2020 (9) TMI 822 - HC - Income Tax

Partnership firms liable for interest payment tax deduction failure, partners jointly liable under Income-tax Act

Three partnership firms appealed against assessment orders for failing to deduct tax on interest payments under section 194A of the Income-tax Act. The ... Validity of demand in respect of firm raised in the name of Partner - TDS u/s 194A - interest paid - failure of the 'payee-assessee' to pay the tax directly as per section 191 - fixing of liability on the assessee and its partners as assessee-in-default - Fix the liability to pay the tax on the correct person - HELD THAT:- The burden to prove that the payee-assessee had paid the tax, which the assessee-deductor failed to deduct was placed on the latter ; by production of a certificate from the accountant. The questions are thus answered against the assessee and in favour of the Revenue. It is settled law that a partnership is neither a natural person nor a juris tic person. It has no separate existence than its partners. The liability of a partnership firm is the liability of its partners. As such, fixing the liability of the firm on its partners can never be held to be illegal. In fact, it necessarily has to be fixed on the partners. In the light of the legal nature of a partnership firm, a demand raised on the managing partner can never be vis ualised as a wrong fixation of liability. It can only be seen as a demand made on the person who is managing the affairs of the firm, for and on behalf of all its partners. Such a demand does not in any way amount to a conclusion that the claim against the other partners has been given up, since the liability of the partners is joint and several. We do not find any perversity in the findings of the Appellate Tribunal. The questions raised in the appeal are answered against the assessee and in favour of the Revenue. Issues:Three partnership firms appealing against assessment orders for failing to deduct tax on interest paid under section 194A of the Income-tax Act.Analysis:1. The main issue is whether the failure to deduct tax on interest payments by the appellants makes them assessee-in-default under section 201 of the Income-tax Act. The appellants argued that the liability should be fixed on the correct person responsible for deduction of tax, not on the firm and its partners. However, the Department contended that failure to deduct tax makes the person liable as an assessee-in-default, as per section 194A.2. The questions raised for consideration include the burden of proof on the appellants, the correctness of the assessment in line with legal principles, and the validity of fixing liability on the appellants and their partners. The judgment clarifies that failure to deduct tax as required by section 194A leads to being deemed an assessee-in-default under section 201, unless specific conditions are met as per the proviso.3. The judgment extensively discusses sections 194A and 201 of the Income-tax Act. It highlights that the failure to deduct tax on interest payments results in being deemed an assessee-in-default under section 201, without the need for confirmation of direct tax payment by the payee. The proviso to section 201 outlines conditions for exemption from default status, which the appellants failed to satisfy.4. Referring to a previous judgment, the court dismisses the contention that liability should be fixed on the payee-assessee before declaring the appellants as defaulters. The judgment emphasizes that the statutory provisions dictate the consequences of failure to deduct tax, making the appellants liable as defaulters.5. The judgment addresses the argument regarding fixing liability on the correct person, stating that a partnership firm's liability is that of its partners. It clarifies that demand on the managing partner is appropriate, as partners share joint and several liability. The findings of the Appellate Tribunal are upheld, and the appeals are dismissed.In conclusion, the judgment affirms that failure to deduct tax on interest payments under section 194A results in being deemed an assessee-in-default under section 201. It clarifies the liability of partnership firms and their partners, emphasizing joint and several liability. The judgment upholds the assessment orders and dismisses the appeals.