Consultancy Fees to doctors from firm - treatment

[Raghavendar]

Dear Experts,

A partnership firm (all the partners are doctors) runs a hospital, and paid consultancy fee to partners for their services in the hospital; this consultancy fee is paid apart from allowable remuneration under the income tax act. Is this allowed in the income tax act?

Please refer to any case law, if possible.

Thanks in advance

[Charu Tyagi]

Consultancy fee as a practicing doctor and remuneration as per partnership deed is allowable and tenable as per law

[Padmanathan KV]

The consultancy fee and remuneration both put together will considered for limit under section 40(b) of IT Act.

In my opinion, the consultancy will also be covered under "remuneration" in section 40(b).

You may also refer to COMMISSIONER OF INCOME-TAX VERSUS PACKWELL (KARNATAKA) INDUSTRIES 2003 (11) TMI 36 - MADRAS High Court.

[Padmanathan KV]

In continuation,

Just reproducing a very important para from above judgement:-

On principle as well, it is not possible to accept the argument that the statutory prohibition is to be ignored or diluted by regarding a partner to whom remuneration is paid as a person who besides being a partner is something more or something different when he deals with the firm. A partner in a firm is very much a partner and it is that status which defines his rights and also imposes on him the obligation to render all the services that he is capable of for the advancement of the objects of the firm. Such a person cannot seek to avoid the effect of the prohibition made in the statute by describing himself as an expert. Any expertise that he may possess is required to be made available to the firm as a partner and even if remuneration therefor is permissible in terms of the partnership deed, nevertheless, having regard to the statutory provision which prevailed until the law was amended in 1992, payment so made cannot be regarded as being items of expenditure so far as the firm is concerned. The question is answered in favour of the Revenue and against the assessee.

AI Summary

Treatment of consultancy fees to partners: such payments are treated with partner remuneration limits and tax restrictiveness.
A partnership of doctors paid consultancy fees to partner-doctors in addition to remuneration; while one view treats such consultancy as separate professional earnings, the prevailing judicial reasoning treats consultancy fees and remuneration together under the statutory ceiling on partner payments and holds that partners cannot be characterised as external experts to avoid statutory restrictions on firm expenditure.