Section 194T: Tedious Challenges before Firms for TDS

Government’s quest to bring more and more payments within the TDS net seems to have prompted section 194T to come on the statute by the Finance (No. 2) Act, 2024 w.e.f. 01.04.2025. Section 194T reads as under:

Payments to partners of firms.

194T. (1) Any person, being a firm, responsible for paying any sum in the nature of salary, remuneration,
commission, bonus or interest to a partner of the firm, shall, at the time of credit of such sum to the account of the partner (including the capital account) or at the time of payment thereof, whichever is earlier shall, deduct income-tax thereon at the rate of ten per cent.

(2) No deduction shall be made under sub-section (1) where such sum or the aggregate of such sums credited or paid or likely to be credited or paid to the partner of the firm does not exceed twenty thousand rupees during the financial year. 

Salient features of section 194T:

1. Obligation to deduct tax u/s 194T is on the firm which would include LLP also in view of the definition of ‘firm’ given in section 2(23) of the Income Tax Act, 1961. 
2. Tax is to be deducted at the rate of 10% on the amount of salary, remuneration, commission, bonus or
   interest paid to a partner of the firm.
3. Tax is to be deducted at the time of credit of such sum to the account of the partner or at the time of payment thereof, whichever is earlier.
4.  No tax is required to be deducted where amount of salary etc. paid to the partner of the firm does not exceed Rs. 20,000/- during the financial year. However, tax would be required to be deducted in case the aggregate of salary, remuneration, interest etc. paid or credited to a partner during the year exceeds a sum of Rs. 20,000/- 

Issues

Though section 194T is not a long section, but several issues arise out of it:

1. Since section 194T has been brought by Finance (No. 2) Act, 2024 w.e.f. 01.04.2025, obligation to deduct Tax at source would arise on or after 01.04.2025. But it does not mean that it is applicable from AY 2025- 26. Even if amount of salary etc. to the partner is credited on 31.03.2025 in respect of financial year 2024-25 but payment is made against such credit in the year commencing on or after 01.04.2025, then also obligation to deduct tax u/s 194T would not arise qua such payment. What is necessary for the obligation to deduct tax under section 194T is that salary etc. to the partner must be in respect of the financial year beginning on or after 1.4.2025.
2. Obligation to deduct tax u/s 194T is with reference to the remuneration, salary, etc. paid or payable to the partner even if such salary, remuneration, etc or any portion of it, is not allowable deduction to the firm against its business or professional income due to operation of the conditions & limits prescribed in section 40(b) of the Income Tax Act, 1961, and even if such excess paid may not be taxable in the hands of the partner. This is for the reason that section 194T refers to any sum in the nature of salary, remuneration, etc. Therefore, allowability or disallowability of deduction in the hands of the firm and its corresponding taxability or non-taxability in the hands of the partner would be of no consequence in the matter of obligation to deduct tax at source. However, there may arise a situation of mismatch where firm deducts tax under section 194T with reference to the amount of remuneration, etc. whereas part of such remuneration may not be allowed as deduction due to operation of section 40(b) and because of such disallowability, the partner concerned offers the allowed amount alone as his taxable income as per section 28(v) read with its proviso. In such a case, the firm would show total amount of remuneration and tax deducted thereon in its TDS return which would in turn be reflected in Form 26AS of the partner concerned whereas the partner’s income tax return would show only the taxable part of the remuneration etc. u/s 28(v) of the Act & total amount of TDS deducted by the Firm. This mismatch would prompt CPC to issue notice to the partner to the effect that the income from the Firm offered in partner’s return is less as compared to TDS credit claimed in the return of income. 
3. In certain cases, remuneration, etc. is provided by the Firm in the partnership deed itself based on the computation of allowable amount as per section 40(b) which in turn is based on the computation of ‘book profit’ which further in turn is based on the finalisation of books of accounts of the firm which may take some time even after the close of the year. The amount of remuneration in that situation would be required to be credited on 31st march of the financial year. Any significant delay in finalisation of books of accounts of the firm in such a situation may lead to the failure of timely compliance of deduction of tax at source and its deposit in time.  
4. Section 194T casts obligation of deduction of tax at source on the firm irrespective of the residential status of the partner. Therefore, if a partner is non-resident, the question would arise as to whether tax has to be deducted u/s 194T or section 195. Section 194T is a specific provision for deduction of tax at source on the payments made to the partners whereas section 195 is also specific provision regarding withholding tax in case of non-residents. Therefore, in absence of non obstante clause in both section 194T and section 195, this issue i.e. tax is to be deducted under which of the two sections, would always remain relevant. 
5. Another aspect which would also be of importance is about the nature of such income received by the partner. Remuneration, salary or interest etc. paid to the partner of a firm has been held in the case of CIT v R. M. Chidamabaram Pillai 106 ITR 292 (SC) to be part of business profits only and that is why such income is taxable u/s 28(v) in the hands of the partner. In so far as tax rate for TDS prescribed u/s 194T is concerned, it is 10% but section 195 would require withholding of the tax with reference to such income at the rates in force. Since such income would be in the nature of business income in the hands of the nonresident partner, it may require the remitter firm to withhold tax at the rate which is applicable to the business income. 

Thus, it can be seen that section 194T is not exception to the general saying that no section under the Indian Income Tax Act is free from contentious issues.