Law:

Section:

Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary etc. paid by firm to petitioner - Assessment year 1996-97 Where manner of fixing remuneration of partners had been specified, method of remuneration having been laid down, assessee-firm was entitled to deduct remuneration paid to partners under section 40(b)( v) [In favour of assessee] Where the question was whether as per the partnership deed in question, any remuneration was fixed for payment to the partners of the firm : Held that, it was apparent that prior to the assessment year 1996-97, the partnership deed of the assessee-firm did not contain any clause in respect of the payment of remuneration. The partners of the assessee-firm executed a fresh partnership deed in March, 1997, and incorporated therein conditions for fixing remuneration. A bare perusal of the partnership deed clearly showed that in case the book profits were up to Rs. 75,000, then the partners would be entitled to remuneration up to Rs. 50,000 or 90 per cent of the book profits, whichever was more. In respect of the next Rs. 75,000, it was 60 per cent, and for the balance book profits, it was 40 per cent. Thereafter, it was further clarified that the book profits would be computed as defined in section 40(b), or any other provision of law as may be applicable for the assessment of the partnership firm. It had also been clarified that in case there was any loss in a particular year, the partners would not be entitled to any remuneration whereas the section in question allows the remuneration even in case of losses. There was no merit in the revenue that in respect of the profits up to Rs. 75,000, even in the partnership deed, the words "up to Rs. 50,000 or 90 per cent of the book profits" had been used which showed that the partnership deed did not exactly determine the remuneration of the partners. CBDT Circular No. 739, dated 25-3-1996 lays down two conditions. Either the amount of remuneration payable should be specified or the manner of quantifying the remuneration should be specified. In the present case, the manner of fixing the remuneration of the partners had been specified. The method of…

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