Circular 739 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Circular 739 holds that from assessment year 1997-98 no deduction under section 40(b)(v) is admissible unless the partnership deed specifies the amount payable to each working partner or lays down the manner of quantifying it.
From the ICAI Guidance Note on Tax Audit (Revised 2026), Appendix XV, cited at paragraphs 21.1 and 35.9. The circular construes section 40(b)(v) of the Income-tax Act, 1961; for tax years under the Income-tax Act, 2025 the corresponding partner-remuneration provision and its deed requirements must be identified afresh.
The two deed clauses Circular 739 considered
Paragraph 1: the Board received representations seeking clarification regarding disallowance of remuneration paid to working partners under section 40(b)(v). The representations referred to two types of clauses generally incorporated in partnership deeds:
- "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."
Assessing Officers were not allowing deduction on the basis of these and similar clauses in the course of scrutiny assessments, for the reason that they neither specify the amount of remuneration to each individual nor lay down the manner of quantifying such remuneration.
The transitional relief
Paragraph 2: since the amended provisions of section 40(b) were introduced only with effect from assessment year 1993-94 and may not have been understood correctly, the Board took the view that a liberal approach may be taken for the initial years. It was decided that for assessment years 1993-94 to 1996-97, deduction for remuneration to a working partner may be allowed on the basis of clauses of the type mentioned at 1(i) above — the clause tying remuneration to the statutory ceiling.
The clause that never worked
Paragraph 3: in cases where neither the amount has been quantified nor even the limit of total remuneration has been specified, but the same has been left to be determined by the partners at the end of the accounting period, payment of remuneration to partners cannot be allowed as deduction in the computation of the firm's income.
Read paragraphs 2 and 3 together. The liberal approach for 1993-94 to 1996-97 applied only to clause type (i) — the one that referenced the section 40(b)(v) ceiling. Clause type (ii), leaving the amount to year-end mutual agreement, was never allowable, in any year, because it fixes neither an amount nor a manner of quantification. The distinction still matters when an old deed is being read forward.
The rule from assessment year 1997-98
"It is clarified that for the assessment years subsequent to the assessment year 1996-97, 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."
Two routes, and only two:
| Route | What the deed must contain |
|---|---|
| Specify the amount | A stated figure of remuneration payable to each individual working partner — partner by partner, not a firm-level total |
| Lay down the manner of quantifying | A formula or mechanism from which the amount is determinable without further agreement — for example, a stated share of book profit, or an allocation of the section 40(b)(v) ceiling among named working partners |
What fails is anything requiring a fresh decision after the year has run. The target of Circular 739 is the deed that defers the decision, not the deed that expresses it as a formula.
Why Circular 739 belongs in the tax audit file
The Guidance Note cites Circular 739 at paragraph 21.1 and paragraph 35.9, which is where the tax auditor meets it:
- Clause 21(c) of Form 3CD requires amounts inadmissible under section 40(b) or 40(ba) and the computation thereof. A deed that fails the Circular 739 test makes the entire partner remuneration inadmissible, not merely the excess over the ceiling.
- The auditor's starting document is therefore the partnership deed itself, read before the computation — and any supplementary deed executed during the year, with its date, since a deed that fixes remuneration mid-year cannot support the whole year.
The usual clause 21(c) computation compares actual remuneration against the section 40(b)(v) ceiling and reports the excess. Where Circular 739 is not satisfied, that comparison never begins: no deduction is admissible at all, so the inadmissible amount at clause 21(c) is the whole of the remuneration debited. This is one of the largest single adjustments a firm's tax audit can throw up, and it turns entirely on the wording of a document the auditor can read in five minutes.
Worked example
| Deed clause | Effect on remuneration of Rs 24,00,000 debited |
|---|---|
| "Remuneration to each working partner shall be Rs 1,00,000 per month" | Admissible subject to the section 40(b)(v) ceiling; only the excess is inadmissible |
| "Working partners A and B shall be entitled to remuneration in the ratio 60:40 of the maximum allowable under section 40(b)(v)" | Manner of quantifying laid down — admissible |
| "Remuneration shall be the amount allowable under section 40(b)(v)" — A.Y. 1995-96 | Allowed under the transitional relief |
| The same clause, A.Y. 2026-27 | Tested against the post-1996-97 rule; the auditor must consider whether a manner of quantifying each partner's share is laid down |
| "Remuneration as may be mutually agreed at the end of the year" | Wholly inadmissible — Rs 24,00,000 reported at clause 21(c) |
| Supplementary deed fixing remuneration executed on 1 October 2025 | Cannot support remuneration for the earlier part of the year |
Audit checklist
- Read the partnership deed before computing anything at clause 21(c).
- Confirm it either specifies the amount for each individual working partner or lays down the manner of quantifying it, as Circular 739 requires.
- Reject any clause leaving the amount to year-end mutual agreement.
- Check whether each remunerated partner is a working partner under the deed.
- Note the date of any supplementary deed and the period it can support.
- Where the deed fails, report the whole remuneration as inadmissible, with the computation.
- Keep a copy of the deed in the working papers.
- Cross-check the clause 21(c) figure against the section 40(b)(v) ceiling where the deed is valid.
Common mistakes
- Reporting only the excess over the ceiling where the deed itself fails the test.
- Treating a firm-level total as specifying each individual working partner's remuneration.
- Relying on the transitional relief for a current assessment year.
- Backdating a supplementary deed's effect to the start of the year.
- Computing the ceiling without first reading the deed.