Remuneration to partners

The amendment to Sec. 40(b) enhancing the limit of remuneration payable to partners in the Finance (No.2) Act of 2009, received the assent of the President on August 19, 2009, and is deemed to have come into force on April 1, 2009. Since the Finance Act was passed on August 19, 2009, a new deed of partnership can be written only in September 2009 or thereafter to revise the salary clause so that the benefit of revised ceiling will not be available from April 1, 2009, though the amendment to law is effective for assessment year 2009-10. Instructions are, therefore, necessary recognising the amendment to partnership deed after August 19, 2009 to be effective from April 1, 2009.

Sec. 40(b) allows deduction for remuneration to a partner, if it is stipulated in the partnership deed, from the date on which such stipulation is made in the deed. The difficulty pointed out by the reader, who is a tax practitioner, is that the enhanced ceiling cannot be availed from April 1 to the date of amendment for the assessment year 2010-11 in view of the fact that the pre-existing deed had provided for maximum salary under the pre-amended law. The law provides for remuneration as agreed between the partners and recorded in the partnership deed, subject to the ceiling prescribed by the statute.

The difficulty of the reader that he is not able to anticipate such enhanced deduction and provides for the same in the deed assumes that what is provided in law is what should be allowed and not that it is a ceiling as intended by the provision.

Salary is expected to be fixed with reference to service rendered by a working partner and not what is fixed as ceiling.

It is only then it is a bona fide provision. The amendment will ensure the benefit of higher ceiling even from April 1, 2009, where salary actually paid as per subsisting partnership deed was higher than the then ceiling prescribed under Sec. 40(b). Sec. 40(b) does not come in the way of a partner being paid a higher salary, if so agreed between the partners, though income tax law would limit the deduction to the ceiling prescribed under Sec. 40(b).

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Printable version | Apr 4, 2020 4:20:16 AM |

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