Our partnership deed says the partners will be paid such salary as they may decide at the end of the year. The AO has disallowed the whole remuneration relying on a 1996 circular. What does that circular actually say?
It says that for assessment years after assessment year 1996-97 no deduction under section 40(b)(v) is 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. And it says that where neither the amount has been quantified nor even the limit of total remuneration has been specified, but the figure has been left to be determined by the partners at the end of the accounting period, the remuneration cannot be allowed as a deduction in computing the firm's income.
Decided by the CBDT Circulars & Instructions (Central Board of Direct Taxes) on 1996-03-25, reported as CBDT Circular No. 739 dated 25 March 1996; referred to in footnote 86 to clause (b) of section 40 on the Income-tax Department's section pages. It bears on section 40(b), section 40(b)(v), section 40(b)(ii), section 40(b)(iii), section 119, section 184, section 185 of the Income Tax Act 1961, in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters.
The circular is the reason a deed clause is the first thing the department reads in a partner remuneration dispute, and it sets the bar in the alternative: quantify the amount, or lay down the manner of quantifying it. Everything that has been litigated since turns on the second limb. A clause that names a figure for each working partner plainly satisfies the circular. A clause that says the salary will be whatever the partners agree at the year end plainly does not. The contested middle ground is the clause that refers to the section 40(b) ceiling itself or reproduces the statutory bands, and the High Courts have not spoken with one voice about whether that is a 'manner of quantifying'. The circular is also of a particular vintage and should be read as such: it was issued when section 40(b) in its 1992 form was new, and on its own terms it fixes the strict requirement only for assessment years subsequent to assessment year 1996-97; the further reading that it also took a liberal view for the transitional assessment years 1993-94 to 1996-97 is the ITAT Cochin's in ITO v. Pulimoottil Silk House, not a statement recovered from the circular itself. Being a circular under section 119 it binds the department but not the assessee and not the courts, so where it is relied on against a firm the answer is often that section 40(b)(v) itself requires only that the payment be authorised by and in accordance with the deed.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 40(b) was recast by the Finance Act 1992 with effect from assessment year 1993-94, replacing the registration scheme for firms with a set of conditions attached to the deduction of payments to partners. Sub-clause (v) allows remuneration to a working partner only where it is authorised by and in accordance with the terms of the partnership deed and only up to the statutory ceiling. Representations followed about deeds that authorised remuneration in general terms without fixing an amount, and the Board issued Circular No. 739 on 25 March 1996 to state the position.
In cases where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners at the end of the accounting period, payment of remuneration to partners cannot be allowed as a deduction in the computation of the firm's income. For the assessment years subsequent to assessment year 1996-97, 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.
The Board's position follows from the words of sub-clause (v) itself, which allows remuneration only in so far as it is 'authorised by, and is in accordance with, the terms of the partnership deed'. A deed that leaves the figure to be settled after the year has ended does not authorise any particular payment, so there is nothing the payment can be in accordance with, and the officer has no way of testing the claim against the deed. The Board did not require a figure, however: it stated the requirement in the alternative, so that a deed which lays down a method of computation is enough, and it fixed the strict requirement only for assessment years after assessment year 1996-97, having dealt with the transitional period differently.
It is clarified that for the assessment years subsequent to the assessment year 1996-97, 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.
