Sood Brij & Associates vs. CIT (Delhi High Court)

DATE: (Date of pronouncement)
DATE: November 9, 2011 (Date of publication)

Click here to download the judgement (sood_brij_40_b_v_partners_remuneration.pdf)

S. 40(b)(v): Partnership Deed must quantify or lay down the manner of quantifying remuneration to partners

The assessee, a firm of Chartered Accountants, provided by its partnership deed that the profits would be divided equally. By a supplementary deed of 1992 it was agreed that the working partners would be paid such remuneration as may be “mutually agreed upon” subject to the provisions of the Act. It was also specified that the total remuneration payable to the working partners would be an amount permissible as remuneration to the working partners under the Act. The AO, CIT (A) & Tribunal held that the deed did not satisfy the conditions of s. 40(b)(v) and deduction was not admissible. On appeal to the High Court, HELD dismissing the appeal:

(i) S. 40(b) (i) to (v) which prescribe the conditions for deduction of remuneration paid to a partner require that the payment should be authorized by, and be “in accordance with the terms of the partnership deed“. This mandates that the quantum of remuneration or the manner of computing the quantum of remuneration should be stipulated in the partnership deed and should not be left undetermined, undecided or to be determined or decided on a future date;

(ii) On facts, while the deed authorized payment of remuneration to the partners, it did not quantify the same or prescribe any method or manner to calculate and compute the remuneration. Clause 1 of the supplementary deed simply stated that the remuneration payable would be “mutually agreed“. Even clause 2 which stated that the total remuneration payable to the working partners shall be the permissible amount read with the clause that stated that profits would be divided equally did not satisfy the requirement of s. 40(b)(v) because it also did not quantify or lay down the manner of quantifying the total remuneration payable to the partners (Anil Hardware Store 323 ITR 368 (HP) distinguished).

Note: Contrast with M/s Durga Dass Devki Nandan vs. ITO (HP High Court) where it was held (after striking down CBDT Circular No. 739 dated 25.3.1996) that a provision in the deed that “remuneration would be as per the Act” was sufficient for s. 40(b)(v)

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  1. […] has been taken in Durga Dass Devki Nandan 241 CTR 180 (HP) while a contrary view has been taken in Sood Brij & Associates & Madeena Constructions 134 ITD 1 […]

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