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?
Yes, on those facts. The Tribunal held that a clause providing that salary 'be paid every month/year as may be mutually agreed between the partners from time to time' neither fixes a sum, fixed or variable by reference to profits, nor identifies which partners are working partners, and is therefore at best an authorisation to pay salary and nothing more. Because s.40(b)(ii) requires the payment to be both 'authorised by' AND 'in accordance with' the terms of the deed, identification of the partner and quantification of the remuneration are prerequisites to the deduction, and a later resolution on the firm's letterhead — unstamped, unregistered, undated by the signatories and produced only when the officer asked — could not be treated as a valid amendment of the deed.
Decided by the ITAT (Sh. Sanjay Arora, Accountant Member (Amritsar Bench, SMC)) on 2019-04-10, reported as I.T.A. No. 412/Asr/2018 (ITAT Amritsar, SMC); Assessment Year 2014-15; heard 18 February 2019, pronounced 10 April 2019. It bears on section 40(b), section 40(b)(i), section 40(b)(ii), section 40(b)(iii), section 40(b)(v), section 184, section 185, section 155 of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
This is the Revenue-side outcome on the clause the brief warns about, and it draws the line the practitioner actually needs. CBDT Circular No. 739 of 1996, set out in full in the order, distinguishes two clause types: type (i), where the partners agree that the remuneration will be the amount allowable under s.40(b)(v), and type (ii), where the amount will be as mutually agreed at the end of the year. Para 4 of the circular denies the deduction from AY 1997-98 onwards unless the deed either specifies the amount for each individual working partner or lays down the manner of quantifying it. The Tribunal held that only a type (i) clause satisfies the law and that a type (ii) clause does not, and it distinguished Durga Dass Devki Nandan v. ITO [2012] 342 ITR 17 (HP) and Classic Law v. ACIT on precisely that ground — in those cases the deed tied the salary to the s.40(b)(v) limit, which is precise and definite and permits quantification. It also declined to follow ACIT v. Suman Constructions, the Pune bench decision that the circular travels beyond the words 'in accordance with', because the Tribunal proceeded on the footing that the circular had by then been upheld on a writ challenge by the jurisdictional Punjab and Haryana High Court in Sood Bhandari & Co. v. CBDT [2012] 204 Taxman 340 (P&H), decided 5 October 2011 in WP No. 3765 of 1997 — a case recorded at para 4.2 of this order, which was not retrieved or read for this entry and whose holding is stated only as this order reports it. There is one point of relief in the order that is easy to miss: where the disallowed salary has been assessed in the partners' own hands, the Tribunal directed that they be given relief by the Assessing Officer under s.155.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee firm claimed Rs 4,40,000 as remuneration to partners in computing its business income for AY 2014-15. Its partnership deed dated 5 June 2007, clause 9, provided: 'The salary/remuneration be paid every month/year as may be mutually agreed between the partners from time to time. The partners may agree to change the quantum of the salary/remuneration by a separate agreement or supplementary deed.' The firm relied on a resolution said to have been passed on 1 April 2013 raising the salary of the two partners, Vikram Kundra and Gautam Kundra, from Rs 1.20 lakh a year each to Rs 2.20 lakh a year each, in modification of an earlier resolution whose date was not specified. The resolution was recorded on the firm's letterhead, was signed by the partners without any date beside their signatures, was neither stamped nor registered, was not witnessed, was not filed with the Registrar of Firms and Societies or with any other authority, and was produced only after the Assessing Officer, on seeing the deed, asked on what basis the partners' salary had been debited. The partners' capital accounts showed salary credited at Rs 15,000 a month for the first four months and Rs 20,000 a month thereafter. The Assessing Officer disallowed the whole claim under s.40(b), relying on Circular No. 739 of 25 March 1996, and the CIT(A) dismissed the firm's appeal.
