Case Law Details
Govind Kumar Vs ACIT (Karnataka High Court)
Partner’s Remuneration Cannot Be Taxed Ignoring s.28(v) r/w s.40(b); Karnataka HC Sets Aside Assessment for Non-Consideration of Statutory Provisions
The Karnataka High Court, in Govind Kumar vs. ACIT, Central Circle-1(1) & Anr. (W.P. No. 10759 of 2025, order dated 01-Dec-2025), set aside the assessment order u/s 143(3), consequential demand notice u/s 156, and penalty notice u/s 274 r/w s.270A for AY 2023-24, holding that the Assessing Officer failed to properly consider the statutory scheme of s.28(v) r/w s.40(b) while taxing partner’s remuneration.
The Court noted that although the Assessing Officer had recorded the Assessee’s specific contention—that remuneration received from an LLP, already subjected to disallowance at the firm level u/s 40(b), cannot again be taxed in the partner’s hands leading to double taxation—the impugned order did not examine or apply these provisions while finalising the assessment. Such non-consideration of relevant statutory provisions was held to vitiate the assessment.
Accordingly, the matter was remanded for fresh consideration, with directions to afford reasonable opportunity to the Assessee and to decide the issue in accordance with law, specifically bearing in mind s.28(v) read with s.40(b). Liberty was reserved to the Assessee to file additional pleadings and documents.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
In this petition, the petitioner seeks the following reliefs:
“(a) quashing the order dated 22.03.2025 bearing No.ITBA/AST/S/143(3)/2024-25/ 1074872405(1) (Annexure-G) passed by the 1st Respondent under section 143(3) of the Act, for the assessment year 2023-24;
(b) quashing the demand notice dated. 22.03.2025 bearing No.ITBA/AST/S/156/2024-25/ 1074872699(1) (Annexure-H) issued by the 1st Respondent under section 156 of the Act for the assessment year 2023-24.
(c) quashing of the notice dated 22.03.2025 bearing No.ITBA/PNL/S/270A/2024-25/ 1074872481(1) (Annexure-J)) issued by the 1st Respondent under Section 274 read with Section 270A of the Act for assessment year 2023-24; and
(d) Pass such other or further orders as this Hon’ble Court may deem fit in the facts and circumstances of the case, in the interests of justice and equity.”
2. Heard learned Senior counsel for the petitioner and learned counsel for respondents and perused the material on record.
3. A perusal of the material on record will indicate that the petitioner is a partner of a Limited Liability Partnership Firm (LLP) under the name and style ‘Bitcipher Labs LLP. During the assessment year 2023-2024, the petitioner received remuneration in a sum of ₹1,59,85,800/- as per the terms and conditions of the partnership deed and the resolution passed by the aforesaid Bitcipher LLP approving the remuneration of the petitioner. During the course of scrutiny assessment proceedings for the assessment year 2023-2024, respondent No.1 issued notices dated 23.06.2024 and 21.08.2024 inter alia calling upon the petitioner to furnish details of the sources of income and computation of income along with profit and loss account. The petitioner having filed his submissions on 05.09.2024 along with necessary details, respondent No.1 issued a show cause notice dated 15.02.2025 calling upon the petitioner to show cause as to why variation as proposed should not be made to his total income.
4. It is the grievance of the petitioner that despite filing detailed objections on 24.02.2025 including taking up the contention that by virtue of Section 28(v) r/w Section 40(b) of the Income Tax Act, such a variation is impermissible since the same would amount double taxation, the respondents have proceeded to pass the impugned assessment order which deserves to be set aside.
5. Per contra, learned counsel for the respondents would support the impugned order and submit that there is no merit in the petition and the same is liable to be dismissed.
6. As rightly contented by learned Senior counsel for the petitioner, a perusal of the impugned order will indicate that respondent No.1 has noticed the specific contention urged on behalf of the petitioner regarding Section 40(b) r/w Section 28(v) of the IT Act at paragraph 4.3.3 and paragraph 4.3.4 of the impugned order which reads as:
“4.3.3 That during the year under consideration, the LLP had reported a book loss of Rs.109,54,79,057/- as per the provision of section 40(b) of the Act. Accordingly, as per the provision of section 40(b) of the Act, the firm claimed an expense of Rs.1,50,000/- and disallowed the balance remuneration.
4.3.4 That, the assessee had offered his share of remuneration of Rs.50,000/- to the tax after adjusting the disallowed amount of Rs.1,59,35,800/- as per the provision of section 28(v) of IT Act, 1961.”
7. However while passing the impugned order, the said contention and the relevant statutory provisions have not been considered or appreciated by respondent No.1 and as such, I deem it just and appropriate to set aside the impugned order and remit the matter back to respondent No.1 for reconsideration afresh in accordance with law by issuing certain directions.
8. Accordingly, the following:
ORDER
i) Writ Petition is hereby allowed.
ii) The impugned order dated 22.03.2025 at Annexure-G, impugned demand notice dated 22.03.2025 at Annexure-H and impugned notice dated 22.03.2025 at Annexure-J are hereby set aside.
iii) The matter is remitted back to respondent No.1 for reconsideration afresh in accordance with law.
iv) Petitioner shall appear before respondent No.1 on 01.2026 without awaiting further notice from respondent No.1.
v) Liberty is reserved in favour of the petitioner to file additional pleadings, documents etc. which shall be considered by respondent No.1 bearing in mind the provisions contained in Section 28(v) r/w 40 (b) of the IT Act and after providing sufficient and reasonable opportunity to the petitioner.
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