Partner’s Remuneration and its Tax Treatment

Remuneration, Salary, Bonus, Commission, Etc. Paid By A Partnership Firm To A Partner Are Taxed As "Profits And Gains Of Business Or Profession" Under The Income Tax Act 1961 (A Partnership Firm Is Taxed As A Corporation). Therefore, Remuneration To A Partner Is Considered Business Income And Not Salary. This Classification Can Have An Important Impact. If Partner Remuneration Is Classified As Business Income Then According To General Business Expense Rules All Expenses Directly Related To This Income May Be Deducted From Taxable Income. These Expenses Include Depreciation And All Other Business Expenses As Specified In Sections 32 And 37, Respectively, Of The Income Tax Act. Nevertheless, Income Tax Department has Historically Denied Deductions For Such Expenses, Especially For So-Called "Personal Expenses" Such As Car Maintenance And Travel, Treating Them Like Salary And Consequently, Non-Deductible Personal Incomes.

What the Delhi ITAT Held in Atul Kumar Gupta vs. ITO (24 Oct 2025)

In the recent decision, the Delhi ITAT revisited the issue for AY 2018‑19. Facts:

• The assessee (partner) received ₹ 24,00,000 as “remuneration” from his CA firm in that year.
• He claimed business expenses of ₹ 6,76,456 — for traveling, telephone, car depreciation, fuel, driver salary, repair & maintenance, etc. — and offered only the balance as taxable.
• The AO (Assessing Officer) had disallowed the deduction claiming that such expenditure cannot be claimed against partner remuneration. The CIT(A) upheld the disallowance.

However, the ITAT in appeal allowed the claim. Key observations:

• Since remuneration to a partner is chargeable under Section 28(v) as business income, it should be treated as business/professional income — not salary.
• Therefore, expenditure incurred wholly and exclusively for earning that business income (remuneration) is allowable under general provisions (Sections 32/37).
• The Tribunal invoked the “rule of consistency” — noting that the assessee had claimed similar deductions in the past, and revenue had allowed them. Denying them now without change in facts would be inconsistent.
• As a result, the claim of ₹ 6,76,456 was accepted, reducing the taxable income accordingly.

Conclusion of ITAT: Partner’s remuneration = business income; valid business/professional expenses incurred for earning that income are deductible.

Legal Basis & Precedents Supporting This View

1. Section 28(v): Statutory provision — remuneration/ salary/bonus etc. received by a partner from firm is to be taxed under “Profits & Gains of Business or Profession.”
2. Precedent Case: CIT v. Ramniklal Kothari (Supreme Court) — Court had held that income (salary/commission etc.) received by a partner from firm is business income, not salary, allowing for business‑style treatment. This case underpins the reasoning; the ITAT in the present case relied on it.
3. Earlier Tribunal Decisions — Prior rulings (e.g. Anil Gupta v. ITO; Aman Tandon v. ACIT) had similarly allowed business expenses against partner remuneration.
4. Rule of Consistency — Once a particular treatment (allowing expenses) has been accepted by revenue earlier, consistent treatment should be maintained, unless there is change in facts or law.

What This Means for Practitioners and Partners — Practical Implications

Given this ruling, here’s how partners / professionals in India (especially working with partnership firms) should view remuneration & expenses:

• Partners’ remuneration should be offered as business/professional income, not salary — giving scope for business‑style deductions.
• Expenses “wholly and exclusively” incurred for the purpose of earning remuneration (e.g. travel, vehicle – if used for professional work, vehicle depreciation, maintenance, telephone, driver, etc.) are potentially deductible under Sections 32/37.
• Maintain robust documentation: bills/invoices, usage records (especially for shared assets like vehicles), proof of expenses being for business — to satisfy “wholly and exclusively” test.
• Use consistency as argument if similar expenditures have been claimed in earlier years and accepted.
• For the firm: Under Section 40(b), remuneration paid to partners must satisfy conditions (authorized by deed, within limits) to be deductible at firm level. But once paid/ taxed to partner, partner’s claim of deduction is separate.

What to Watch Out For — Limitations and Cautions

•   The expense must truly be “wholly and exclusively” for earning business income. Personal expenses will be rejected. If the payment to a partner was not authorized by the firm's deed or exceeded the limits set by Section 40(b), then the firm might lose the claims or deductions, which could have further consequences. Each case depends on the facts.
• For example, if a vehicle is used partly for personal use, the expense claims might be reduced or denied. Although the ITAT has approved deductions, the revenue might dispute them. This makes compliance and documentation very important.  

Conclusion: Why the Atul Kumar Gupta Decision Is Significant

The 24 Oct 2025 decision by Delhi ITAT in Atul Kumar Gupta vs. ITO consolidates and reaffirms a vital principle: partner remuneration is business income, not salary — and accordingly, business‑related expenses incurred to earn that income are deductible, subject to law.

This represents favourable jurisprudence for partners in firms allowing them to offset real expenses incurred in earning that income, reducing tax burden in a legally sound manner.

Given the consistent statutory basis (Section 28(v)), Supreme Court precedent, and now fresh Tribunal affirmation, this position should be considered robust — though as always, correct record‑keeping and compliance remain essential.

Let us know if any further clarification on any aspect of the process!