Section 40(b)(v)

Section 40(b)(v) — the law in short

What the courts have decided on section 40(b)(v), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Pr CIT, Kota v Modern Motors — a deed that fixes the METHOD of computing partners' salary is enough High CourtHelps taxpayerNo later treatment found
  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.
• Sood Brij & Associates v CIT High CourtHelps department
  Our deed says the partners will be paid such remuneration as they mutually agree, up to the statutory ceiling. Is that enough for s.40(b)(v)?
  No. The Delhi High Court held that the words 'in accordance with the terms of the partnership deed' require the deed either to quantify the remuneration or to lay down the manner of computing it. A clause that leaves the amount to be settled by mutual agreement in future does not do that, and a clause that merely reproduces the statutory maximum fixes a ceiling rather than a quantum. The deduction of Rs. 21,40,000 was disallowed.
• CIT v Anil Hardware Store High CourtHelps taxpayer
  My deed gives a formula for partner remuneration, not a figure. Will the deduction be disallowed?
  No, provided the deed lays down the manner of quantifying the remuneration. Section 40(b)(v) read with Circular 739 puts the two limbs in the alternative — either the amount for each working partner, or the manner of quantifying it — and a transparent formula tied to book profit satisfies the second, so long as what is paid stays within the ceiling.
• 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.
• Statutory position — section 194T: from 1 April 2025 a firm must deduct 10 per cent on what it pays its own partners CBDT Circulars & InstructionsCuts both ways
  We credit partners' remuneration and interest to their capital accounts once a year when the accounts are finalised. Do we now have to deduct TDS on that?
  Yes, from 1 April 2025. Section 194T, inserted by the Finance (No. 2) Act 2024, requires a firm paying any sum in the nature of salary, remuneration, commission, bonus or interest to a partner to deduct income-tax at 10 per cent at the time of credit to the partner's account — expressly INCLUDING his capital account — or at the time of payment, whichever is earlier. No deduction is required where the sum, or the aggregate of such sums credited or paid or likely to be credited or paid to that partner, does not exceed Rs 20,000 in the financial year.
• 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.
• 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.

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.