What the courts have decided on section 40(b)(ii), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.
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GRK Agencies v ITO — a deed saying salary 'as may be mutually agreed' will not carry a section 40(b)(v) claim
ITATHelps departmentValidity unconfirmed
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.
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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.
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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 departmentValidity unconfirmed
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.
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.