919. Liability of registered firm to retain percentage of share of each partner in certain income of firm – Whether arises even before tax is levied and is communicated to partners

1. Attention of the Chambers of Commerce is invited to the provi­sion contained in sub-section (4) of section 182 which requires that “a registered firm may retain out of the shares of each partner in the income of the firm a sum not exceeding 30 per cent thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him ; and where the tax so levied cannot be recovered from the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or could have been so retained”.

2. A case has recently come to the notice of the Board where for several years the registered firm had not retained any amount out of the shares of the partners in its income for the payment of the tax liabilities of the partners. It is likely that there may be some other such cases also where the aforesaid provision has not been complied with by the registered firms presumably under the misconception that the amounts have to be retained only after the receipt of notice of tax demanded from the partners of the firm. As is clear from sub-section (4) of section 182, the legal liability to retain the amount equal to 30 per cent of the share of each partner in the income of the firm arises even before the tax is levied by the Income-tax Officer, and is communicated to the partners. In other words the amount has to be retained as a sort of security by the registered firm towards the payment of the tax liabilities of the partners and has to be released only after the said liability has been duly discharged by the partner or on his behalf.

Circular : No. 260 [F. No. 385/65/79-IT(B)], dated 31-7-1979

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