Remuneration to partners expense or appropriation

Originally posted by :k chakraborty territorial io
	Do i need to show Remuneration paid to partner by firm as expense in the profit and loss statement? We show remumeration as an appropriation in the profit and loss appropriation statement. Which treatment is correct from the point of view of ITR and Accounting Standard applicable to non-corporate level IV entity?

Hi, 

As per the Accounting Standards (AS) applicable to non-corporate level IV entities in India, remuneration paid to a partner of a firm should be treated as an appropriation of profits and not as an expense. Therefore, it should not be shown as an expense in the Profit and Loss Statement.

However, while filing the Income Tax Return (ITR), it's important to make a distinction between the remuneration paid to partners and the share of profits allocated to them. This is because the remuneration paid to partners is taxable as a deduction from profits, while the share of profits allocated to partners is taxed as their income.

Therefore, the remuneration paid to partners should be shown separately in the ITR under the head "Salaries and Wages" and should be claimed as a deduction from profits, subject to the limits prescribed by the Income Tax Act. The share of profits allocated to partners should be shown separately under the head "Income from Business or Profession" in the ITR and should be taxed as per the applicable tax rates.

In ITR 5 there is a specific head ( sl. no. 46 of PART A P&L ) to show remuneration paid to partners, But there is also a head under schedule BP to show any other amount allowable as deduction ( sl. no. 31). so i have two options either to show remuneration in P&L  or in Schedule BP. My doubt is whether i should disclose values in PART A P&L as per  P& L statement prepared in accordance with ICAI standards or should i put values in PART A P&L in the given format( in itr) only, deviating from P&L statement prepared in accordance with ICAI guidelines.

Also note  instructions for ITR 5 says " The reported figures of the profit and loss account should match with the audited profit and loss account, in case the accounts were required to be audited" , so should i conclude PART A P&L should be as per P&L prepared following icai guidelines? if so i should not show Partners remuneration in PART A P&L , as the same is not an item in P&L as per ICAI. 

please give your input.

Both views exist; the answer differs between accounting and tax:

• Accounting (non-corporate entities): remuneration and interest to partners are appropriations of profit under the partnership deed (Sec 13, Partnership Act). Traditionally they are shown in the P&L Appropriation Account. The ICAI's financial statement formats for non-corporate entities (2023) also allow showing them as an expense, if the deed provides for it and it is disclosed.

• Income-tax: the firm is a separate assessee. Remuneration and interest are deductible within Sec 40(b) limits (interest up to 12%; remuneration on the book-profit slab, minimum Rs 3 lakh from AY 2025-26). In ITR-5 they are shown in the P&L (Part A-P&L, partners' remuneration line), and Schedule BP adds back any excess over Sec 40(b).

• So the presentation in the books does not affect the deduction, as long as it is authorised by the deed and within limits.

• TDS: from 1 April 2025, Sec 194T requires 10% TDS on payments to partners above Rs 20,000 a year (from 1 April 2026, Sec 393 of the Income-tax Act, 2025).