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CBDT has clarified that ‘total income’ of the firm for s/s. (2A) of section 10 of the Act, includes income which is exempt or deductible under various provisions of the Act. The income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Accordingly, the entire profit credited to the partners’ accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act.