The appeal was dismissed. Clause 9 of the deed is not an agreement for a particular sum, fixed or variable by reference to the firm's profits, and does not identify which of the two partners is a working partner; it is at best an authorisation to pay salary. The words 'in accordance with', appearing in s.40(b)(ii) alongside 'authorised by', put it beyond doubt that identification of the partner and quantification of the remuneration are prerequisites for the deduction. Para 4 of Circular No. 739 applies to the year, and even for earlier years only a clause of the type described in para 1(i) of the circular — remuneration to be the amount allowable under s.40(b)(v) — could meet the requirement of law, and not one of the type in para 1(ii), which is what clause 9 is. The resolution could not be regarded as a valid partnership deed or as a valid amendment of the deed dated 5 June 2007: its execution on the date claimed was not proved, it was neither stamped nor registered and so not admissible in evidence as a legally enforceable contract, it was not filed with any authority, and it did not qualify 'partners' with the word 'working' so that on its terms salary would be payable irrespective of whether a partner was a working partner, contrary to s.40(b)(i). Entries in the books of account are not decisive. Where the salary disallowed to the firm had been assessed in the partners' hands, the Assessing Officer was directed to give them relief under s.155.
The Member began by asking whether clause 9 was a valid clause at all, and answered that it agreed to pay salary and nothing more. He accepted that 'authorised by' might be read broadly, since remuneration is essentially a part of the firm's profit which is appropriated among the partners and the salary clause only modifies that appropriation, but held that the additional words 'in accordance with' remove any ambiguity: salary, to constitute a proper charge on the profits of the firm, must be specific both as to the person and as to the amount, with only the balance profit appropriated between the partners. On that construction Circular No. 739 — which he reproduced in full — explains the provision correctly, and para 4 governs assessment years after AY 1996-97. He rejected the assessee's reliance on ACIT v. Suman Constructions, in which the Pune bench had held that the circular travelled beyond the words 'in accordance with', because the circular had been upheld on a writ challenge by the jurisdictional Punjab and Haryana High Court in Sood Bhandari & Co. v. CBDT, where the disallowance was sustained even when made by way of adjustment under s.143(1)(a) in a case of a para 1(ii) clause. He distinguished Durga Dass Devki Nandan v. ITO and Classic Law v. ACIT as cases where the deed provided for salary in terms of s.40(b)(v) itself, which is precise and definite and permits quantification. Turning to the resolution, he held that a partnership being an agreement to share profits in a defined ratio, and remuneration being part of a partner's share of profit, the agreement must be arrived at before the period to which it relates; that the date was also mandated by s.40(b)(iii), so the clause could not operate retrospectively; that an unstamped and unregistered document is not admissible as a legally enforceable contract; and that the firm's conduct — persisting with an impermissible clause years after the Board's clarification, then producing undated resolutions only when questioned — betrayed its case that the resolutions had been passed on the dates from which they were made effective.
However, as afore-stated, the words 'in accordance with' leaves one in no manner of any doubt that the identification of the partner/s and the quantification of remuneration, is a prerequisite for deduction.
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Handle my notice → Ask a CA on WhatsAppYes, on those facts. The Tribunal held that a clause providing that salary 'be paid every month/year as may be mutually agreed between the partners from time to time' neither fixes a sum, fixed or variable by reference to profits, nor identifies which partners are working partners, and is therefore at best an authorisation to pay salary and nothing more. Because s.40(b)(ii) requires the payment to be both 'authorised by' AND 'in accordance with' the terms of the deed, identification of the partner and quantification of the remuneration are prerequisites to the deduction, and a later resolution on the firm's letterhead — unstamped, unregistered, undated by the signatories and produced only when the officer asked — could not be treated as a valid amendment of the deed. This was decided by the ITAT (Sh. Sanjay Arora, Accountant Member (Amritsar Bench, SMC)) and bears on section 40(b), section 40(b)(i), section 40(b)(ii), section 40(b)(iii), section 40(b)(v), section 184, section 185, section 155 of the Income Tax Act 1961. It is reported as I.T.A. No. 412/Asr/2018 (ITAT Amritsar, SMC); Assessment Year 2014-15; heard 18 February 2019, pronounced 10 April 2019. This is the Revenue-side outcome on the clause the brief warns about, and it draws the line the practitioner actually needs. CBDT Circular No. 739 of 1996, set out in full in the order, distinguishes two clause types: type (i), where the partners agree that the remuneration will be the amount allowable under s.40(b)(v), and type (ii), where the amount will be as mutually agreed at the end of the year. Para 4 of the circular denies the deduction from AY 1997-98 onwards unless the deed either specifies the amount for each individual working partner or lays down the manner of quantifying it. The Tribunal held that only a type (i) clause satisfies the law and that a type (ii) clause does not, and it distinguished Durga Dass Devki Nandan v. ITO [2012] 342 ITR 17 (HP) and Classic Law v. ACIT on precisely that ground — in those cases the deed tied the salary to the s.40(b)(v) limit, which is precise and definite and permits quantification. It also declined to follow ACIT v. Suman Constructions, the Pune bench decision that the circular travels beyond the words 'in accordance with', because the Tribunal proceeded on the footing that the circular had by then been upheld on a writ challenge by the jurisdictional Punjab and Haryana High Court in Sood Bhandari & Co. v. CBDT [2012] 204 Taxman 340 (P&H), decided 5 October 2011 in WP No. 3765 of 1997 — a case recorded at para 4.2 of this order, which was not retrieved or read for this entry and whose holding is stated only as this order reports it. There is one point of relief in the order that is easy to miss: where the disallowed salary has been assessed in the partners' own hands, the Tribunal directed that they be given relief by the Assessing Officer under s.155. If it applies to you, the first step is this: Read the remuneration clause before anything else and classify it: if it fixes an amount, or fixes the manner of quantification (a percentage of book profit, or the s.40(b)(v) ceiling itself), the claim stands; if it leaves the amount to be agreed later, it does not.
