M/s Durga Dass Devki Nandan vs. ITO (HP High Court)

CBDT Circular which specifies that for s. 40(b)(v), the partnership deed should specify the remuneration, is invalid

The assessee, a firm, provided by the partnership deed that its partners would be “working partners within the meaning of s. 40(b)” and “be paid a monthly salary as per the income-tax provisions”. The AO relied CBDT Circular No. 739 dated 25.3.1996 and held that because the deed did not specify the amount of remuneration payable to the partner or lay down the manner of quantifying such remuneration, the deduction was not admissible. This was reversed by the CIT (A). However, the Tribunal upheld the AO on the ground that the agreement did not meet with the requirements of the circular and so deduction of salary paid to the partners was not admissible. On appeal by the assessee, HELD allowing the appeal:

S. 40(b)(v) allows a deduction of payment of remuneration to a working partner if it authorized by the partnership deed and not in excess of the limits. S. 40(b)(v) does not lay-down any condition that the partnership deed should fix the remuneration or the method of quantifying remuneration. Accordingly, CBDT circular No. 739 dated 25.3.1996 which requires that either the amount of remuneration payable to each individual should be fixed in the agreement or the partnership agreement deed should lay down the manner of quantifying such remuneration goes beyond s. 40(b)(v). The CBDT cannot issue a circular which goes against the provisions of the Act. The CBDT can only clarify issues but cannot insert terms and conditions which are not part of the main statute. A partnership deed which provides that the remuneration would be as per the provisions of the Act meaning thereby that the remuneration would not exceed the maximum remuneration provided in the Act is valid and deduction is admissible.