Is it a firm?
Section4 of partnership Act 1932
Partnership and Partner:
"Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually, "partners" and collectively "a firm".
Section6 of partnership Act 1932
Mode Of Determination Of Existence Of Partnership:-
In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. It should be decided by the partners of the partnership as defined in section 4 of the Act and such a partnership should be arises from the contract and not from the status as per section 5 of the Act.
So from the definition of partnership it is very clear that they ‘have agreed to share profits from the business carried on by all or any of them acting for all’. There is no need of common deploying or injection of fund or capital by all the partners like AOP as judged by Honourable supreme court in the case of ‘Sudhir Nagpal And Others vs The Income Tax Officer’. As per section 5 of the Act partnership should arise from a contract. As per section 6 partners have to decide are they partners or not. Since the stated case is a partnership as they are sharing profits of the business carried on by them self’s, they have contract, partnership deed and they stated in that they are partners (assuming from the situation).So it is a partnership firm.
Applicability of section 40(b) of Income Tax Act 1961
As per section 40(b) of the Act
i) Remuneration should be authorised by and in accordance with partnership deed. A Circular has been issued by CBDT having no.739 dt. 25.03.1996 stating that amount of remuneration shall be disallowed if the deed doesn’t specify the amount of remuneration OR it doesn’t lay down the manner of fixation of remuneration. One of the above stated clause must be in the deed to avail the deduction as per sec 40(b). Case law CIT v/s Anil Hardware Store (2010) 323 ITR 368 (HP).
ii) Remuneration should be paid to a working partner, defined in explanation 4 of the section. As you specified here in the situation remuneration is paid only to the working partners.so this condition is satisfied in the partnership.
iii) Remuneration should be within the limits as stated in the section (not texting here as it is well known to everyone).If the remuneration paid to the partners is in excess then the excess will be disallowed.
Conclusion of applicability of section 40(b)
Only the working partners alone gets the remuneration and the clause is stated in the partnership deed, section 40(b) is applicable here. If the remuneration paid is in excess of the limits as stated in the Act then the excess only will come under the ambit of disallowance.
Under what head?
The partner will get taxed the whole amount of remuneration under ‘Profits and Gains of Business or Profession’ as per clause (v) of section 28 of the Act and it will not be treated as salary as per section 15 of the Act.
Should all this sharing of income from projects be simply treated as sharing of profits or remuneration?
As per point (i) of clause (b) of section 40 of the Act “Any payment of salary, bonus, commission or remuneration by whatever name called (hereinafter referred to as remuneration)
So in our case is there a sharing of profit by whatever name called it can be treated as remuneration. So the sharing of profit is a payment of remuneration to the partners and section 40(b) will get apply.
The above referred are my guidance and supportings to your first Query. Expecting this helps you to turn the key of solution to the problem.
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