Amendment of partnership deed to increase distributable profits.

[C.A. DEV KUMAR KOTHARI]

Amendment in Income-tax Act:

The Finance (no.2) Act 2009 has amended and increased maximum remuneration which can be paid to  partners  with benefit of  allowability  under section 40(b). The distribution should  however,  be in accordance with partnership deed of the firm or any variation in the same as agreed by all partners and supported by a suitable deed signed by all partners.

The amendment was proposed vide clause 15 of the Finance (No.2) Bill, 2009 and has been enacted in the same manner. Accordingly now relevant clause of section 40 of the Income-tax Act w.e.f. 1st day of April, 2010, stands as follows:

"(a) on the first Rs.3,00,000 of the book-profit or in case of a loss	Rs.1,50,000 or at the rate of 90 per cent. Of the book-profit, whichever is more;
(b) on the balance of the book-profit	at the rate of 60 per cent.".

So now there is no difference between professional firms and other firms. In case of loss in any type of firm the allowable deduction on account of remuneration to eligible partners shall be Rs.1,50,000/-

This amendment is w.e.f. 01.04.2010 and is applicable from assessment year 2010-11 for which the previous year begun on 01.04.2009 that is before amendment was even announced in budget proposal and became law later on. Therefore, naturally assessee firms and their partners can take steps to amend partnership deed only subsequently. However, they can give effect to the amendment w.e.f. 01.04.2009.

Deed of amendment or deed of variation:

A draft deed of amendment of partnership deed is appended below in which the author has considered two working partners and one sleeping partner / a company. The language in amendment deed needs to be tuned with the original deed.

Suggested clause for deemed amendment:

 Author also suggest a clause for deemed amendment, by consent of all partners so as to change rate of interest, book profit and distributable profits in tune with amendments in the Income-tax Act, 1961 or any new enactment in place of the Act. If this type of clause is existing in original/ variation deed made earlier  as suggested by author to his clients) one can take view that the relevant clauses stands amended without any further need to prepare an amendment deed. However, to keep the matter beyond  any doubt, it is advisable to execute an amendment or variation deed as early as possible

Profits are distributed at year end:

Profit and loss account is prepared at year end. The first year after amendment will end on 31.03.2010. After preparation of the profit and loss account the book profit and distributable profit shall be determined. Therefore, amendment in partnership deed made now, in tune with amendment in Income-tax Act,1961  w.r.e.f. 01.04.2009 should be accepted by the A.O. and it is expected that the A.O. shall not dispute amount of distributable profit on the basis of amendment for whole of the year. In view of the author the A.O. shall have no such right to dispute, because the amended law is applicable for whole of the previous year, and the decision to distribute profit is made at the year end.  

But one should not be surprised  if the A.O.  raises a dispute  in this regard. In that case  it may be argued that the Act was passed late hence the deed was amended after amendment was passed and that is reason for belated amendment in deed. That this  was for reasons beyond control of the assessee.

Board Circular is desired:

The business in partnership firms are generally at small and medium scale. It can be said that partnership firms are usually not very well organized.

CBDT will do well by issuing a circular to the effect that an amendment in partnership deed made at any time before 31.03.2010 will govern the entire previous year ended on 31.03.2010.

DEED OF AMENDMENT OF PARTNERSHIP

Of

M/s. X.Y. Investments, Stock Exchange Road  …. India.

THIS DEED OF AMENDMENT OF PARTNERSHIP is made on this the day of, Two Thousand and Nine  BETWEEN  (1)X  ….., son of ….., at present residing at Premises No. …..  (2)   Y ….., son of ….., at present residing at Premises No. ….. of the   and (3)  M/s XY   Ltd having their registered office at…. Hereinafter individually and collectively referred to as partner / partners which expression shall, unless otherwise stated or repugnant to the context shall include respective their legal heirs or successor or successor-in-office and assigns as the case may be.

WHEREASthe parties to this deed have been carrying on a business in Co-partnership under the name and style of "……" at …… since the …….. vide Deed of Partnership duly executed.

AND WHEREASThe parties hereof have mutually agreed and decided to their respective remuneration and made necessary changes in the terms, conditions and stipulations mentioned in the said Deed of Partnership dated the ……….

AND WHEREAS the parties to this Indenture in order to have their respective functions as partners and to avoid any future disputers and/or misunderstanding among themselves, have decided to record the terms, conditions and stipulations of the reconstituted partnership concern since verbally agreed upon in a deed of Amendment of Partnership in writing.

THE PARTNERS  UNANIMOUSLY CONSENT  AND AGREE   AS  FOLLOWS :

1. That the  partners mentioned at serial nos. 1 and 2  shall be the working partner  and shall devote time and attention in the conduct of the affairs of the Partnership business and in consideration of devoting time and attention to the business of the Partnership, as the circumstances and business needs may require, they shall be entitled to draw remuneration annually as mentioned below with effect from 1^st April 2009. Partner at serial no. 3 being a company and/ or a sleeping partner is not considered as a working partner.
2. The yearly remuneration shall be calculated as percentage of the Book Profit for each accounting year in the following manner :-

Book Profit	Amount of Salary payable to partners
on the first Rs.3,00,000 of the book-profit or in case of a loss	Rs.1,50,000 or at the rate of 90 per cent. Of the book-profit, whichever is more;
on the balance of the book-profit	At the rate of 60%

For the purpose of the above calculation, the Book Profit shall be calculated on the basis of Book Profits as shown by the books and computed as provided in the Chapter-IVD of the Income Tax Act without deducting remuneration paid or payable to the partners for the relevant accounting year. The remuneration so paid or payable to the Working Partners as above shall be credited to their respective current accounts on ascertainment of Book Profits.  The partner salary shall be distributed between the aforesaid partners in the following manner:

Name of Partner	Share of Partners Remuneration
Mr. X	60%
Mr. Y	40%
M/s. XY Ltd	Nil
Total	100%

The Working Partners shall be entitled to regularly draw certain amount every month against such remuneration so payable to them and if his total withdrawals during the year exceed the amount of remuneration found payable to any of them, and it is not made up by the amount found credited in the current account, then such excess shall be treated as drawings from the partners capital balance with the firm. 

3. The partners may from time to time modify the above term relating to payment of remuneration by executing a Supplementary Deed and any such Deed when executed shall have effect, unless otherwise provided, from the first day of the accounting period in which such supplementary Deed is executed and the same shall form part of this Deed of Partnership.
4. That partners also agree that in case of any amendment in the Income-tax Act, 1961 (or any new enactment coming into force in place of the Income-tax Act, 1961) in relation to interest payable to partners, book profit of firm, distributable profits and  maximum ratio of profit distributable and similar related provisions  the partnership deed shall be deemed to have been amended, with consent of all partners, in these regard so as to permit payment or distribution not exceeding maximum being permitted in the relevant law as may be in force from time to time without their being any need to amend the partnership deed  about  these issues.
5. That all other Clauses as stated in the Deed of Partnership shall have the effect on the partnership firm as they applied to the firm, except for those clauses mentioned hereinabove.

IN WITNESS WHEREOF the parties hereto have set and subscribed their hands, and seals and signatures on the day, month and year first written above.

SIGNED, SEALED AND DELIVERED BY In the presence of:                          

SIGNATURE OF PARTNERS

( …X.. )

( …Y….. )

For  XY  Ltd

Director.

Discussions to this article

[jaikannan jegatheson]

Please clarify that the amendment made in the remuneration clause of the partnership deed has to be intimated both to registrar of firms and income tax department