Rajasthan AAR: Partnership Firm and Partners’ Income Tax Payments Cannot Be Clubbed to Claim Exemption Under Rule 86B GST
Pranav B Prem
The Rajasthan Authority for Advance Ruling (AAR) has held that the income tax paid by a partnership firm and its partners cannot be aggregated to claim exemption under Rule 86B of the Central Goods and Services Tax (CGST) Rules, 2017. The Bench of Utkarsha (Joint Commissioner, Central Tax) and Dr. Akhedan Charan (Additional Commissioner, State Tax) observed that the exemption under Rule 86B(a) was not applicable to the applicant. Consequently, the restrictions under Rule 86B on the use of the amount available in the electronic credit ledger were held to be applicable.
Background
The applicant, M/s Aadinath Agro Industries, a partnership firm engaged in spice processing, is registered under GST. The firm’s monthly taxable turnover exceeded ₹50 lakh, making it subject to the restrictions under Rule 86B. Under Rule 86B, a registered person cannot use more than 99% of the Input Tax Credit (ITC) available in the electronic credit ledger for discharging output tax liability if the taxable supply in a month exceeds ₹50 lakh. However, the proviso to the rule provides certain exemptions, including where the proprietor, Karta, Managing Director, or any two partners have paid income tax exceeding ₹1 lakh in each of the last two financial years.
The applicant argued that while no single partner had individually paid more than ₹1 lakh, the firm and its partners together had paid income tax exceeding ₹1 lakh, which should be considered sufficient to qualify for the exemption. They submitted that the tax compliance of a partnership firm and its partners is financially interdependent and should be viewed collectively.
Submissions of the Applicant
The applicant contended that denying exemption on the ground that no individual partner had paid more than ₹1 lakh contradicted the economic reality of partnership taxation. It was argued that although a firm and its partners are distinct under the Income Tax Act, 1961, they operate as a single economic unit, and therefore, cumulative tax compliance should be considered.
The applicant also emphasized that Rule 86B was introduced to curb fraudulent ITC claims and bogus invoicing and was not intended to penalize genuine tax-compliant businesses. According to the applicant, their cumulative tax payments reflected genuine compliance, and imposing cash payment restrictions despite such compliance adversely affected working capital.
Findings of the AAR
After examining the facts, the Authority noted that during FY 2022–23 and FY 2023–24, neither the firm nor any individual partner had paid income tax exceeding ₹1 lakh. The cumulative tax payment of the firm and its partners was above ₹1 lakh, but the AAR held that there was no provision under Rule 86B to permit clubbing of income tax payments of the firm and its partners for the purpose of exemption. The AAR referred to the proviso of Rule 86B, which explicitly states that the restriction does not apply if “any of its two partners” have paid income tax exceeding ₹1 lakh in each of the last two financial years. Since this condition was not satisfied, the applicant could not claim exemption.
The AAR concluded that:
The total income tax paid by the firm and its partners together cannot be considered for exemption under Rule 86B.
If no individual partner has paid more than ₹1 lakh in tax, the exemption does not apply even if the cumulative amount exceeds ₹1 lakh.
Accordingly, the AAR ruled that the exemption under Rule 86B is not applicable to M/s Aadinath Agro Industries. The firm must discharge its output tax liability by paying at least 1% in cash, using the electronic credit ledger only up to 99% of the total tax liability for each month.
Applicant’s Name: Aadinath Agro Industries
