Our deed does not name a rupee figure; it gives slabs of book profit and percentages. The officer says the amount is not specified and has disallowed the salary. Is he right?
No. The Rajasthan High Court upheld the Tribunal's view that where the deed provides the manner of quantifying the remuneration — here as slabs of percentages of book profit determinable only at the year end, shared equally among the partners, with no salary in a year of loss — the exact quantum need not be stated, and the deduction under s.40(b)(v) is allowable. Circular No. 739 of 1996 itself requires either the quantum OR the manner of quantification, and on these facts it supported the assessee rather than the Revenue.
Decided by the High Court (Hon'ble Mr. Justice K.S. Jhaveri and Hon'ble Mr. Justice Banwari Lal Sharma) on 2016-09-30, reported as D.B. Income Tax Appeal No. 176/2016 (High Court of Judicature for Rajasthan, Bench at Jaipur). It bears on section 40(b), section 40(b)(v), section 43B of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
This is the taxpayer-side outcome on the s.40(b)(v) deed question and it fixes the safe form of clause. The Revenue's argument, which recurs in every one of these assessments, is that if the deed does not state a rupee figure it fails Circular No. 739. The Tribunal's answer, adopted by the High Court, is that the circular is disjunctive: quantum or manner. Making the salary a function of annual book profit means the exact quantum cannot be known until the year closes, and that does not offend the section. The Tribunal drew the distinction that matters — this was 'not a case simpliciter that the partners have left the doors open to claim the remuneration as per section 40(b)(v) of the Act', which is the situation the circular was issued to meet. There is a further practical point in the record: the deed had been executed in 2002 and the same claim had been allowed year after year, and the Tribunal saw no reason for the officer to read the deed differently in the year under appeal. Note the shape of the judgment before relying on it: the High Court dismissed the appeal on the footing that no substantial question of law arose, so the reasoning is the Tribunal's, reproduced in the judgment and adopted.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The Revenue appealed against a Tribunal order which had confirmed the CIT(A) on two issues, one on a provision for entry tax and s.43B and the other on remuneration to partners. On the remuneration issue, the partnership deed had been executed on 9 December 2002 and the firm had come into existence from that date, and the assessee had claimed remuneration on the basis of that deed from AY 2003-04 onwards, the claim having been allowed by the Assessing Officer in earlier years. Clause 6 of the deed provided that working allowance or remuneration was to be allowed after allowing interest on capital, on slabs of book profit at stated percentages, the salary so computed to be shared equally among all the partners, and no salary to be allowed to partners in case of loss. The Assessing Officer in the year under appeal read the deed differently and disallowed the remuneration, relying on the proposition that remuneration of partners must be fixed and cannot be varied. The CIT(A) deleted the disallowance and the Tribunal confirmed that deletion.
The Revenue's appeal was dismissed as devoid of merit; the view taken by the Tribunal was just and proper and no substantial question of law arose. The Tribunal's holding, adopted by the Court, was that clause 6 of the deed provides the manner of quantifying the remuneration payable to the partners; that although the exact quantum has not been specified, because the salary has been made a function of annual book profit which can be determined only at the end of the year, the deed clearly provides for the manner of quantification; that this is not a case where the partners have simply left the doors open to claim remuneration as per s.40(b)(v), which was the backdrop for Circular No. 739; and that the Board's guidance in fact supported the assessee rather than the Revenue, so that the CIT(A) had rightly deleted the disallowance.