The assessee firm claimed Rs 4,40,000 as remuneration to partners in computing its business income for AY 2014-15. Its partnership deed dated 5 June 2007, clause 9, provided: 'The salary/remuneration be paid every month/year as may be mutually agreed between the partners from time to time. The partners may agree to change the quantum of the salary/remuneration by a separate agreement or supplementary deed.' The firm relied on a resolution said to have been passed on 1 April 2013 raising the salary of the two partners, Vikram Kundra and Gautam Kundra, from Rs 1.20 lakh a year each to Rs 2.20 lakh a year each, in modification of an earlier resolution whose date was not specified. The resolution was recorded on the firm's letterhead, was signed by the partners without any date beside their signatures, was neither stamped nor registered, was not witnessed, was not filed with the Registrar of Firms and Societies or with any other authority, and was produced only after the Assessing Officer, on seeing the deed, asked on what basis the partners' salary had been debited. The partners' capital accounts showed salary credited at Rs 15,000 a month for the first four months and Rs 20,000 a month thereafter. The Assessing Officer disallowed the whole claim under s.40(b), relying on Circular No. 739 of 25 March 1996, and the CIT(A) dismissed the firm's appeal. The matter was decided on 2019-04-10 by the ITAT (Sh. Sanjay Arora, Accountant Member (Amritsar Bench, SMC)). On those facts the ITAT held as follows. The appeal was dismissed. Clause 9 of the deed is not an agreement for a particular sum, fixed or variable by reference to the firm's profits, and does not identify which of the two partners is a working partner; it is at best an authorisation to pay salary. The words 'in accordance with', appearing in s.40(b)(ii) alongside 'authorised by', put it beyond doubt that identification of the partner and quantification of the remuneration are prerequisites for the deduction. Para 4 of Circular No. 739 applies to the year, and even for earlier years only a clause of the type described in para 1(i) of the circular — remuneration to be the amount allowable under s.40(b)(v) — could meet the requirement of law, and not one of the type in para 1(ii), which is what clause 9 is. The resolution could not be regarded as a valid partnership deed or as a valid amendment of the deed dated 5 June 2007: its execution on the date claimed was not proved, it was neither stamped nor registered and so not admissible in evidence as a legally enforceable contract, it was not filed with any authority, and it did not qualify 'partners' with the word 'working' so that on its terms salary would be payable irrespective of whether a partner was a working partner, contrary to s.40(b)(i). Entries in the books of account are not decisive. Where the salary disallowed to the firm had been assessed in the partners' hands, the Assessing Officer was directed to give them relief under s.155.