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Handle my notice → Ask a CA on WhatsAppIt says that for assessment years after assessment year 1996-97 no deduction under section 40(b)(v) is 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. And it says that where neither the amount has been quantified nor even the limit of total remuneration has been specified, but the figure has been left to be determined by the partners at the end of the accounting period, the remuneration cannot be allowed as a deduction in computing the firm's income. This was decided by the CBDT Circulars & Instructions (Central Board of Direct Taxes) and bears on section 40(b), section 40(b)(v), section 40(b)(ii), section 40(b)(iii), section 119, section 184, section 185 of the Income Tax Act 1961. It is reported as CBDT Circular No. 739 dated 25 March 1996; referred to in footnote 86 to clause (b) of section 40 on the Income-tax Department's section pages. The circular is the reason a deed clause is the first thing the department reads in a partner remuneration dispute, and it sets the bar in the alternative: quantify the amount, or lay down the manner of quantifying it. Everything that has been litigated since turns on the second limb. A clause that names a figure for each working partner plainly satisfies the circular. A clause that says the salary will be whatever the partners agree at the year end plainly does not. The contested middle ground is the clause that refers to the section 40(b) ceiling itself or reproduces the statutory bands, and the High Courts have not spoken with one voice about whether that is a 'manner of quantifying'. The circular is also of a particular vintage and should be read as such: it was issued when section 40(b) in its 1992 form was new, and on its own terms it fixes the strict requirement only for assessment years subsequent to assessment year 1996-97; the further reading that it also took a liberal view for the transitional assessment years 1993-94 to 1996-97 is the ITAT Cochin's in ITO v. Pulimoottil Silk House, not a statement recovered from the circular itself. Being a circular under section 119 it binds the department but not the assessee and not the courts, so where it is relied on against a firm the answer is often that section 40(b)(v) itself requires only that the payment be authorised by and in accordance with the deed. If it applies to you, the first step is this: Read the remuneration clause of the deed against the circular's own alternative: does it specify the amount payable to each individual working partner, or does it lay down the manner of quantifying it? If it does either, the circular is satisfied on its own terms.
Section 40(b) was recast by the Finance Act 1992 with effect from assessment year 1993-94, replacing the registration scheme for firms with a set of conditions attached to the deduction of payments to partners. Sub-clause (v) allows remuneration to a working partner only where it is authorised by and in accordance with the terms of the partnership deed and only up to the statutory ceiling. Representations followed about deeds that authorised remuneration in general terms without fixing an amount, and the Board issued Circular No. 739 on 25 March 1996 to state the position. The matter was decided on 1996-03-25 by the CBDT Circulars & Instructions (Central Board of Direct Taxes). On those facts the CBDT Circulars & Instructions held as follows. In cases where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners at the end of the accounting period, payment of remuneration to partners cannot be allowed as a deduction in the computation of the firm's income. For the assessment years subsequent to assessment year 1996-97, 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.
The Board's position follows from the words of sub-clause (v) itself, which allows remuneration only in so far as it is 'authorised by, and is in accordance with, the terms of the partnership deed'. A deed that leaves the figure to be settled after the year has ended does not authorise any particular payment, so there is nothing the payment can be in accordance with, and the officer has no way of testing the claim against the deed. The Board did not require a figure, however: it stated the requirement in the alternative, so that a deed which lays down a method of computation is enough, and it fixed the strict requirement only for assessment years after assessment year 1996-97, having dealt with the transitional period differently. In the words reproduced by the source cited on this page: "It is clarified that for the assessment years subsequent to the assessment year 1996-97, 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."
It was decided by the CBDT Circulars & Instructions on 1996-03-25 and is reported as CBDT Circular No. 739 dated 25 March 1996; referred to in footnote 86 to clause (b) of section 40 on the Income-tax Department's section pages. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 40(b), section 40(b)(v), section 40(b)(ii), section 40(b)(iii), section 119, section 184, section 185, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. In cases where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners at the end of the accounting period, payment of remuneration to partners cannot be allowed as a deduction in the computation of the firm's income. For the assessment years subsequent to assessment year 1996-97, 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. It arises in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters, on section 40(b), section 40(b)(v), section 40(b)(ii), section 40(b)(iii), section 119, section 184, section 185 of the Income Tax Act 1961, and was decided by Central Board of Direct Taxes. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the clause refers to the section 40(b) limits or reproduces the statutory bands, treat this as the contested ground, marshal the authorities both ways and be ready for the department to cite the Delhi High Court line against you. Where the clause leaves the figure entirely to be settled at the year end, do not fight the circular — amend the deed prospectively and confine the dispute to the earlier years, remembering section 40(b)(iii), which bars a deduction for any period falling before the date of the deed that authorises the payment. Take the point that a circular under section 119 binds the income-tax authorities and cannot enlarge the conditions Parliament laid down in section 40(b), and that the section requires authorisation by and accordance with the deed rather than any particular drafting formula. Confirm the assessment year: the circular fixes the strict requirement for years after assessment year 1996-97, and it dealt with the transitional years 1993-94 to 1996-97 differently.
