Sharing of profits btw partners- a different business model

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Nupur Sharma (Querist)
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06 December 2014 The limits for remuneration, interest on capital etc have been given under section 44(b). Anything paid in excess of those limits or if the conditions laid down under section 44(b) are not followed, then the amount will be dissallowed.

One of the most important conditions laid down under this section is that remuneration clause must be present in partnership deed and quantification of such remuneration payable to partners must be done in the partnership deed.

Keeping in mind this section, I have a query to ask here. What if the partnership firm is based on a slightly different business model? Like in case there are 3 partners and they undertake IT projects from overseas clients. Project A has been undertaken by first partner and project B by the second partner, Project C by the third partner and a Project D on which first and second partners are working. Now first partner will get all the income generated from project A plus 50 % from Project D and similarly second partner will get all income generated from Project B plus 50% from Project D, while the third partner will get all income genertaed from his project C.

Will limits of section 40(b) apply here as well? But under what head? This is not salary. Should all this sharing of income from projects be simply treated as sharing of profits because this cannot be treated as remuneration in my opinion.

I would really appreciate if somebody could guide me on this. Quite a technical issue for me.

Thanks in advance

Nupur Sharma

Nupur Sharma (Querist)
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06 December 2014 Nobody to respond????

Nupur Sharma

Nupur Sharma (Querist)
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06 December 2014 Nobody to respond???????

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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25 July 2025 You're absolutely right to question the application of Section 40(b) in such a nuanced profit-sharing model among partners. Let's clarify everything step-by-step.

🔍 Your Business Model:
You have three partners.

Each partner works on independent IT projects (A, B, C).

Two partners work jointly on Project D, income split 50/50.

Income from each project goes entirely or proportionally to the respective partner(s).

📌 Core Question:
Is this "income sharing by project" subject to Section 40(b) limits (remuneration/interest to partners)? Or can it be treated as profit-sharing?

✅ Short Answer:
This is NOT covered under Section 40(b) — if structured and documented properly in the partnership deed.
It should be treated as profit-sharing, not remuneration.

📘 Understanding Section 40(b):
Section 40(b) of the Income Tax Act applies only when:

A firm claims deduction for:

Salary/remuneration to partners

Interest on capital/loan to partners

Conditions must be satisfied:

These payments must be authorized and quantified in the partnership deed.

Subject to prescribed limits under Income Tax Rules.

⚠️ Any excess or non-compliant payment gets disallowed as a deduction from the firm’s taxable income.

🧠 But Your Model is Different:
There is no salary or remuneration.

The firm’s net income is being allocated based on project-wise effort and contribution.

Each partner gets their agreed share of net income, based on project ownership.

Thus, this is profit sharing, not remuneration.

💡 How to Stay Compliant:
✅ Clearly Draft the Partnership Deed:

Mention project-based profit-sharing ratio.

Instead of a flat ratio (e.g., 33-33-34), explain:

Partner A gets 100% of Project A's net income + 50% of Project D

Partner B gets 100% of Project B + 50% of Project D

Partner C gets 100% of Project C

State that no remuneration or interest on capital is payable (if that’s the case).

📑 Do NOT claim it as remuneration or salary/commission/bonus in books — because that triggers Section 40(b).

🧾 Record project-wise revenue and expenses properly in the firm’s books for audit trail.

🛡️ No TDS required, and this income is exempt in hands of partners under Section 10(2A) as share of profit from a partnership firm.

⚖️ Precedents & Clarifications:
CBDT and courts have consistently distinguished between remuneration and profit sharing.

As long as profit-sharing is based on agreement and not services rendered, Section 40(b) does not apply.

📝 Example Clause for Partnership Deed:
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Profit sharing among partners shall be based on the respective projects handled:
- Partner A shall be entitled to 100% of net income from Project A and 50% of net income from Project D.
- Partner B shall be entitled to 100% of net income from Project B and 50% of net income from Project D.
- Partner C shall be entitled to 100% of net income from Project C.
No fixed remuneration or salary shall be paid to any partner.
✅ Final Verdict:
Your model is fully acceptable under Indian tax laws, provided it's structured as profit sharing.

Section 40(b) will not apply, and there's no disallowance risk, if everything is in the deed and books correctly.

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