Introduction
Section 194T as introduced by Finance Bill 2024 stipulates that any salary, bonus, commission, interest, or remuneration paid to a partner of a firm will be subject to TDS at 10% if the aggregate amount for the relevant financial year exceeds Rs. 20,000. TDS should be deducted at the time of credit to the account of the partner or at the time of payment, whichever is earlier.
But what’s the issue with this?
The Interplay
Section 40(b) sets out that any salary, bonus, commission, or interest is allowed as expenditure for the firm if it is within a certain limit as specified if it is paid to a working partner, paid within agreement terms. In the case of interest, the rate should be within a rate of 12%, and remuneration should be within the following limits: for the first ₹6,00,000 of book profit at a rate of 90% of ₹6,00,000 or ₹3,00,000 whichever is higher and the rest of the book profits at rate of 60%.
The Dispute
From the firm’s point of view
With respect to remuneration, the book profit determined as per the provisions of Income Tax will be finalized during the tax season, which is usually between the month of July to September. Suppose a firm pays a remuneration of ₹10,00,000 to a partner during the year where the firm deducts TDS of ₹1,00,000 at the time of payment being earlier. But as per Section 40(b), he is allowed a remuneration of ₹9,00,000 which is credited to the account of the partner where TDS amounts to ₹90,000. The excess remuneration of ₹1,00,000 will be disallowed in the hands of the firm.
From the partner’s point of view
The partner will be taxed only at ₹9,00,000. As per the tax records, he has earned an income of ₹10,00,000, where he might face consequences from the Income Tax department in the name of notice.
The Wrap-Up
Since the firm in its ITR mandatorily discloses the list of the partners, their PAN, and remuneration charged to them. Now, this amendment creates an additional regulatory compliance to the firm.
Either the firm or the partner has to face consequences. The firm has to keep revising the quarterly returns, creating huge traffic on the portal.
If a non-working partner receives remuneration where TDS is deducted, the situation remains the same. In this case, the remuneration allowed in the hands of the firm and taxability in the hands of the partner is Nil.
The excess TDS paid of ₹10,000 by the firm is cost to them.
The proposed introduction of Sec 194T and amendment in Sec 40(b) is applicable from 01st April 2025.
Ideally, it should have been applicable to firms who opted for presumptive taxation under 44AD and 44ADA.
Feel free to share your thoughts on this amendment and its implications.
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