Deductibility of partner expenses: payments for services rendered to the firm are firm expenses and not deductible from the partner's share.

Whether a partner may deduct a payment to third parties from his share of firm income is addressed by applying the principle that deductions are allowed only for expenditure incurred wholly and exclusively to earn the partner's share; interest on capital borrowed and invested by the partner is deductible, but payments for services performed for the firm (supervision, custody, purchases, cash handling) are firm expenses and not personal expenses of the partner. The operative effect: such service payments do not reduce the partner's taxable share and the claim is disallowed.

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Issues: Whether the sum of Rs. 2,000 paid by the assessee constitutes a permissible deduction from the assessee's share of income from the firm for the assessment year 1956-57 under any provision of the Income-tax Act.

Analysis: The statutory framework includes Section 23(5), which requires inclusion of a partner's share of the firm's income in his total income, Section 16(1)(b), which treats receipts from the firm (salary, interest, commission or other remuneration together with share of profit) as part of the partner's total income, and Section 10(2), which permits certain deductions in computing profits and gains. Precedent recognises that a partner may, in proper cases, claim deductions necessary to arrive at his true profits and gains and that interest on capital borrowed by a partner for investment in the firm can be deductible. However, where an expenditure is incurred to render services to the firm itself (for example, supervision, custody of cash, purchases, checking stock and credit control) the payment is in reality an expense of the firm and not a personal expenditure incurred by the partner to earn his share. The facts show the payment in question was for services performed for the firm (holding keys, handling cash, supervising purchases and staff), and there was no partnership agreement produced imposing personal managerial duties on the partner that would justify deputation in his personal capacity. The authorities relied upon by the assessee are distinguishable on their facts, and the Supreme Court and High Court precedents permit deductions only where the expenditure is wholly and exclusively for the partner's earning of his share (for example, interest on capital borrowed by the partner and invested in the firm) and not where the payment is effectively for the firm's management.

Conclusion: The payment of Rs. 2,000 is not an allowable deduction from the assessee's share of income; the claim is rejected.

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