Allow ability of remuneration when partnership deed not specify the remuneration payable to each individual working partner but lays down the manner of fixing the remuneration
In a case where the partnership deed does not specify the remuneration payable to each individual working partner but lays down the manner of fixing the remuneration, would the assessee-firm be entitled to deduction in respect of remuneration paid to partners?
CIT Vs. Anil Hardware Store (2010) 323 ITR 0368 (HP) Relevant section: 40(b)(v)
The partnership deed of the assessee firm provided that in case the book profits of the firm are up to Rs. 75,000, then the partners would be entitled to remuneration up to Rs. 50,000 or 90 per cent of the book profits, whichever is more. In respect of the next Rs. 75,000, it is 60 per cent and for the balance book profits, it is 40 per cent. Thereafter, it is further clarified that the book profits shall be computed as defined in section 40(b) of the Income-tax Act, 1961, or any other provision of law as may be applicable for the assessment of the partnership firm. It has also been clarified that in case there is any loss in a particular year, the partners shall not be entitled to any remuneration. Clause 7 of the partnership deed laid down that the remuneration payable to the partners should be credited to the respective accounts at the time of closing the accounting year and clause 5 stated that the partners shall be entitled to equal remuneration.
The High Court held that the manner of fixing the remuneration of the partners has been specified in the partnership deed. In a given year, the partners may decide to invest certain amounts of the profits into other venture and receive less remuneration than that which is permissible under the partnership deed, but there is nothing which debars them from claiming the maximum amount of remuneration payable in terms of the partnership deed. The method of remuneration having been laid down, the assessee- firm is entitled to deduct the remuneration paid to the partners under section 40(b)(v) of the Income-tax Act.
(1) Payment of remuneration to working partners is allowed as deduction if it is authorised by the partnership deed and is subject to the overall ceiling limits specified in section 40(b)(v). The limits for partners’ remuneration under section 40(b)(v) has revised upwards and the differential limits for partners’ remuneration paid by professional firms and non-professional firms have been removed. On the first Rs. 3 lakh of book profit or in case of loss, the limit would be the higher of Rs. 1,50,000 or 90% of book profit and on the balance of book profit, the limit would be 60%.
(2) The CBDT had, vide Circular No. 739 dated 25-3-1996, clarified that no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.
In this case, since the partnership deed lays down the manner of quantifying such remuneration, the same would be allowed as deduction subject to the limits specified in section 40(b)(v).