Section 326
Section 326: consequence of not complying with Section 325
Section 326 sets out what happens when a firm fails to meet the documentation conditions in Section 325 for being assessed as a firm - the firm loses its deduction for payments to partners, and correspondingly, the partners don't get taxed on those payments either.
The consequence
Irrespective of any other provision of the Act, where a firm does not comply with the provisions of section 325 for any tax year: no deduction is allowed, in computing its income chargeable under "Profits and gains of business or profession", for any payment of interest, salary, bonus, commission or remuneration (by whatever name called) made by the firm to a partner; and such interest, salary, bonus, commission or remuneration is not chargeable to income-tax under section 26(2)(g) in the hands of the firm's partners.
Frequently asked questions
What happens to a firm's deduction for partner salary or interest if it fails Section 325's conditions?
The deduction is disallowed entirely under Section 326(a) - the firm cannot deduct interest, salary, bonus, commission or remuneration paid to partners.
If the firm loses the deduction, do the partners still get taxed on that income?
No - Section 326(b) keeps that same interest, salary, bonus, commission or remuneration out of the partners' taxable income under section 26(2)(g), since the firm never got a deduction for it.
Related sections
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Get help with partnership firm complianceLast updated 9 September 2026