The officer has disallowed the whole of our partners' remuneration - the deed does not name a figure, he says one partner is not a working partner, and he has worked the ceiling on the net profit after remuneration. What is left of the claim?
The client is a firm of three partners trading in building materials, assessed at a ward in Nashik, accounts audited under s.44AB. The partnership deed dated 1 April 2017 says that the working partners shall be paid such remuneration as may be mutually agreed between them from time to time, subject to the ceiling laid down in s.40(b)(v). A supplementary deed executed on 15 January 2024 sets out slabs of book profit and percentages and names the two partners who are to draw remuneration. For FY 2023-24 the firm paid Rs 14,00,000 to the managing partner and Rs 10,00,000 to a second partner, who is his wife and keeps the firm's books and handles its bank and statutory work from home. Interest to partners of Rs 5,40,000 at 12 per cent was also paid and is not in dispute. The net profit after remuneration is Rs 9,00,000, so book profit before remuneration is Rs 33,00,000. The return for AY 2024-25 was filed on 30 October 2024. The order under s.143(3) read with s.144B dated 12 March 2026 disallows the whole Rs 24,00,000: the original deed quantifies nothing, the supplementary deed came in January 2024 and cannot cover the earlier months, the second partner is a sleeping partner, and in any event the ceiling worked on the Rs 9,00,000 shown is Rs 6,30,000. The firm holds both deeds, the partners' capital accounts, and the bank and GST records the second partner maintains.
Read both deeds with a calendar beside them and settle three dates before arguing anything: when the deed that authorises the payment was executed, what period the claim covers, and whether the deed quantifies the remuneration or lays down a manner of quantifying it. Those three answers decide how much of the Rs 24,00,000 is even arguable. The ceiling is the fourth question and the smallest one - on this file it takes off Rs 3,30,000 whatever happens, and no argument about book profit reaches the rest of the claim if the deed does not carry it.
A High Court has held that the words requiring the payment to be in accordance with the terms of the partnership deed mean the deed must either quantify the remuneration or lay down the manner of computing it; a clause leaving 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. That is this deed in both respects. A Tribunal Bench has gone further on facts close to these: a clause saying salary is to be paid as mutually agreed from time to time neither fixes a sum, fixed or variable by reference to profits, nor identifies which partners are working partners, so it is at best an authorisation to pay and nothing more, and a later resolution on the firm's letterhead - unstamped, undated by the signatories and produced only when the officer asked - is not a valid amendment of the deed.
The Board's circular says that no deduction is admissible unless the deed either specifies the amount payable to each individual working partner or lays down the manner of quantifying such remuneration, and that where neither the amount nor even the limit has been specified and the figure is left to be determined by the partners at the end of the period, the remuneration cannot be allowed. Read the other way, a deed that states the manner is enough - and a High Court has so held, upholding a deduction where the deed gave slabs of percentages of book profit determinable only at the year end, shared equally, with no salary in a year of loss, on the footing that the circular itself requires either the quantum or the manner. The supplementary deed here is in that form.
Sub-clause (iii) denies the deduction for any period falling before the date of the deed that authorises the payment. The library's statement of the section puts it as one of three cumulative gates - status, authorisation and timing - which all have to be passed before the ceiling becomes relevant at all, and its concept page says the same in practitioner's terms: a supplementary deed executed in one month cannot authorise remuneration for the preceding months, and it is the easiest disallowance an officer can make. On this file that means the defensible claim is the part of the Rs 24,00,000 referable to 15 January 2024 onwards, computed on the slabs the supplementary deed lays down.
Only a working partner may be paid at all - an individual actively engaged in conducting the affairs of the business or profession of the firm - and the officer's finding here is that the second partner does not attend the office. A Tribunal Bench has held that not attending the office daily does not make a partner a sleeping partner where the work she actually did was proved, and noted that the remuneration had been offered by her under s.28(v). The test is what she does, so the file needs the bank authorisations, the GST and TDS filings made under her signature, the correspondence and the books she maintains.
Book profit for this purpose is the net profit shown in the profit and loss account, computed in the manner laid down in Chapter IV-D, increased by the aggregate remuneration paid or payable to all the partners if that has been deducted in arriving at the net profit. The grossing-up is deliberate, so that the ceiling is not computed on a figure the remuneration has itself depressed - which is exactly what the order does here. For AY 2024-25 the table is Rs 1,50,000 or 90 per cent of book profit, whichever is more, on the first Rs 3,00,000 of book profit or in case of a loss, and 60 per cent of the balance; the raised figures of Rs 3,00,000 and Rs 6,00,000 apply only from AY 2025-26. On book profit of Rs 33,00,000 the ceiling is Rs 2,70,000 plus Rs 18,00,000, that is Rs 20,70,000, against the Rs 6,30,000 in the order.
If the firm is not assessed as a firm for the year, the question of quantum never arises: the firm is assessed so that no deduction by way of interest, salary, bonus, commission or remuneration to any partner is allowed at all, and the same consequence follows on a best judgment failure. That turns on whether a certified copy of the instrument accompanied the return and whether any change in the constitution or in the partners' shares during the year was reported. On this file the supplementary deed of January 2024 is a change during the year, so confirm what was filed with the return of AY 2024-25.
What the partners received is not exempt. Only a partner's share in the total income of a firm separately assessed as such is exempt; interest, salary, bonus, commission and remuneration are charged in his hands as business income under s.28(v). The proviso to that clause then works the other way, reducing the partner's income to the extent the firm was denied the deduction under s.40(b) - so a disallowance sustained in the firm must be followed through into each partner's assessment, or the same money is taxed twice. Where the failure is under the firm-status provisions instead, both of them end by saying the sums are not chargeable under that clause at all.
A total disallowance on a mutual-agreement clause usually becomes a partial one. Where a supplementary deed exists and states a manner of quantification, the claim for the period after it is commonly allowed, and the period before it is commonly lost - so the realistic outcome on this file is somewhere between the ceiling figure for the part-year and nil, not the Rs 24,00,000 claimed. The working-partner finding is generally deleted where function is evidenced and generally sustained where the answer is that the partner is a family member who helps. The ceiling recomputation on grossed-up book profit is close to automatic once the working is filed. What is usually lost altogether is a deed that quantifies nothing and was never supplemented. The corresponding relief in the partner's hands is often missed, and that is the part of the file most likely to cost the client twice.
