An HUF is partner in a firm and remuneration is paid to the Karta of HUF – whether allowable as deduction u/s 40(b) of The Income Tax Act? In whose hands the remuneration is taxable – individual or HUF?  

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An HUF is partner in a firm and remuneration is paid to the Karta of HUF – whether allowable as deduction u/s 40(b) of The Income Tax Act? In whose hands the remuneration is taxable – individual or HUF?    

Though HUF can become partner in partnership firm, generally the remuneration paid to KARTA representing HUF is treated as income of KARTA in his individual capacity for the reason that KARTA is rendering his services in his Individual capacity [Explanation 4 to s. 40(b)].

Though an HUF is a partner but only through an individual, who functions in his personal capacity qua the firm, hence, payment to such a person is allowable as deduction as if paid to an individual partner. [ITO vs. Bharat Enterprises (2006) 103 TTJ 280 (PUNE)]

Useful references:

  • Where assessee-firm paid salary to a partner who was actively engaged in conducting affairs of business of firm, it was to be held that requirement of Explanation 4 to Section 40(b) stood complied with, and, thus, assessee-firm would be entitled to deduction in respect of salary paid to said partner even though he was a partner in representative capacity of HUF.[P. Gautam & Co. vs. JCIT [2011] 14 com 79 (Ahd.)]
  • Salary paid to working partner even though as Karta of HUF, is received as individual and as working partner, hence allowable as deduction while computing income of firm.[CIT vs. Jugal Kishor & Sons [2011] 10 com 82 (All.)]
  • It is individuals of HUF who indirectly become partner in firm in which HUF is said to be partner and therefore provisions of Section 40(b) that prohibits deduction of payments of commission to any partner who is not a working partner, in computing income under the head PGBP, will not be applicable. Therefore deduction of any commission payable to any individual of HUF shall be allowable.[CIT v. Central Scientific Instrument Corporation [2010] 1 DTLONLINE 149 (All.)]
  • Business expenditure—Disallowance under s. 40(b)—Salary to partner— HUF partner represented by Karta—Salary paid to Karta is not salary paid to HUF partner and cannot be disallowed under s. 40(b). [A. RAMAKRISHNAIAH & CO. vs.CIT (1994) 74 TAXMAN 0583 (AP)]  Etc.

 

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