Still good law. Nothing withdraws or supersedes this circular, and its validity has been tested and upheld. In M/s Sood Bhandari & Co. v. Central Board of Direct Taxes (Punjab & Haryana High Court, 5 October 2011) the circular was directly challenged and the Court upheld it, holding that 'the circular being clarificatory in nature cannot be said to be beyond the powers of the Board conferred on it under Section 119 of the Act', and that where a deed leaves remuneration unquantified until year end the payment is not deductible. It is still being used as the operative test: in ACIT v. Luthra & Luthra Law Offices (ITAT Delhi Bench 'B', 5 September 2022) the Bench applied the circular at paragraphs 8-9, asking whether the deed satisfied it and holding that it did. So there is no live doubt that the circular remains in force. Two dating points go with it. First, s.40(b)(v) was a provision of the Income-tax Act, 1961, repealed on 1 April 2026 by s.536 of the Income-tax Act, 2025 (Act 30 of 2025). Second, the circular is not thereby dead: the CBDT FAQs on Interplay and Transition record that s.536(2)(j) keeps circulars, notifications and instructions issued under the old Act valid so long as they do not conflict with the new Act. Whether this circular fits the corresponding provision of the 2025 Act is not established here, and a firm drafting a deed for a year governed by that Act should settle the quantum or the manner of quantifying it in the deed in any event, since that is the drafting discipline the circular exists to enforce and it costs nothing to observe. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The circular's own text has not been read, and that governs how this entry should be used. Paragraphs 3 and 4 reproduced here are taken from the text quoted in the order of the ITAT Delhi in Quality Traders, Delhi v. ITO, Ward-63(2), New Delhi, decided 23 March 2021, where they appear inside the passage the Tribunal reproduces from the assessment order. That is two removes from the circular itself, and anyone relying on the exact words in a submission should obtain the circular before doing so. The source order is ITAT Delhi Bench 'SMC-2', ITA No. 2815/Del/2019, assessment year 2015-16, decided 23 March 2021. The number and date are independently confirmed by the Income-tax Department's own footnote against sub-clause (v) of clause (b) of section 40, which reads: 'See Circular No. 739, dated 25-3-1996.' That footnote is carried only on the older edition of the section and has been dropped from the current one, so its absence from the section as it now reads is not a sign that the circular has gone. The substance of paragraph 4 is separately corroborated by the ITAT Amritsar order in Paradise Rubber Industries v. Pr. CIT, decided 24 September 2021, which records the same clarification. One reading in this entry is at a further remove still. The statement that the circular took a liberal view for assessment years 1993-94 to 1996-97 comes from the ITAT Cochin order in ITO v. Pulimoottil Silk House, decided 23 March 2007, at its paragraphs 19 and 20, and is not stated from the circular itself. Treat it as the Cochin Bench's characterisation of the circular rather than as its text, because the distinction matters for the earlier years: for those years the argument is that the circular itself allowed a deduction on a deed that would fail the test stated for later years, and that argument stands or falls on the circular's actual words. For assessment years after 1996-97 the test as quoted is plain enough on its face, and the two limbs are alternatives — the deed may specify the amount payable to each individual working partner, or it may lay down the manner of quantifying it. A deed that does neither, and leaves the figure to be settled by the partners when the year is over, is the case the circular puts outside section 40(b)(v). This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
In cases where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners at the end of the accounting period, payment of remuneration to partners cannot be allowed as a deduction in the computation of the firm's income. For the assessment years subsequent to assessment year 1996-97, 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.
TaxSphere, “CBDT Circular No. 739 dated 25 March 1996 — a deed that neither fixes the remuneration nor fixes the way of working it out carries no section 40(b)(v) claim”, https://taxnotice.vittsphere.com/caselaw/case/cbdt-circular-739-the-deed-must-quantify-the-remuneration-or-the-manner-of-quantifying-it/ (validity last checked 2026-09-08)
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Our partnership deed says partners' salary will be as mutually agreed from time to time, and we passed a resolution fixing the amounts. The officer has disallowed the whole remuneration. Can he?
What is the maximum remuneration my firm can deduct for its working partners for the year I am filing now, and does the old professional / non-professional split still exist?
Our deed says the partners will be paid such remuneration as they mutually agree, up to the statutory ceiling. Is that enough for s.40(b)(v)?
The revised partnership deed was not filed with the return but was produced during the assessment. Does s.185 still disallow the partners' remuneration?
