Deductibility of partner expenses: expenses incurred to render services that secure a partner's profit share are deductible against that share.

Where a partner's entitlement to a share of partnership profits is contractual consideration for services, expenditures incurred by the partner to render those services are for the purpose of earning that share and are deductible against the partner's share income. The partnership deed and factual finding that the partner employed a full time manager to perform the services that entitled him to his half share were decisive. The legal test is whether the expense was incurred to produce the service based profit share; if affirmative, deduction under the relevant allowance is available to the partner.

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Issues: Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the claim of the assessee for deduction of salary, commission and travelling expenses paid to Sri Adaikappa Chettiar, from his share income in the firm of M/s. S. K. Pictures, Tirunelveli?

Analysis: The partnership deed expressly provided that the assessee's half share of profits was in consideration of services to be rendered by him; entitlement to the share depended on performance of those services. The factual finding that the assessee engaged Adaikappa Chettiar as his full-time manager to perform the services which entitled him to the share is treated as decisive. Where expenditure is incurred by a partner for the purpose of rendering services that alone entitle him to his share of profits, the expenditure is incurred for the purpose of earning the assessee's share income. The matter is essentially one of fact to be determined by reference to the partnership terms and the nature of the expenditure; if the finding is affirmative, deduction under the relevant provision permitting such allowances is available to the partner.

Conclusion: The claim for deduction of salary, commission and travelling expenses paid to Adaikappa Chettiar is allowable against the assessee's share income; the question is answered against the revenue and in favour of the assessee.

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