GST Vidhi | GST Advance Ruling

Rule 86B Under GST (Rajasthan AAR Ruling) – Cumulative Income Tax of Firm and Partners Not Eligible for Rule 86B Exemption

Introduction: In a critical interpretation of Rule 86B of the CGST Rules, the Rajasthan Authority for Advance Ruling (AAR) has ruled that the cumulative income tax paid by a partnership firm and its partners cannot be clubbed for the purpose of claiming exemption from the restrictions imposed by Rule 86B. The ruling came in the case of M/s Aadinath Agro Industries, a spice processing firm with monthly taxable turnover exceeding ₹50 lakhs.

Case Details

• Applicant: M/s Aadinath Agro Industries
• AAR Order No.: RAJ/AAR/2025-26/53
• Date of Ruling: 23rd May 2025
• Authority: Rajasthan AAR

Issues Raised by the Applicant

The applicant sought an advance ruling on the following questions:

1.    Whether the total income tax paid by the firm and its partners cumulatively can be considered for the exemption under Rule 86B?

2.    If no individual partner paid over ₹1 lakh in income tax, but the firm and partners together paid more than ₹1 lakh, would that qualify for exemption under Rule 86B?

Applicant’s Submissions

The applicant contended that:

• The firm and its partners are financially interdependent and operate as a single economic unit.
• The total income tax paid collectively exceeds ₹1 lakh across the last two financial years.
• The interpretation of Rule 86B should focus on substance over form, and the exemption should be granted based on collective tax credibility.
• Section 40(b) of the Income Tax Act already recognizes partner remuneration and interest on capital as individually taxable.
• The restriction imposed by Rule 86B affects working capital and creates unnecessary hardship for genuine, tax-compliant businesses.
• The rule should be interpreted liberally in line with its intent — to curb fraud, not burden legitimate taxpayers.

Legal Background – Rule 86B

Rule 86B restricts the use of ITC to discharge output tax liability beyond 99% if taxable turnover exceeds ₹50 lakh in a month.

Exemption Clause (Clause a):

The restriction does not apply if:

“The person or the proprietor or Karta or the Managing Director or any of its two partners… have paid more than ₹1 lakh as income tax under the Income-tax Act, 1961 in each of the last two financial years…”

Authority’s Observations

• The applicant admitted that no individual partner or the firm has paid ₹1 lakh or more in income tax in each of the last two financial years.
• The combined amount of income tax paid by the firm and partners was above ₹1 lakh (FY 2022–23 and FY 2023–24), but individually no entity crossed the ₹1 lakh threshold.
• The wording of Rule 86B is clear and unambiguous — it requires any of two partners or specified persons to individually meet the income tax threshold.
• There is no legal basis to permit cumulative computation for exemption under Rule 86B.
• A partnership firm and its partners are distinct persons for income tax purposes under Indian law.

Final Ruling

Thus, the restriction under Rule 86B applies to M/s Aadinath Agro Industries, and they must discharge at least 1% of output tax liability in cash, even if sufficient ITC is available.

Conclusion

The Rajasthan AAR has made it clear that Rule 86B exemption is only available when specified individuals (not in aggregate) meet the income tax criteria. This judgment underscores the importance of clear income tax disclosures by firms and their partners if they wish to avail themselves of cash flow flexibility under GST.

Disclaimer: All the Information is based on the notification, circular advisory and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.

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