1968 (11) TMI 12 - HC - Income Tax

Assessee, a partner of a firm claimed salary and travelling allowance paid to A, who assisted him in the work, which the assessee was to do under the terms of the partnership, as deduction - Expenditure was incurred by the assessee for earning a half share of the profits of the firm - so it is allowable as deduction form his share income

Summary

Issues:
- Deduction of salary, commission, and traveling expenses from share income in a partnership firm.

Analysis:
The judgment pertains to a reference regarding the allowance of deduction for salary, commission, and traveling expenses paid to an individual from his share income in a partnership firm. The partnership deed outlined the roles and responsibilities of the partners, specifying that one partner would operate bank accounts and have overall management control, while the other partner would handle production-related tasks. The assessee engaged a full-time manager, for whom he paid salary and traveling expenses. The Income-tax officer initially rejected the deduction claim, stating that the share income had already considered allowable expenses. However, the Appellate Assistant Commissioner and the Tribunal disagreed, leading to the initiation of the reference by the Commissioner of Income-tax.

The court referred to the case of Basantlal Gupta v. Commissioner of Income-tax, which established that deductions under section 10(2) of the Income-tax Act could be made from a partner's share income in a firm, provided the expenditure was incurred for earning that income. The court emphasized that the determination of whether an expense is deductible is a factual inquiry, dependent on whether the expenditure was for the purpose of earning the income in question. In this case, the partnership deed clearly stated that the share of profits paid to the assessee was in consideration of specific services rendered by him. Therefore, any expenditure incurred in fulfilling those duties, such as the salary and traveling expenses for the manager, was deemed to be for the purpose of the assessee earning his share of profits in the firm.

In conclusion, the court held in favor of the assessee, allowing the deduction of the salary and traveling expenses from his share income in the partnership firm. The judgment underscored the principle that expenses incurred for fulfilling duties outlined in a partnership agreement and necessary for earning a partner's share of profits are deductible. The ruling was against the revenue, with costs awarded to the assessee.