Partners remuneration disallowed in the hands of the firm u/s 40(b) and its taxation in the hands of the partners  

There are instances where the remuneration paid by the firm is not fully allowed as deduction in the hands of the firm in view of section 40(b) of the Income Tax AAA- 1 961.

For example, a firm has paid a remuneration of Rs. 9 Lakh to its 3 partners @ Rs. 3 Lakh each. Let us assume that the amount allowable in the hands of the firm as deduction u/s 40(b) worked out to Rs. 8.10 Lakh (i.e., Rs, 2.70 Lakh each).

Now, the question arises as to the taxability in the hands of the firm as well as in the hands of the partner.

It may be noted that in the hands of the firm, deduction towards remuneration will be available on the basis of section 40(b) only. It means deduction will be available only of Rs. 8.10 Lakh and not Rs. 9 Lakh as debited to the P & L A/c.

In the hands of the firm, partners would be liable to pay the tax on remuneration of Rs. 2.70 Lakh and not on Rs. 3 Lakh. It may be noted that section 28 deals with taxation of income under the head “Income from Business & Profession”. Section 28(v) reads as under:

Profits and gains of business or profession.

28. The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,—

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year ;

(ii)………………

(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm :

Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted ;

In short, what is allowed as deduction in the hands of the firm is only taxable in the hand so the partner. In the case of firm, deduction was allowed at Rs. 2.70 Lakh per partner. So, partner is liable to pay tax on Rs. 2.70 Lakh and not Rs. 3 Lakh as paid by the firm. The taxation in the hands of the partner is governed  by section 28 and so partners are not liable to pay tax on the basis of Rs. 3 Lakh received but only on the basis of Rs. 2.70 Lakh allowed as deduction to the firm.