Section 185

Section 185 — the law in short

What the courts have decided on section 185, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• CIT v S.R. Batliboi & Associates High CourtHelps taxpayerHigh Courts differ
  The revised partnership deed was not filed with the return but was produced during the assessment. Does s.185 still disallow the partners' remuneration?
  No, on this judgment. The Calcutta High Court held that s.185 read with s.184, although worded in emphatic terms, is not intended to be mandatory. The Assessing Officer had refused to treat the return as defective under s.139(9); having refused that, he could not simultaneously hold the return to be in derogation of s.184(4) and disallow the deduction. The disallowance of Rs. 4,49,60,000 of partners' remuneration was deleted.
• M/s Bhaskar & Co v CIT High CourtHelps departmentHigh Courts differ
  Our firm was a registered firm before 1993. Must we still produce a certified copy of the deed to be assessed as a firm?
  Yes. The Kerala High Court held that even a firm which enjoyed registration up to assessment year 1992-93 must furnish a certified copy of the instrument of partnership to be assessed as a firm for any year from 1993-94 onwards, and that the consequence of non-production is disallowance under s.185 of interest, remuneration and bonus paid to partners. Once the status is granted on that footing, s.184(3) carries it forward without further production until there is a change in constitution, when s.184(4) requires the revised instrument with the return. On the facts the Court gave a limited concession, remitting the matter for verification and directing that status as a firm be granted as a special case if the certified copy had in fact been produced when the assessment was taken up.
• GRK Agencies v ITO — a deed saying salary 'as may be mutually agreed' will not carry a section 40(b)(v) claim ITATHelps departmentNo later treatment found
  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.
• Shree Jagdamba Emery Stone v ITO ITATHelps taxpayerNo later treatment found
  The officer refused you firm status because a document was missing that the Explanation to s.139(9) does not mention. Was he entitled to do that without giving you a chance to put it right?
  No. The Tribunal held that the enumeration of defects in the Explanation below s.139(9) is not exhaustive but only illustrative, so a document the Explanation does not name can still be a defect; but precisely because it is a defect within s.139(9), the assessee must be given the opportunity to rectify it before the consequence is visited on him. The department could not deny firm status on a defect outside the Explanation without first offering that opportunity.
• Statutory position — section 40(b)(v): the working-partner remuneration ceiling, raised from AY 2025-26 CBDT Circulars & InstructionsCuts both ways
  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?
  For assessment year 2025-26 onwards the ceiling is Rs 3,00,000 or 90 per cent of the book profit, whichever is more, on the first Rs 6,00,000 of book profit or in case of a loss, and 60 per cent of the balance of the book profit. Those figures were substituted by the Finance (No. 2) Act 2024 (Act No. 15 of 2024) with effect from 1 April 2025. For assessment years 2010-11 to 2024-25 the same two-band table applied but with Rs 1,50,000 and Rs 3,00,000 in place of Rs 3,00,000 and Rs 6,00,000. The separate table for professional firms disappeared from AY 2010-11 and there is now one table for all firms.
• Statutory position — sections 184 and 185: what a firm loses when it is not assessed as a firm CBDT Circulars & InstructionsCuts both ways
  The AO has invoked section 185 because of a defect in the partnership deed filed with our return. What exactly do we lose, and does the partner get any relief?
  The firm loses every rupee it paid its partners. Section 185 provides that where a firm does not comply with section 184 for any assessment year, it is so assessed that no deduction by way of interest, salary, bonus, commission or remuneration to any partner is allowed in computing its business income. Section 184(5) imposes the same consequence where there is a section 144 failure. The partner is not taxed on the same amounts, because both provisions end by saying those sums are not chargeable under clause (v) of section 28.
• 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 CBDT Circulars & InstructionsHelps department
  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.
• Statutory position — sections 10(2A) and 28(v): the share of profit is exempt, the remuneration and interest are not CBDT Circulars & InstructionsCuts both ways
  The AO says the whole of what I received from my firm is taxable. Which part of a partner's receipts from his firm is actually exempt, and how is the exempt share computed?
  Only the partner's share in the total income of the firm is exempt, and only where the firm is separately assessed as such — that is section 10(2A). Interest, salary, bonus, commission and remuneration due to or received by a partner from the firm are not covered by the exemption at all; they are charged in the partner's hands as business income under section 28(v). The proviso to section 28(v) then works the other way, reducing the partner's income to the extent the firm was denied the deduction under section 40(b).

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.