Mumbai: India's apex authority has been told by the court to step in amid a flurry of orders across the country demanding tax on bonuses and performance-driven remunerations received by partners of large tax, audit, consultancy and other professional partnership firms, including some belonging to Big 4 members.
Those grappling with such orders argue that the Income tax (I-T) department stands on flimsy ground as their firms have already paid tax on such payments.
Nonetheless, tax offices in Delhi, Mumbai, Chennai, Indore, Bhubaneshwar and few other cities have pursued the issue.
A partner with S R Batloi & Co (SRB), the audit arm of EY, and a partner of a Big 4 firm have separately moved the Delhi High Court, challenging the actions of the tax officers.
Staying the tax recovering proceedings on the SRB partner, the court in an order on April 1, 2026 said, "Having regard to the fact that the issue in hands may have larger implications and bearing on various assessees who are partners in different professional firms, we deem it appropriate to direct the Central Board of Direct Taxes (CBDT) to issue a clarification in this regard."
SRB shall share the facts and relevant provisions to the CBDT chairman within a fortnight following which the board shall examine the issue and issue a clarification.
BEYOND PROFIT SHARE
"Lately, High Courts have been reluctant to intervene in cases where taxpayers have an alternative remedy. However, since this issue, involving a question of law, could apply to many taxpayers across India, the court has not only entertained the writ petitions but also granted interim relief.
The issue boils down to a combined reading of a number of provisions but it is very clear that the remuneration paid by a firm (the definition would include an LLP) to a partner would be taxable in the hands of the partner to the extent the same has been allowed as a deduction to the firm," said Nemin Shah, director, EQX Business Consultancy.
Any remuneration over and above that, said Shah, should be treated as akin to share of profit (profit on which the firm would have paid taxes), and should be exempt in the hands of the partner-a position made clearer in the new I-T Act.
The SRB counsel said that several proceedings have been triggered with the I-T department either assessing or reassessing such amounts in the hands of partners despite the fact that firms had offered tax on such amounts.
Besides the share of profits- over which there is no dispute with the tax office-partners receive bonuses which are under the department's lens. Bonus amounts are either equivalent or even higher than the profit share.
Partners say tax officers relied on Section 28(v) of the I-T Act while ignoring the proviso that reduces the taxable income.
"A combined reading of Sections 28(v) and 40(b) of the ITA makes it clear that the amount paid to or received by a partner from a firm is taxable only to the extent such amount is allowable in the hands of the firm. The ITA further provides that where, upon completion of a firm's assessment, any remuneration paid to a partner is found to be disallowable under Section 40(b), the Assessing Officer is empowered to amend the partner's assessment to appropriately adjust the partner's income to the extent of such disallowance. This necessitates a corresponding rectification in the partner's hands. Accordingly, the existing legal position is unambiguous: the same amount cannot be subjected to tax simultaneously in the hands of both the firm and its partners. This position was affirmed in a 2022 tribunal decision involving a law firm," said chartered accountant Ashish Karundia.
Most served with the orders for FY2023-24 had shown earnings as 'exempt income' in I-T returns. Since last year, tax officials have been taking a closer look at large 'exempt incomes' which also include agricultural earnings and retirement benefits.
Those grappling with such orders argue that the Income tax (I-T) department stands on flimsy ground as their firms have already paid tax on such payments.
Nonetheless, tax offices in Delhi, Mumbai, Chennai, Indore, Bhubaneshwar and few other cities have pursued the issue.
A partner with S R Batloi & Co (SRB), the audit arm of EY, and a partner of a Big 4 firm have separately moved the Delhi High Court, challenging the actions of the tax officers.
Staying the tax recovering proceedings on the SRB partner, the court in an order on April 1, 2026 said, "Having regard to the fact that the issue in hands may have larger implications and bearing on various assessees who are partners in different professional firms, we deem it appropriate to direct the Central Board of Direct Taxes (CBDT) to issue a clarification in this regard."
SRB shall share the facts and relevant provisions to the CBDT chairman within a fortnight following which the board shall examine the issue and issue a clarification.
BEYOND PROFIT SHARE
"Lately, High Courts have been reluctant to intervene in cases where taxpayers have an alternative remedy. However, since this issue, involving a question of law, could apply to many taxpayers across India, the court has not only entertained the writ petitions but also granted interim relief.
The issue boils down to a combined reading of a number of provisions but it is very clear that the remuneration paid by a firm (the definition would include an LLP) to a partner would be taxable in the hands of the partner to the extent the same has been allowed as a deduction to the firm," said Nemin Shah, director, EQX Business Consultancy.
Any remuneration over and above that, said Shah, should be treated as akin to share of profit (profit on which the firm would have paid taxes), and should be exempt in the hands of the partner-a position made clearer in the new I-T Act.
The SRB counsel said that several proceedings have been triggered with the I-T department either assessing or reassessing such amounts in the hands of partners despite the fact that firms had offered tax on such amounts.
Besides the share of profits- over which there is no dispute with the tax office-partners receive bonuses which are under the department's lens. Bonus amounts are either equivalent or even higher than the profit share.
Partners say tax officers relied on Section 28(v) of the I-T Act while ignoring the proviso that reduces the taxable income.
"A combined reading of Sections 28(v) and 40(b) of the ITA makes it clear that the amount paid to or received by a partner from a firm is taxable only to the extent such amount is allowable in the hands of the firm. The ITA further provides that where, upon completion of a firm's assessment, any remuneration paid to a partner is found to be disallowable under Section 40(b), the Assessing Officer is empowered to amend the partner's assessment to appropriately adjust the partner's income to the extent of such disallowance. This necessitates a corresponding rectification in the partner's hands. Accordingly, the existing legal position is unambiguous: the same amount cannot be subjected to tax simultaneously in the hands of both the firm and its partners. This position was affirmed in a 2022 tribunal decision involving a law firm," said chartered accountant Ashish Karundia.
Most served with the orders for FY2023-24 had shown earnings as 'exempt income' in I-T returns. Since last year, tax officials have been taking a closer look at large 'exempt incomes' which also include agricultural earnings and retirement benefits.