The Member began by asking whether clause 9 was a valid clause at all, and answered that it agreed to pay salary and nothing more. He accepted that 'authorised by' might be read broadly, since remuneration is essentially a part of the firm's profit which is appropriated among the partners and the salary clause only modifies that appropriation, but held that the additional words 'in accordance with' remove any ambiguity: salary, to constitute a proper charge on the profits of the firm, must be specific both as to the person and as to the amount, with only the balance profit appropriated between the partners. On that construction Circular No. 739 — which he reproduced in full — explains the provision correctly, and para 4 governs assessment years after AY 1996-97. He rejected the assessee's reliance on ACIT v. Suman Constructions, in which the Pune bench had held that the circular travelled beyond the words 'in accordance with', because the circular had been upheld on a writ challenge by the jurisdictional Punjab and Haryana High Court in Sood Bhandari & Co. v. CBDT, where the disallowance was sustained even when made by way of adjustment under s.143(1)(a) in a case of a para 1(ii) clause. He distinguished Durga Dass Devki Nandan v. ITO and Classic Law v. ACIT as cases where the deed provided for salary in terms of s.40(b)(v) itself, which is precise and definite and permits quantification. Turning to the resolution, he held that a partnership being an agreement to share profits in a defined ratio, and remuneration being part of a partner's share of profit, the agreement must be arrived at before the period to which it relates; that the date was also mandated by s.40(b)(iii), so the clause could not operate retrospectively; that an unstamped and unregistered document is not admissible as a legally enforceable contract; and that the firm's conduct — persisting with an impermissible clause years after the Board's clarification, then producing undated resolutions only when questioned — betrayed its case that the resolutions had been passed on the dates from which they were made effective. In the words reproduced by the source cited on this page: "However, as afore-stated, the words 'in accordance with' leaves one in no manner of any doubt that the identification of the partner/s and the quantification of remuneration, is a prerequisite for deduction." The decision followed or applied Sood Bhandari & Co. v. CBDT [2012] 204 Taxman 340 (P&H), WP No. 3765 of 1997, decided 5 October 2011 — followed as the jurisdictional High Court decision upholding Circular No. 739; CBDT Circular No. 739 dated 25 March 1996 — reproduced in full and applied; ACIT v. Suman Constructions [2009] 20 DTR 450 (Pune Trib.) — not followed; Durga Dass Devki Nandan v. ITO [2012] 342 ITR 17 (HP), decided 11 March 2011 — distinguished by this Tribunal as a case on a deed tying the salary to the s.40(b)(v) limit; but the High Court's own ratio was that Circular No. 739 goes beyond s.40(b)(v) and is invalid, which the distinction drawn here does not engage. Not read from a primary source; its date and holding are stated from two secondary reports.; Classic Law v. ACIT, ITA No. 340/Del/2016, dated 15 January 2018 — distinguished; ITO v. Kakkar Cold Storage [2004] 991 TTJ 722 (Asr) — distinguished as relating to AY 1993-94, for which the circular itself makes an exception.
It was decided by the ITAT on 2019-04-10 and is reported as I.T.A. No. 412/Asr/2018 (ITAT Amritsar, SMC); Assessment Year 2014-15; heard 18 February 2019, pronounced 10 April 2019. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 40(b), section 40(b)(i), section 40(b)(ii), section 40(b)(iii), section 40(b)(v), section 184, section 185, section 155, 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. The appeal was dismissed. Clause 9 of the deed is not an agreement for a particular sum, fixed or variable by reference to the firm's profits, and does not identify which of the two partners is a working partner; it is at best an authorisation to pay salary. The words 'in accordance with', appearing in s.40(b)(ii) alongside 'authorised by', put it beyond doubt that identification of the partner and quantification of the remuneration are prerequisites for the deduction. Para 4 of Circular No. 739 applies to the year, and even for earlier years only a clause of the type described in para 1(i) of the circular — remuneration to be the amount allowable under s.40(b)(v) — could meet the requirement of law, and not one of the type in para 1(ii), which is what clause 9 is. The resolution could not be regarded as a valid partnership deed or as a valid amendment of the deed dated 5 June 2007: its execution on the date claimed was not proved, it was neither stamped nor registered and so not admissible in evidence as a legally enforceable contract, it was not filed with any authority, and it did not qualify 'partners' with the word 'working' so that on its terms salary would be payable irrespective of whether a partner was a working partner, contrary to s.40(b)(i). Entries in the books of account are not decisive. Where the salary disallowed to the firm had been assessed in the partners' hands, the Assessing Officer was directed to give them relief under s.155. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 40(b), section 40(b)(i), section 40(b)(ii), section 40(b)(iii), section 40(b)(v), section 184, section 185, section 155 of the Income Tax Act 1961, and was decided by Sh. Sanjay Arora, Accountant Member (Amritsar Bench, SMC). 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. Amend the deed prospectively by a properly executed, stamped supplementary deed — not a resolution on the firm's letterhead — and do it BEFORE the period to which the remuneration relates, because s.40(b)(iii) denies the deduction for any period falling prior to the date of the deed authorising it. Make sure the clause names the working partners, or at least qualifies 'partners' with the word 'working'; the Tribunal held that a resolution referring simply to 'partners' would allow salary to a non-working partner and fall foul of s.40(b)(i). If you must rely on a supplementary instrument, be able to prove the date it was executed — the absence of a date beside the partners' signatures, and the failure to file it with the Registrar of Firms or with any other authority the firm is registered with, was fatal here. Do not rest on entries in the books: the Tribunal held that book entries are not decisive and that a written agreement is a requirement of law for a firm to be assessed as a firm under ss.184 and 185. Where the remuneration has been disallowed to the firm but taxed in the partners' hands, apply for consequential relief under s.155; the Tribunal directed it here. Check whether the jurisdictional High Court has upheld or read down Circular 739 — the answer differs between Punjab and Haryana (upheld, in Sood Bhandari) and Himachal Pradesh (Durga Dass Devki Nandan, 11 March 2011, where the circular itself was held invalid), and the choice of authority decides the appeal.