The route is the Tribunal's, reproduced in the judgment. The Tribunal began from the terms of clause 6: the remuneration was to be worked out on stated percentages of book profit determined at the end of the year, shared equally among the three partners, with no salary in a year of loss. It then read Circular No. 739 as providing that where either the quantum or the manner of quantification of remuneration has been specified in the partnership deed, the remuneration is allowable under s.40(b)(v) and not otherwise. Applying that, since the salary was a function of annual book profit the exact quantum could not have been specified, but the manner of quantification plainly was; and the case was therefore outside the mischief the circular was directed at, namely a deed leaving the partners free to claim whatever s.40(b)(v) would permit. The Tribunal also noted that the deed had governed the claim since AY 2003-04 and that the claim had been allowed in the past, and saw no special reason for the officer to take a contrary view or to read the deed differently in the year in question. The assessee's reliance before the Tribunal on CIT v. Anil Hardware Store, 323 ITR 368 (HP), Durga Dass Devki Nandan v. ITO (2012) 342 ITR 17 (HP), ACIT v. Suman Construction (2009) 20 DTR 450 (Pune Trib.), Mohd. Nizamuddin v. ACIT (2014) 39 CCH 439 (Jp. Trib.) and CIT v. Supreme Builders (2008) 303 ITR 1 (P&H) is recorded in the judgment. The High Court, on that material, held the Tribunal's view just and proper.
In our opinion, the view taken by the Tribunal is just and proper. No substantial question of law arises in this appeal.
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Handle my notice → Ask a CA on WhatsAppNo. The Rajasthan High Court upheld the Tribunal's view that where the deed provides the manner of quantifying the remuneration — here as slabs of percentages of book profit determinable only at the year end, shared equally among the partners, with no salary in a year of loss — the exact quantum need not be stated, and the deduction under s.40(b)(v) is allowable. Circular No. 739 of 1996 itself requires either the quantum OR the manner of quantification, and on these facts it supported the assessee rather than the Revenue. This was decided by the High Court (Hon'ble Mr. Justice K.S. Jhaveri and Hon'ble Mr. Justice Banwari Lal Sharma) and bears on section 40(b), section 40(b)(v), section 43B of the Income Tax Act 1961. It is reported as D.B. Income Tax Appeal No. 176/2016 (High Court of Judicature for Rajasthan, Bench at Jaipur). This is the taxpayer-side outcome on the s.40(b)(v) deed question and it fixes the safe form of clause. The Revenue's argument, which recurs in every one of these assessments, is that if the deed does not state a rupee figure it fails Circular No. 739. The Tribunal's answer, adopted by the High Court, is that the circular is disjunctive: quantum or manner. Making the salary a function of annual book profit means the exact quantum cannot be known until the year closes, and that does not offend the section. The Tribunal drew the distinction that matters — this was 'not a case simpliciter that the partners have left the doors open to claim the remuneration as per section 40(b)(v) of the Act', which is the situation the circular was issued to meet. There is a further practical point in the record: the deed had been executed in 2002 and the same claim had been allowed year after year, and the Tribunal saw no reason for the officer to read the deed differently in the year under appeal. Note the shape of the judgment before relying on it: the High Court dismissed the appeal on the footing that no substantial question of law arose, so the reasoning is the Tribunal's, reproduced in the judgment and adopted. If it applies to you, the first step is this: Draft the remuneration clause as a formula, not as a promise to agree: slabs of book profit with stated percentages, a stated basis of sharing among the named working partners, and an express statement of what happens in a year of loss.
The Revenue appealed against a Tribunal order which had confirmed the CIT(A) on two issues, one on a provision for entry tax and s.43B and the other on remuneration to partners. On the remuneration issue, the partnership deed had been executed on 9 December 2002 and the firm had come into existence from that date, and the assessee had claimed remuneration on the basis of that deed from AY 2003-04 onwards, the claim having been allowed by the Assessing Officer in earlier years. Clause 6 of the deed provided that working allowance or remuneration was to be allowed after allowing interest on capital, on slabs of book profit at stated percentages, the salary so computed to be shared equally among all the partners, and no salary to be allowed to partners in case of loss. The Assessing Officer in the year under appeal read the deed differently and disallowed the remuneration, relying on the proposition that remuneration of partners must be fixed and cannot be varied. The CIT(A) deleted the disallowance and the Tribunal confirmed that deletion. The matter was decided on 2016-09-30 by the High Court (Hon'ble Mr. Justice K.S. Jhaveri and Hon'ble Mr. Justice Banwari Lal Sharma). On those facts the High Court held as follows. The Revenue's appeal was dismissed as devoid of merit; the view taken by the Tribunal was just and proper and no substantial question of law arose. The Tribunal's holding, adopted by the Court, was that clause 6 of the deed provides the manner of quantifying the remuneration payable to the partners; that although the exact quantum has not been specified, because the salary has been made a function of annual book profit which can be determined only at the end of the year, the deed clearly provides for the manner of quantification; that this is not a case where the partners have simply left the doors open to claim remuneration as per s.40(b)(v), which was the backdrop for Circular No. 739; and that the Board's guidance in fact supported the assessee rather than the Revenue, so that the CIT(A) had rightly deleted the disallowance.
