Partner salary deduction barred by statute: firm cannot claim allowance for payments made to partners, regardless of capacity.

Salary paid by a firm to its partners was held not deductible in computing the firm's business income where section 10(4)(b) of the Indian Income-tax Act, 1922 applied. Although such payment might otherwise qualify as business expenditure laid out wholly and exclusively for business, the provision was treated as an absolute statutory bar on any allowance for salary, commission, remuneration or interest paid by a firm to any partner. The fact that the partners were also kartas of their Hindu undivided families did not alter the position, because the partner's capacity was irrelevant to the firm's deduction claim. A contractual agreement for remuneration could not override the prohibition.

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Issues: Whether salary paid by a firm to its partners, under a written agreement, was deductible in computing the firm's business income despite the prohibition in section 10(4)(b) of the Indian Income-tax Act, 1922, where the partners were also kartas of their respective Hindu undivided families.

Analysis: The salary claim could otherwise fall within the general deduction provision for expenditure laid out wholly and exclusively for business, but section 10(4)(b) enacted a specific restriction against any allowance in respect of payment by way of salary, commission, remuneration or interest made by a firm to any partner. The provision was construed as an absolute bar operating once the payment was made to a partner, irrespective of the capacity in which the partner received it. The distinction between a partner acting as an individual and as karta of a Hindu undivided family was held to be irrelevant for the firm's deduction claim. The contractual arrangement and the contention that the remuneration represented services rendered in an individual capacity could not override the statutory prohibition.

Conclusion: The salary payments were not allowable as a deduction in the hands of the firm and the question was answered against the assessee and in favour of the Revenue.

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