Searched for later treatment; none was found. That is not the same as a source affirming it. A citedby: search returns two hits, both orders in M/s Ansal Housing & Construction Ltd (ITAT Delhi, 26 July 2024) about allocation of head-office interest to eligible units — unrelated to s.40(b)(v). A second probe on the firm's name returns only this order, and indiankanoon records 'Cited by 0' against it. No later decision citing this order on a deed providing for salary 'as may be mutually agreed' was found, and no Punjab & Haryana High Court appeal from it was traced. Practitioners should note the point is contested in the wider case law and that CBDT Circular No. 739 dated 25 March 1996 is the usual battleground. 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 order was heard by a Single Member (SMC) bench and is written in the first person singular. Two citations in it look wrong as printed: 'ITO v. Kakkar Cold Storage [2004] 991 TTJ 722 (Asr)' carries an improbable volume number, and 'Durga Dass Devki Nandan v. ITO [2012] 342 ITR 17 (HP)' is given as 2012 here while other sources give the same report as 2011 — I did not resolve either, and I could not open the Himachal Pradesh High Court judgment itself (see NOTES-B22.md). The printed text uses single quotation marks around 'in accordance with' and 'authorized by'; the key_quote reproduces the punctuation as printed. The order also refers to the firm having been questioned about registration with the Registrar of Firms and Societies; nothing turns on which State's registrar. I fetched the order three times with ?type=print — once for the s.40(b)(v) paragraphs, once in full, and once to confirm the two sentences used as quotations, which came back identical. 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.
The appeal was dismissed. Clause 9 of the deed is not an agreement for a particular sum, fixed or variable by reference to the firm's profits, and does not identify which of the two partners is a working partner; it is at best an authorisation to pay salary. The words 'in accordance with', appearing in s.40(b)(ii) alongside 'authorised by', put it beyond doubt that identification of the partner and quantification of the remuneration are prerequisites for the deduction. Para 4 of Circular No. 739 applies to the year, and even for earlier years only a clause of the type described in para 1(i) of the circular — remuneration to be the amount allowable under s.40(b)(v) — could meet the requirement of law, and not one of the type in para 1(ii), which is what clause 9 is. The resolution could not be regarded as a valid partnership deed or as a valid amendment of the deed dated 5 June 2007: its execution on the date claimed was not proved, it was neither stamped nor registered and so not admissible in evidence as a legally enforceable contract, it was not filed with any authority, and it did not qualify 'partners' with the word 'working' so that on its terms salary would be payable irrespective of whether a partner was a working partner, contrary to s.40(b)(i). Entries in the books of account are not decisive. Where the salary disallowed to the firm had been assessed in the partners' hands, the Assessing Officer was directed to give them relief under s.155.
TaxSphere, “GRK Agencies v ITO — a deed saying salary 'as may be mutually agreed' will not carry a section 40(b)(v) claim”, https://taxnotice.vittsphere.com/caselaw/case/grk-agencies-v-ito-40b-v-salary-as-may-be-mutually-agreed/ (validity last checked 2026-09-07)
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