Persons belonging to the scheduled tribes are exempt from income tax, but when two brothers of the community enter into a partnership they cannot claim the exemption under Section 10(26) of Income Tax Act, an Appellate Tribunal has ruled.

The Guwahati Bench of the Income Tax Appellate Tribunal (ITAT) has held that the exemption under Section 10(26) of the Income Tax Act has been specifically conferred on members of the Scheduled Tribe residing in the specified area.

The exemption cannot be extended to another separate and distinct “person”, that is, the partnership firm, though such a firm consists of the individual partners.

Tax experts said the provisions need to be revisited as it discourages the entrepreneurial spirit among the deprived sections of population. If something is good individually, then how is it bad collectively in law.

The assessee partnership firm was running a hotel business under the name and style of M/s Hotel Centre Point at Shillong. It consisted of two partners, and both the partners were brothers and belonged to the Khasis tribe, which is enlisted as a Scheduled Tribe in the State of Meghalaya and is covered under Clause (25) of Article 366 of the Constitution of India.

The assessee claimed that because partners are individually exempt under section 10(26), a partnership firm comprised of those same partners should also be exempt. However, the Assessing Officer (AO) rejected the assessee’s claim.

Aggrieved by the order, the assessee preferred an appeal to the Commissioners of Income Tax (Appeals) and it allowed the claim of exemption under section 10(26) and the matter reached before the Tribunal.

The Tribunal held that a partnership firm is considered a separate entity for tax purposes under the Income Tax Act. It is subject to its own set of rules regarding tax rates, deductions, and allowances, distinct from those applicable to individuals.

Section 5 of the Indian Partnership Act clarifies that a partnership is formed through a contract between partners, not by their status as members of a Hindu Undivided Family or the same family. Therefore, even if the partners of a firm are siblings or spouses, their relationship does not impact the firm’s status or tax liability.