Salary Paid to a Partner is Business Income; Expenses Incurred to Earn it are Deductible.

Issue

Whether expenses (like car depreciation) incurred by a partner, which are wholly and exclusively for the purpose of earning remuneration from their partnership firm, can be claimed as a deduction, or if such remuneration is non-deductible “Salary” income.

Facts

The assessee, a chartered accountant, was a partner in a partnership firm.
The assessee received salary/remuneration from the firm and declared it as their income.
Against this income, the assessee claimed business-related expenses, such as depreciation on their motor car.
The Assessing Officer (AO) disallowed these expenses, holding that professional or business expenditure is not allowable as a deduction from the remuneration a partner receives from their firm.
It was noted that the assessee had been claiming, and the department had been allowing, these same expenses in past assessment years.

Decision

The court ruled decisively in favour of the assessee and held that the expenditure was allowable.
It held that as per Section 28(v) of the Income-tax Act, any salary, bonus, or remuneration received by a partner from a firm is to be treated as “Business Income,” not as “Salary.”
Since the income is classified as business income, any expenditure incurred “wholly and exclusively” for the purpose of earning that income (such as depreciation under Section 32 or other expenses under Section 37) is an allowable deduction.
The court also invoked the “rule of consistency,” stating that since the department had allowed these very expenses in the past, they should not be disallowed in the current year when the facts remain the same.

Key Takeaways

Partner’s Salary is “Business Income”: This is a fundamental principle. The remuneration paid to a partner is not “Salary” (TDS under Sec 192 is not applicable); it is an appropriation of profits treated as business income under Section 28(v).
Expenses to Earn Business Income are Deductible: Because a partner’s remuneration is their business income, they are entitled to deduct all legitimate expenses incurred to earn that income, just like any other business or professional.
Principle of Consistency: The tax department cannot arbitrarily change its position on an issue that has been consistently accepted in an assessee’s own case in prior years, provided the facts have not changed.

IN THE ITAT DELHI BENCH ‘SMC’

Atul Kumar Gupta

Income-tax Officer^*

Vikas Awasthy, Judicial Member

IT Appeal No. 3516 (DELHI) of 2025
[Assessment year 2018-19]

OCTOBER 24, 2025

Anil Sharma, CA. for the Appellant. Ms. Sudha Gupta, Sr. DR for the Respondent.

ORDER

1. This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [in short ‘the CIT(A)’] dated 30.03.2025, for Assessment Year 2018-19.

2. Shri Anil Sharma, appearing on behalf of the assessee submitted that the assessee is a Chartered Accountant by profession and is a partner in M/s. A P R A & Associates LLP, Chartered Accountants. During the period relevant to assessment year under appeal, the assessee received remuneration of Rs.24,00,000/- from the aforesaid partnership firm. The assessee claimed expenditure of Rs.6,76,456/- on account of travelling expenses, telephone expenses, depreciation, repair and maintenance, fuel expenses, driver salary, etc. and offered balance salary of Rs.11,62,424/- to tax. The Assessing Officer (AO) disallowed assessee claim of expenditure holding that professional expenditure is not allowable from the remuneration received by the partner. Aggrieved by the assessment order dated 03.03.2021, the assessee carried the issue in appeal before the CIT(A) but remained unsuccessful. Hence, the present appeal.

2.1. The ld. AR of the assessee submitted that the authorities below have erred in not considering the fact that the salary received by a partner of a firm is in the nature of business income. He referred to provisions of section 28(v) of the Income Tax Act,1961(hereinafter referred to as ‘the Act’), to contend that any interest salary, bonus, commission or remuneration by whatever name called received by partner from such firm is in the nature of business income. In support of his contention, he placed reliance on the decision of Hon’ble Supreme Court of India in the case of CIT v. Ramniklal Kothari [1969] 74 ITR 57 (SC). He further placed reliance on the decision of the Tribunal in the case of Anil Gupta v. ITO in ITA No. 5645/Del/2023 for AY 2010-11 decided on 31.01.2014 and the decision of Tribunal in the case of Aman Tandon v. ACIT [IT Appeal No. 3469/Del/2015] for AY 2011-12 decided on 13.12.2019. The ld. AR also referred to the computation of income at page no. 228 to show that the salary received by the assessee from partnership firm has been offered to tax under the head Income from Business and Profession.

3. Per contra, Ms. Sudha Gupta representing the department vehemently defended the impugned order and prayed for dismissing appeal of the assessee.

4. Both sides heard, orders of the authorities below examined. The short issue in the present appeal is; Whether the assessee is eligible to claim business expenditure from salary received by the assessee from partnership firm?

5. The identical has been considered by the Division Bench of the Tribunal in the case of Anil Gupta (supra) wherein the assessee a Chartered Accountant had claimed business expenditure from remuneration received from partnership firm. The AO and the CIT(A) disallowed assessee’s claim of such business expenditure from the salary received from the partnership firm. The Tribunal after considering the facts of the case and the decision of Hon’ble Apex Court in the Ramnik Lal Kothari (supra) allowed assessee’s claim of expenditure.

6. Section 28(v) of the Act, allows any interest salary, bonus, remuneration by whatever name called received by a partner from the partnership firm to be treated as business income. Consequently, any expenditure incurred by the partner exclusively and solely for the purpose of earning such business income is an allowable expenditure u/s. 32 and 37 of the Act. The assessee has been claiming such expenditure from salary received from the partnership firm in the past. The Rule of consistency demands that if the expenditure in the nature of depreciation on motor car, etc. has been allowed to the assessee in the past, the same should be allowable in the subsequent assessment year as well. Thus, in light of the facts and provision of section 28(v) of the Act, I have no hesitation in holding that the expenditure incurred by the assessee wholly and exclusively for the purpose of business and profession is a allowable expenditure.

7. The ld. AR of the assessee submitted that business expenditure from salary was claimed by the other partner of partnership firm for the impugned assessment year. The AO allowed such expenditure in the case of other partner. Taking into consideration entire facts of the case and legal position, appeal of the assessee is allowed.