Deductibility of partners' salaries depends on strict factual proof of employment-like service and bona fide remuneration.

Prior allowance of partners' salaries in an earlier assessment year does not bind the assessing authority in subsequent years; each assessment year requires fresh factual determination, and the prior order does not operate as res judicata. Salaries paid to working partners are deductible only where strict factual proof shows the partner performed services in an employment-like capacity and received bona fide remuneration distinct from profit shares; contractual terms, payment regularity, relation to capital returns and profit share, and indicators of a tax avoidance device are relevant, and absent such proof the payments may be disallowed.

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Issues: (i) Whether an earlier order allowing partners' salaries in a prior assessment operates as res judicata against the Commissioner in a subsequent year; (ii) Whether salaries paid to working partners are allowable deductions as legal expenses under Section 10(2)(9) of the Income-tax Act.

Issue (i): Whether the prior order in a particular assessment year operates as res judicata in a subsequent assessment year.

Analysis: The prior allowance of partners' salaries in a specific assessment year does not bind the assessing authority or his successor in subsequent assessment years; each assessment year requires its own determination based on the facts of that year.

Conclusion: The prior order does not operate as res judicata and does not preclude fresh inquiry in subsequent assessment years.

Issue (ii): Whether salaries paid to working partners are deductible as legal expenses under Section 10(2)(9) of the Income-tax Act.

Analysis: Salaries to partners are not universally inadmissible; deductibility depends on factual determination whether a partner performs services in a capacity truly analogous to an employee and is remunerated irrespective of profit-sharing. Special qualifications, contractual terms, the amount of salary relative to profits and capital returns, and the possibility of the arrangement being a device to avoid tax are relevant. Strict proof is required to establish that payments are bona fide remuneration to partners acting as employees rather than disguised profit distributions.

Conclusion: Salaries to partners may be allowed as deductions if, on facts, the partners are true employees and the payments are bona fide; otherwise they may be disallowed.

Final Conclusion: The authority is to decide afresh for the assessment year in question whether the particular payments to partners are deductible, having regard to the factual indicators of employment status and the risk of tax avoidance.

Ratio Decidendi: Salaries paid to partners are deductible only where, on strict factual proof, the partner is genuinely acting in an employment capacity and remuneration is bona fide and distinct from profit-sharing; mere partnership status does not preclude deductibility but factual proof is essential.

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