Circular No. 739

377. Whether for assessment years subsequent to assessment year 1996-97, no deduction under section 40(b)(v) will be admissible unless partnership deed either specifies amount of remuneration payable to each individual working partner or lays down manner of quantifying such remuneration

What this is

Circular No. 739 was issued by the Central Board of Direct Taxes on 25 March 1996. Its subject is 377. Whether for assessment years subsequent to assessment year 1996-97, no deduction under section 40(b)(v) will be admissible unless partnership deed either specifies amount of remuneration payable to each individual working partner or lays down manner of quantifying such remuneration.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Settles when a partnership deed clause is good enough to support the deduction for working partners' remuneration under section 40(b)(v). Two common clauses were in question: one saying remuneration will be the amount allowable under section 40(b)(v), the other saying it will be as mutually agreed between the partners at the end of the year. Taking a liberal view for the initial years of the amended section 40(b), which came in only from assessment year 1993-94, the Board allows the deduction on the first type of clause for assessment years 1993-94 to 1996-97. Where neither the amount nor even the limit of total remuneration is specified and the whole matter is left to the partners at the end of the accounting period, no deduction is allowed. And for assessment years after 1996-97 no deduction is admissible under section 40(b)(v) unless the deed either specifies the amount payable to each individual working partner or lays down the manner of quantifying it.

Why it was issued

Representations were received that Assessing Officers were refusing the deduction in scrutiny assessments on such clauses, on the ground that they neither specify the amount for each partner nor lay down a manner of quantification.

Who it reaches

Firms paying remuneration to working partners
Firms whose deeds tie remuneration to the section 40(b)(v) ceiling
Firms whose deeds leave remuneration to be agreed at the year end
Assessing Officers scrutinising partner remuneration

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.40	s.35, s.66

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

377. Whether for assessment years subsequent to assessment year 1996-97, no deduction under section 40(b)(v) will be admissible unless partnership deed either specifies amount of remuneration payable to each individual working partner or lays down manner of quantifying such remuneration
1. The Board have received representations seeking clarification regarding disallowance of remuneration paid to the working partners as provided under section 40(b)( v) of the Income-tax Act. In particular, the representations have referred to two types of clauses which are generally incorporated in the partnership deeds. These are :
(i) The partners have agreed that the remuneration to a working partner will be the amount of remuneration allowable under the provisions of section 40(b)( v) of the Income-tax Act; and
(ii) The amount of remuneration to working partner will be as may be mutually agreed upon between partners at the end of the year.
It has been represented that the Assessing Officers are not allowing deduction on the basis of these and similar clauses in the course of scrutiny assessments for the reason that they neither specify the amount of remuneration to each individual nor lay down the manner of quantifying such remuneration.
2. The Board have considered the representations. Since the amended provisions of section 40(b) have been introduced only with effect from the assessment year 1993-94 and these may not have been understood correctly the Board are of the view that liberal approach may be taken for the initial years. It has been decided that for the assessment years 1993-94 to 1996-97 deduction for remuneration to a working partner may be allowed on the basis of the clauses of the type mentioned at 1(i) above.
3. 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, in such cases payment of remuneration to partners cannot be allowed as deduction in the computation of the firm’s income.
4. 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.
Circular : No. 739, dated 25-3-1996.

What to watch

The concession for the first type of clause is confined to assessment years 1993-94 to 1996-97 - the circular fixes that window itself and it has long closed.
The second type of clause, leaving the amount to be agreed at the year end, is refused for every year, including the concession years.
From assessment year 1997-98 onwards the deed must do one of two things: name the amount for each individual working partner, or set out the manner of quantifying it.
Section 40(b) has been amended since, including its ceilings; what survives here is the requirement that the deed itself must fix the amount or the method.

Where you meet it

In a scrutiny assessment of a firm where partner remuneration is disallowed for a vague deed clause, and when drafting or amending a partnership deed.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 12/2019 — 'Assessment of Firms'- some of the important issues to be kept under consideration by the Assessing Officers while frami 19 June 2019
Circular 10/DV/2013 — Section 40(a)(ia) OF the Income-tax Act, 1961 - Business disallowance - Interest, etc., paid to resident without deducti 16 December 2013
Circular No. 1/2009 — 1/2009 dated 27 03 2009 27 March 2009
Circular No. 786 — [Withdrawn by Circular No. 7/2009, Dated 22-10-2009] 7 February 2000
Circular No. 737 — Sections 44AD and 44AE l Civil Construction Business/transport Business 23 February 1996
Circular No. 649 — Section 44C l Head Office Expenditure in Case of Non-residents 31 March 1993

← Circular No. 738 · Circular No. 737 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.