S. 40(b) — Remuneration to working partner as per the partnership deed — Partnership deed gave power to modify the terms of remuneration — Whether the existence of such term would render remuneration not qualified for deduction — Held, No.

The assessee, a firm, executed a supplementary partnership
deed on 20-6-2004 to provide for the payment of interest and remuneration to the
working partners. As per the deed, the remuneration was to be calculated as a
percentage of the profit as per S. 40(b) of the Act. One of the clauses in the
deed further provided that the partners may decide to pay remuneration at a
lower amount or not to pay remuneration or to pay remuneration on any other
criteria or ratio. According to the AO, as explained in Circular No. 739, dated
25-3-1996, since the partnership deed did not contain a specific provision for
calculating the amount of remuneration, no remuneration was allowable. He
further held that in any case, the remuneration for the period till 20-6-2004,
since it pertained to the period prior to the date of the execution of the deed,
cannot be allowed. The CIT(A) on appeal upheld the order of the AO.

According to the Tribunal, the Board Circular referred to by
the Tribunal required that either the remuneration payable to each of the
working partners is laid down in the deed or the deed must lay down the manner
of ascertaining such remuneration. Referring to the supplementary deed, the
Tribunal noted that the deed did provide the manner of quantifying the
remuneration to the partners. According to the Tribunal, the presence of clause
3(d) which empowered the partners to lower the remuneration or to not pay the
remuneration, did not erase the other clauses which clearly laid down the amount
of remuneration payable. It further observed that even in the absence of the
said clause 3(d), the partners had the power to alter the remuneration payable.
Accordingly, the orders of the lower authorities were modified to the said
extent.