The route is the Tribunal's, reproduced in the judgment. The Tribunal began from the terms of clause 6: the remuneration was to be worked out on stated percentages of book profit determined at the end of the year, shared equally among the three partners, with no salary in a year of loss. It then read Circular No. 739 as providing that where either the quantum or the manner of quantification of remuneration has been specified in the partnership deed, the remuneration is allowable under s.40(b)(v) and not otherwise. Applying that, since the salary was a function of annual book profit the exact quantum could not have been specified, but the manner of quantification plainly was; and the case was therefore outside the mischief the circular was directed at, namely a deed leaving the partners free to claim whatever s.40(b)(v) would permit. The Tribunal also noted that the deed had governed the claim since AY 2003-04 and that the claim had been allowed in the past, and saw no special reason for the officer to take a contrary view or to read the deed differently in the year in question. The assessee's reliance before the Tribunal on CIT v. Anil Hardware Store, 323 ITR 368 (HP), Durga Dass Devki Nandan v. ITO (2012) 342 ITR 17 (HP), ACIT v. Suman Construction (2009) 20 DTR 450 (Pune Trib.), Mohd. Nizamuddin v. ACIT (2014) 39 CCH 439 (Jp. Trib.) and CIT v. Supreme Builders (2008) 303 ITR 1 (P&H) is recorded in the judgment. The High Court, on that material, held the Tribunal's view just and proper. In the words reproduced by the source cited on this page: "In our opinion, the view taken by the Tribunal is just and proper. No substantial question of law arises in this appeal." The decision followed or applied CBDT Circular No. 739 dated 25 March 1996 — read as disjunctive (quantum or manner of quantification) and applied in the assessee's favour; CIT v. Anil Hardware Store, 323 ITR 368 (HP) — cited by the assessee before the Tribunal; Durga Dass Devki Nandan v. ITO (2012) 342 ITR 17 (HP) — cited by the assessee before the Tribunal; ACIT v. Suman Construction (2009) 20 DTR 450 (Pune Trib.) — cited by the assessee before the Tribunal; CIT v. Supreme Builders (2008) 303 ITR 1 (P&H) — cited by the assessee before the Tribunal.
It was decided by the High Court on 2016-09-30 and is reported as D.B. Income Tax Appeal No. 176/2016 (High Court of Judicature for Rajasthan, Bench at Jaipur). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 40(b), section 40(b)(v), section 43B, 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 taxpayer. The Revenue's appeal was dismissed as devoid of merit; the view taken by the Tribunal was just and proper and no substantial question of law arose. The Tribunal's holding, adopted by the Court, was that clause 6 of the deed provides the manner of quantifying the remuneration payable to the partners; that although the exact quantum has not been specified, because the salary has been made a function of annual book profit which can be determined only at the end of the year, the deed clearly provides for the manner of quantification; that this is not a case where the partners have simply left the doors open to claim remuneration as per s.40(b)(v), which was the backdrop for Circular No. 739; and that the Board's guidance in fact supported the assessee rather than the Revenue, so that the CIT(A) had rightly deleted the disallowance. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 40(b), section 40(b)(v), section 43B of the Income Tax Act 1961, and was decided by Hon'ble Mr. Justice K.S. Jhaveri and Hon'ble Mr. Justice Banwari Lal Sharma. 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. Do not draft the clause simply as 'remuneration as allowable under section 40(b)(v)' if you can avoid it — that is the very form Circular No. 739 was issued about, and although some High Courts allow it, a formula in the deed puts the point beyond argument. Where the same clause has been accepted in earlier assessments, put the history on record; the Tribunal here relied on the deed having been in force since AY 2003-04 with the claim allowed throughout. Meet the circular on its own terms: quote para 4 and show that the deed 'lays down the manner of quantifying such remuneration', which is the alternative limb. Keep the computation of book profit under Explanation 3 to s.40(b) on file, since the deduction is capped by the s.40(b)(v) limits in any event — as revised by the Finance (No. 2) Act 2024 from AY 2025-26 to Rs 3,00,000 or 90 per cent of the first Rs 6,00,000 of book profit, whichever is more, and 60 per cent of the balance. If the deed leaves the amount to later agreement, this decision will not save the claim; see the contrary line, where such clauses have been held bad.
