of income receivable by Sri Radhakishan Jalan from M/s. Rock International and this agreement does not make the assessee firm a partner in M/s. Rock International. In the backdrop of this, to decide the issue in hand, let us examine the provisions of Section 10(2A), which runs as under: "10(2A) In the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm." Thus, a reading of the section shows that it is applicable in case of a person who is a partner in a firm, which is separately assessed to tax as a firm. In view of the facts of the present case as discussed above, we found that the assessee firm is not a partner in any firm and nor legally it can be a partner in any firm. Thus, in our considered view the CIT (A) was not justified in holding that the income received by the assessee firm by virtue of its superior title over the share of income receivable by Sri Radha Kishan Jallan, is exempt Under Section 10(2A) of the I.T. Act in the hands of the assessee firm.
6. The other section under which the learned A/R of the assessee relied upon for his contention that the income of the assessee firm is not liable to tax is Section 80HHC. The relevant portion of Section 80HHC is extracted as under: "80HHC. (1) Where an assessee, ......., is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction to the extent of profits referred in Sub-section (1B), derived by the assessee from the export of such goods or merchandise.
Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate...
(1A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House............'' (4) The deduction under Sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant... certifying that the deduction has been correctly claimed in accordance with the provisions of this section." Thus, a reading of the above provisions of the law shows that an assessee for being entitled to deduction Under Section 80HHC must be engaged in at least sale of any goods or merchandise. In the instant case, it is observed that the only income of the assessee firm in the years under consideration is by way of superior title over the share of income otherwise receivable by Sri Radhakishan Jallan from the partnership firm styled M/s. Rock International. Thus, the assessee firm has not sold any goods during the years under consideration. It was also the argument of the learned A/R of the assessee that the character of the above income of the assessee is same as the character of the income earned by M/s. Rock International and as the income has been held as exempt in the hands of M/s. Rock International, the income in hands of the assessee firm also ought to be held as an exempt income. For this reliance was placed on the decision in the case of CIT v. Gopal Krishna M. Singre and Ors. 214 ITR 443 (Bom) & in the case of CIT v. Brij Raman Das 118 ITR 397 (All) (wrongly referred by the assessee as CIT v. Brijmohan Das, 118 ITR 337). We have gone through the above decisions and find them, as an authority for the proposition that the head of income of the share income allocated in the hands of the partner will remain same as in the hands of the partnership firm.
In the instant case, the head of income has been taken as business income by the AO and hence, the same is not in dispute. Further, the claim of the assessee that as in those case deduction were allowed Under Section 80L to the partners and hence, deduction Under Section 80HHC should have been allowed to the assessee firm, is found unacceptable and decisions relied upon are found distinguishable. To appreciate the above position, the relevant portion of Section 80L is extracted as under: "80L. (1) Where the gross total income of an assessee, being...includes any income by way of - (i) interest......... ".
Thus, deduction Under Section 80L is allowed if the specified interest forms the part of the gross total income of the assessee. In contrast to this, for being entitled for deduction Under Section 80HHC it is not sufficient that the assessee's gross total income includes the income in the nature of export profit but it is a condition precedent of that section that the assessee should be engaged in sale of goods or merchandise either directly outside India or to an Export House or Trading House. For Section 80HHC not the nature of income but the source of income is relevant. It is also observed that deduction Under Section 80L is not admissible in the hands of a partnership firm whereas deduction Under Section 80HHC is available to a partnership firm on satisfying the conditions prescribed in that section. Still further, the assessee firm is not a partner in the firm M/s. Rock International.
7. In view of the above, in our considered opinion, the CIT (A) was not justified in holding that the entire income of the assessee firm is exempt from the levy of tax. Hence, we set aside the order of the CIT (A) and restore back the order of the AO.