Treatment of Interest, Commission

29/07/2020 0 By indiafreenotes

In Board Circular No. 55 of 1941, it was stated that interest charged to a partner on his overdrawn account should not be included in the total income of the firm.

It was further stated that where it appears that the capital borrowed for the purpose of business was partly diverted towards over-drawn account, the correct procedure would be to disallow the proportionate share of the interest payable on this capital in computing the income of the firm.

It has been brought to the Notice of the Board that under the law as it stands it would not be correct to exclude interest received by a firm from its partners while computing the total income of the firm. Whereas the interest paid to partners has to be disallowed in the assessment of the firm under the provisions of section 40(b) of the Income-tax Act, 1961, there is no provision to exclude any portion of the interest of other income received by the firm from its total income. The matter has been examined by the Board and it has been decided that the interest received by a firm from its partners should be assessed as the income of the firm. However, where a firm pays interest to as well as received interest from the same partner, only the net interest can be stated to have been received or paid by the firm, as the case may be and only the net interest should be taken into consideration. This view also finds support in the decision of the Allahabad High Court in the case of Shri Ram Mahadeo Prasad, [1953] 24 I.T.R. 176. In view of the above, the instructions contained in Board’s Circular No. 55 of 1941 may be treated as modified accordingly.


A commission is a fee that a business pays to a salesperson in exchange for his or her services in either facilitating, supervising, or completing a sale. The commission may be based on a flat fee arrangement, or (more commonly) as a percentage of the revenue generated. Less-common commission structures are based on the gross margin or net income generated by a sale; these structures are typically less used, since they are more difficult to calculate. A commission may be earned by an employee or an outside salesperson or entity.

Under the accrual basis of accounting, you should record an expense and an offsetting liability for a commission in the same period as you record the sale generated by the salesperson, and when you can calculate the amount of the commission. This is a debit to the commission expense account and a credit to a commission liability account (which is usually classified as a short-term liability, except for cases where you expect to pay the commission in more than one year).

Under the cash basis of accounting, you should record a commission when it is paid, so there is a credit to the cash account and a debit to the commission expense account.

You can classify the commission expense as part of the cost of goods sold, since it directly relates to the sale of goods or services. It is also acceptable to classify it as part of the expenses of the sales department.

If an employee is receiving a commission, then the company withholds income taxes on the amount of the commission paid to the employee. If the person receiving the commission is not an employee, then that person considers the commission to be revenue, and may pay taxes if there is a resulting profit.