Validity check could not be completed. Validity check could not be completed: I did not search for any special leave petition against this judgment or for later treatment of it. Two limits should be stated plainly. First, the Court dismissed the appeal on the ground that no substantial question of law arose, so the weight of the decision as authority rests on its approval of the Tribunal's construction rather than on any independent reasoning. Second, the wider question of Circular No. 739's validity is contested: the Punjab and Haryana High Court is reported to have upheld the circular on a writ challenge in Sood Bhandari & Co. v. CBDT [2012] 204 Taxman 340 (P&H), WP No. 3765 of 1997, decided 5 October 2011 — that judgment was not retrieved or read, and its holding is stated only as the Amritsar Tribunal reports it at para 4.2 of GRK Agencies v. ITO (10 April 2019); while the Himachal Pradesh High Court in Durga Dass Devki Nandan v. ITO (2012) 342 ITR 17 (HP), decided 11 March 2011, held Circular No. 739 to go beyond s.40(b)(v) and to be invalid, on the ground that the Board cannot insert conditions not in the statute — that court's own site could not be opened and this is stated from two secondary reports, not from the judgment; nothing in this judgment resolves that, because on its facts the circular and the assessee pointed the same way. The s.40(b)(v) monetary limits have since been revised by the Finance (No. 2) Act 2024 with effect from AY 2025-26, and from 1 April 2025 s.194T requires tax to be deducted at 10 per cent on remuneration paid or credited to a partner; neither affects the construction point decided here. 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.
Read the judgment as printed with care. It is short and its transcription is poor in places: para 2 records counsel's contention in broken English ('Remuneration of partners is to be fixed if cannot be varied'), only the Revenue's counsel is named and no appearance is recorded for the assessee, and the remuneration table taken from the deed is mangled in the printed text — as it appears, the first slab is 'on the first Rs. 75000/- of the book profit' answered by 'Rs. 50000/- or at the rate of 90% of the book profit, whichever is more', the second 'on the next Rs. 75000/-' at 60 per cent and the third 'on the balance of the book profit' at 40 per cent, with the columns broken across the page. The figures in the deed do not correspond to the statutory slabs in force for the year and I could not reconcile them; nothing in the holding turns on the figures. The judgment also decides a separate ground on entry tax and s.43B, which is not covered by this entry. The substantive reasoning quoted in this entry is the Tribunal's, set out in the judgment at paras 4 and 6; the High Court's own words are confined to paras 7 and 8. I fetched the judgment twice with ?type=print and paras 7 and 8 came back identical on both passes. 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 Revenue's appeal was dismissed as devoid of merit; the view taken by the Tribunal was just and proper and no substantial question of law arose. The Tribunal's holding, adopted by the Court, was that clause 6 of the deed provides the manner of quantifying the remuneration payable to the partners; that although the exact quantum has not been specified, because the salary has been made a function of annual book profit which can be determined only at the end of the year, the deed clearly provides for the manner of quantification; that this is not a case where the partners have simply left the doors open to claim remuneration as per s.40(b)(v), which was the backdrop for Circular No. 739; and that the Board's guidance in fact supported the assessee rather than the Revenue, so that the CIT(A) had rightly deleted the disallowance.
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