Law:

Section:

Section 4 of the Income-tax Act, 1961 - Income - Diversion of, at source by overriding title - Assessee, a partnership firm, made payment to two of its partners to meet their additional expenses of living in metropolitan cities by way of city allowance and claimed deduction thereof on ground that it was incurred for carrying on its business - Whether impugned payment was an application of its income and payment was made by assessee after it had accrued or was earned - Held, yes Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary, etc., paid by firm to any partner - Whether in view of facts under head 'Income - Diversion of, at source by overriding title', impugned payment fell within ambit of expression 'remuneration' occurring in section 40(b) and, thus, could not be allowed as a permissible deduction - Held, yes Facts The assessee, a partnership firm, paid to two of its partners, in pursuance of the provisions of the partnership deed, certain sum to meet their additional expenses of living in two metropolitan cities by way of city allowance and claimed the impugned payment as a deduction. The ITO disallowed the assessee's claim on the ground that it was nothing other than remuneration paid to its partners and, therefore, it could not be allowed as a permissible deduction in view of the express prohibition contained in section 40(5). On appeal, the Tribunal rejected the assessee's claim observing that the impugned payment was not an expenditure incurred for the purpose of carrying on the business of the assessee, but it was an application of its income after it had been earned. On reference: Held In the present case, it could not be said that the impugned payment formed a part of the assessee's expenditure incurred for earning its income. Because, if it were so, there was no reason to treat it differently instead of saying and treating it as a part of the assessee's expenditure incurred at its those two branches at metropolitan cities. In that situation, it would not have been a lump sum payment to those two partners but precisely the extra expenditure incurred at these two branches of which the material particulars would be…

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