Salary and interest to partners is allowable under section 40(b) even in respect of addition of undisclosed profit !

ACIT v. Balakrishna & Co. &Vice-Versa

Decision:    In assessee’s favour.

Facts:

AO alleged that the credit entries in respect of certain project was not shown by assessee in its profit and loss account and estimated the profit at certain rate and made addition of such undisclosed profit. Assessee contended that while estimating the profit, AO did not allow deduction for interest and salary paid to the partners.

Held:

Since as per section 28(v) tax liability of salary and interest paid to the partners in terms of partnership deed, shifts upon the partners and cannot be taken as tax liability of the firm; therefore the applicability of section 28(v) could not be excluded even in when best judgment assessment is made. Further, the partners were working partners and were entitled to salary and interest, as per terms of the deed in accordance with section 40(b), therefore the same should have been allowed while estimating the profit.