Case Law Details
Ratilal & Sons Vs ITO (ITAT Mumbai)
For invoking provisions of section 40A(3) of the Act, following conditions need to be cumulatively satisfied:- (i) there should be an expenditure; (ii) expenditure should be in mode other than prescribed by the section; and (iii) amount of expenditure should be more than Rs. 20,000. As stated in the earlier portion of this order, the remuneration paid to partner is share of profit of the firm and it retains the same character in the hands of the partner and taxable as such. It is not in the nature of salary paid by the employer to an employee, deduction of which can be claimed as an expenditure by the employer. The Hon’ble Jurisdictional High Court in S. Magnus v/s CIT: [1958] 33 ITR 538 observed as under:
“Lindley in his famous treatise on the Law of Partnership, 11th edition, at page 154, states: “In point of law, a partner cannot be employed by his firm for a man cannot be his own employer.”
Thus, we are of the view that being a share of profit, remuneration paid to partner will not fall within the category of ‘expenditure’ as normally considered and accordingly even if paid in cash above the threshold under section 40A(3) of the Act, provided the conditions of section 40(b) of the Act are not applicable, shall be allowed as deduction while computing the income under the head ‘Profits and gains of business or profession’.
Our aforesaid conclusion is also supported by accounting treatment of remuneration paid to the partner by the firm. As the salaries paid to partners is an appropriation of profit rather than charge, so it is debited to ‘profit and loss appropriation account’ and shall be credited to respective partners’ capital / current accounts.
Please become a Premium member. If you are already a Premium member, login here to access the full content.
