EVALUATING SEC. 194T OF THE INCOME TAX ACT, 1961
INTRODUCTION
A number of significant changes have been observed with the introduction of Finance Act, 2024. One such change has been made in the governance of payment made by the Firms towards their partners, with the introduction of Section 194T in the Income Tax Act, 1961. This provision compels the Partnership Firms and Limited Liability Partnerships for deduction of tax at source at the rate of 10% of the amount. However, such payment must be in the nature of Salary, Remuneration, Commission, Bonus or Interest. This provision only comes to effect when the aggregate amount paid to a partner, exceeds the prescribed limit of Rs. 20,000/- in a financial year. The deduction for payment of such nature is usually claimed under Sub Section b of Section 40 of the IT Act and are subject to predetermined limits.
APPLICABILITY
The said provision is applicable to all the Partnership firms and Limited Liability Partnerships. It applies to all the transactions made in the form of Salary, Remuneration, Commission, Bonus and Interest. This particular section does not throw any light over the transactions in the form of Revaluation of assets, Recognition of goodwill, Restructuring of the firm, Change in profit sharing ratio etc. though such transactions are not in the nature of salary, remuneration etc. This poses an imminent task before the accountants of the firms to ensure that the nature of the transactions in their books of account is without any flaw. However, such precautionary measure does not promise that the firms may not fall prey to the close scrutiny by the IT Department. The said section is to be imposed in the case of working partners as well as non-working partners.
BENEFITS
Introduction of Section 194T also puts stormy clouds over the practice of interim withdrawals made by the partners. It has been a common practice where only during the finalisation of the account the nature of the withdrawal is submitted. However, Section 194T creates an obligatory duty before the firm to specify the nature of such withdrawals at the same time of credit or payment being made.
It also eases the path for tax compliance as it does not stay dependent on the partners for tax payment while filing Return of Income (ITR). It strictly guides the firms to deducts the tax at the very onset of the transaction. This reduces the possibility of tax evasion and also mitigates the risk tax underreporting and delay.
Inclusion of such transactions in Form 26AS, makes the tax deduction and liabilities, easier to track and follow whether correct amount has been disbursed. This increases the transparency for the partners, firms as well as the concerned department to ensure clean transactions between the firm and its partners.
One of the major benefits of Section 194T can be observed in the form of avoidance of payment of taxes at once during the filing of Return of Income. With the introduction of Section 194T the obligation over the partners to pay the tax at one instance has eased off. Which may ensure timely tax payment and lower down the cases of tax evasion.
CHALLENGES
Another major challenge put by the introduction of Section 194T is regarding the profit share mechanism in the firms. Sub-Section 2A of Section 10 of the IT Act, states that profit share of a partners of a firm is exempted from the scope of TDS. However, the lack of clarity regarding the difference between profit share and remuneration may attract Section 194T of the IT Act, 1961 eventually putting unwanted liabilities over the shoulders of the firm.
In some cases when the amount is only credited to partner’s capital account for record purposes without actual cashflow, the provision of Section 194T may get attracted. In such case, even though there has been no monetary exchange the transaction is subject to tax liability creating burden over the tax payer.
There is another challenge put up by the introduction of Section 194T, which may result in differences between the TDS by the firm and taxable income of the partner u/s 28(v) of the IT Act. With the introduction of Section 194T, 10% TDS is to be charged over the entire amount that is paid or credited to the partners. Whereas, Section 28(v) of the IT Act is subject to the allowability u/s 40(b).
For instance,
A firm pays Rs. 15,00,000/- as remuneration to one of the partners. In compliance with Section 194T, the firm needs to deduct the TDS of Rs. 1,50,000/- at the very outset of the payment being made.
However, Section 40(b) of the IT Act only allows for maximum remuneration payment worth Rs. 6,00,000/-. Herein, in accordance with Section 28(v) the partner only needs to pay tax on the total amount of Rs. 2,00,000/-.
In this case a difference between the Return of Income of the partner and the Form 26AS is imminent. This may result in unwanted attention from the IT Department.
In the meantime, there has been certain ambiguity regarding the applicability of Section 194T to the non-residents. Section 195 of the IT Act states that payment made to a non-resident by any person is subject to Tax Deduction at Source. Such payment can be in form of interest, royalty, technical service etc. (excluding salary). Whereas, Section 194T states that all the payment made by a firm to its partners is subject to tax deduction.
However, the said provisions are silent regarding which of the two sections is applicable in case of a non-resident person. A clarity regarding the same is much needed from the Central Board of Direct Taxes (CBDT).
Another sphere where introduction of Section 194T may create a significant challenge is regarding the retirement settlement of the partners, such settlements is inclusive of various components like, firm’s goodwill, profits, capital invested etc. If not properly accounted for the retirement settlement may also end up attracting TDS liability and if not paid may result in penalty proceedings.
CONCLUSION
With the introduction of Section 194T the intent of the legislature was to bring in transparency in the transactions between the firm and its partners. The intention behind such section was also to ensure that the tax evasion shall be minimized. However, the challenges in the interpretation and procedure in course of Income Tax Act are inevitable. Section 194T need further attention from the CBDT to ensure that it is well interpreted and is free from any legal ambiguity. It would also require the firm and the partners to be cautious about their financial approach and increase the systematic cash flow. In spirit to avoid any unwanted proceedings or deduction it is crucial for the firms to ensure that the books of account are well kept and the transactions are well labelled for.