How to draft remuneration clause in case of partnership deed

Originally posted by : CA Abhishek Singh
	Hello everyone, i have to draft the partnership deed of a firm engaged in the business of construction. it has three partners having equal shares. i have read the income tax act and one of the conidtion in sec 40b for allowing the remuneration is that "IT SHOULD BE AUTHORISED BY AND IN ACCORDANCE WITH THE PARTNERSHIP DEED". My question : How should i draft the clause so that remuneration should be as per the income tax act.

Specimen 

The remuneration payable to the abovesaid working partners shall be computed in the manner laid down in explanation 3 to section 40(b) of the Income Tax Act 1961 or any other applicable provision as may be in force in the I. T. assessment of the PARTNERSHIP FIRM of the relevant accounting year. Such amount shall be distributed between the said working partners in their profit / loss sharing ratio. Such remuneration shall be calculated at the close of the accounting year and shall be credited to the account of each working partners. The working partners shall be entitled to withdraw out of remuneration for their personal needs from time to time.

thanks a lot.

1. It is agreed by and between the parties hereto that the following parties shall devote their full time and attention in the conduct of affairs of the firm as the circumstances and business needs may require:
   1. Mr. Partner 1
   2. Ms. Partner 2

The total remuneration payable to the above working partners shall be worked out as under:

For the purpose of this clause the expression “BOOK PROFIT’’ as defined in S.40 (b) of I.T. Act, 1961 or any statutory modification or re-enactment thereof, for the time being in force. Such total remuneration shall be paid to the working partners that is to say

1. Mr. Partner 1                    ------%
2. Ms. Partner 2                ----%

The remuneration payable to the working partners above shall be credited to their respective accounts on ascertainment of book profits.

The total remuneration/bonus shall not extend as per the limits laid down under clause 5 of section 40 (b) of the I.T. Act 1961 , and the above calculation of the remuneration is also subject to variation, if any changes made under clause 5 of section 40 (b) of the Income Tax Act , 1961.

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. Suppose, 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.

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

I have made changes in LLP Partnership agreement and added Remuneration clause. Now want to file Form-3 for the same but in serial number 19, it is asking to choose an option. what option do i need to choose?

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