36. Shyam, a partner of a firm consists of Madhu, a partnership officer’s two sons and a daughter with his share in the main partnership. Shyam is separated from his wife and is paying maintenance to her. What is his tax liability on the income earned from the main partnership and the amount?

1. Facts of the Case

Shyam is a partner in a partnership firm.
He constitutes another sub-partnership with:
- Two sons and a daughter of Mr. Madhu, a partnership officer.
Shyam’s share in the main partnership firm is the subject of this sub-partnership.
Shyam is separated from his wife (not divorced), and he is paying regular maintenance to her.
The query involves determining:
- Whether the income from the main firm is taxable in Shyam’s hands or the sub-partnership.
- Whether any deduction or tax relief is available for the maintenance payments made to his wife.

Is Shyam individually taxable on his share of profit from the main partnership firm?
Does the creation of a sub-partnership with Madhu’s children affect his taxability?
Can maintenance paid to a separated wife be claimed as a deduction from taxable income?
What is the final tax liability of Shyam in respect of the income earned?

As per Section 10(2A) of the Income Tax Act: “Share of profit received by a partner from a firm which is separately assessed to tax under the Income Tax Act shall be exempt from tax in the hands of the partner.”
Therefore, Shyam’s share of profit from the main firm is not taxable again in his hands if the firm is assessed as such.

Implication: Profit share is exempt, but interest or remuneration received from the firm (if any) is taxable under Section 28(v).

In the case of R. Dhandayuthapani v. CIT (1978) and CIT v. Bagyalakshmi & Co. (1965): If a partner creates a sub-partnership, the income is diverted at source, and tax liability arises in the hands of the sub-partnership, not the original partner.

Therefore, if the sub-partnership is genuine and recognized:

The income from the main firm will be assessed in the hands of the sub-partnership.
Shyam is not individually liable to tax on that income.

Maintenance paid to a spouse (if not under divorce) is not deductible under the Act unless there is a court decree.
If the payment is under a legal obligation (as per separation agreement or court order), it is treated as application of income, and not deductible under any specific section.
On the other hand, the wife is not taxed on maintenance received if it is not a professional or income-based transaction (as per CBDT clarification and several rulings).

No deduction is available under Section 80 or business expenditure sections for maintenance payments to a spouse.

Based on the above facts and law:

Shyam’s share of profit from the main partnership firm is exempt under Section 10(2A).
If a valid and genuine sub-partnership is formed with Madhu’s sons and daughter, the income is considered to be diverted at source, and the sub-partnership will be taxed.
If there is no valid sub-partnership agreement, then the income remains assessable in Shyam’s individual hands.
The maintenance paid to his separated wife is not allowable as a deduction, but it also does not affect the computation of taxable income; it is a post-tax application of income.