How to book income for partners- different business model

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

Quantification of remuneration is must: CBDT in its circular no. 739 dt 25/03/1996 have clarified that no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration. Thus quantification of remuneration is required to be there in the partnership deed for it to be considered as authorized by the partnership deed and to avoid any disallowance u/s 40(b). It is seen that in many cases the partnership deed contains clauses like the following “The partners have agreed that the remuneration to a working partner will be the amount of remuneration allowable under the provisions of section 40(b)(v) of the Income-tax Act and the amount of remuneration to working partner will be as may be mutually agreed upon between partners at the end of the year.” If such a clause is contained in the partnership deed then remuneration to partners may be disallowed as per section 40(b) in view of the above circular. However In Commissioner of Income Tax Versus M/s. Anil Hardware Store [2010] 323 ITR 368 (HP) where remuneration clause in partnership deed was in line with section 40(b) and It was contended on behalf of the revenue that in respect of the profits upto Rs.75,000/-, even in the partnership deed, the word “upto Rs.50,000/- or 90% of the book profits” have been used which shows that the partnership deed does not exactly determine the remuneration of the partners. But it was held that “The CBDT circular referred to above 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 has been specified.” Hence deduction was allowed.