By CA Surekha S Ahuja
Introduction: Revisiting the Tax Character of Partner’s Remuneration
The recent decision of the Delhi Bench of the ITAT has once again reaffirmed a principle that often becomes contentious in tax assessments — whether a partner receiving remuneration from a firm can claim deduction of business-related expenses and depreciation incurred in the course of earning such income.
The Tribunal has held that remuneration received by a partner from the firm is taxable as business income under Section 28(v) of the Income-tax Act, 1961, and consequently, any expenditure incurred wholly and exclusively for earning such income — including depreciation on assets used for professional purposes — is allowable under Sections 32 and 37.
The ruling assumes significance especially for professionals and partners in CA, legal, and consultancy firms, where the demarcation between personal professional infrastructure and firm-level income is often blurred.
Statutory Framework: Section 28(v) and Allowability of Expenditure
Section 28(v) of the Act specifically brings to tax:
“any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm shall be chargeable to income-tax under the head ‘Profits and gains of business or profession’.”
Therefore, such remuneration is not treated as “salary” in the ordinary sense but as business income. Consequently, the computation of income under this head must logically follow the general principles governing business income under Sections 30 to 43D, including deductions under:
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Section 32: Depreciation on assets used for the purposes of business or profession;
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Section 37(1): Any other expenditure (not capital or personal) incurred wholly and exclusively for the purposes of business or profession.
Thus, once remuneration is classified under Section 28(v), the natural corollary is that expenses incurred for earning it — such as office rent, telephone, conveyance, staff, or depreciation on assets used — are legitimate deductions.
Case Law and Tribunal’s Reasoning
In the case under reference, the assessee was a Chartered Accountant, a partner in a professional firm. He received remuneration and interest from the firm and claimed depreciation and other business-related expenses against such income.
The Assessing Officer disallowed the claim on the ground that the remuneration was in the nature of salary, and no further expenses could be allowed, as the firm itself was already claiming business expenditure.
The ITAT, however, reversed the disallowance, holding as follows:
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The remuneration received by a partner is assessable as business income under Section 28(v). Hence, any expenditure incurred wholly and exclusively for earning such income cannot be denied merely because the firm has claimed its own set of expenses.
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The doctrine of consistency also applied — since such claims had been accepted in prior years, the same should not be disturbed in the absence of any change in facts or law.
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The Tribunal placed reliance on settled judicial principles, inter alia:
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CIT v. R.M. Chidambaram Pillai (1977) 106 ITR 292 (SC) – holding that the relationship between a partner and the firm is not of employer–employee.
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ACIT v. Krishna Electrical Industries (2009) 31 SOT 423 (Del) – confirming that partner’s remuneration is taxable as business income, and corresponding expenses are deductible.
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ITO v. Anil Batra (2012) 20 taxmann.com 436 (Delhi – Trib.) – allowing depreciation and professional expenses against partner’s remuneration.
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Analytical Interpretation: Distinguishing Salary from Professional Remuneration
This decision clarifies an often-misunderstood principle — a partner’s remuneration may have the label of “salary,” but not its substance.
The Income-tax Act, through Section 28(v), treats such income as profits and gains of business, precisely because the partner’s contribution (skill, capital, time) is entrepreneurial in nature. Hence, the partner stands on the same footing as a self-employed professional earning income from business activity.
It follows that if a partner maintains independent professional infrastructure, incurs costs for professional upgradation, or owns assets used in rendering services that benefit the firm, such expenditure bears a direct nexus with the earning of remuneration. Disallowance of these expenses would distort the principle of real income.
Key Learnings and Professional Insights
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Statutory Alignment: Once income is brought under Section 28(v), business deduction provisions automatically apply.
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Consistency Principle: When such deductions have been allowed in earlier assessments, any deviation must be backed by a change in facts or law (Radhasoami Satsang v. CIT, 193 ITR 321 (SC)).
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Dual Deduction Concern: Expenses incurred by the firm and those by the partner are distinct — the firm’s expenses relate to its operations, while the partner’s relate to personal professional outlays in earning remuneration.
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Documentation: To substantiate such claims, partners should maintain proper records — invoices, depreciation schedules, and evidence of professional usage.
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Depreciation Justification: Ownership and user test under Section 32 must be fulfilled; assets should be used for the professional purpose of the partner’s engagement with the firm.
Conclusion: Recognition of Professional Reality
The ITAT Delhi ruling (180 taxmann.com 120) restores much-needed clarity to the taxation of professional partners. It affirms that the business nature of partner’s remuneration carries with it the full right to corresponding deductions, just as any other business or professional income.
In essence, a partner’s remuneration is not “salary for employment” but “profit for enterprise.” The recognition of this principle ensures that taxation reflects commercial and professional realities, preserving the equity and intent of Section 28(v).
