194T TDS on Partners Remuneration

[Ethirajan Parthasarathy]

As per section 194T, TDS is to be done on remuneration paid to a partners. A partnership firm pays fixed salary of 3 lakhs p.a. But as per section 40(b) allowable salary is 2 lakh.

As per section 28(v), its very clear that partner will be taxed only on 2 lakhs which is the deduction allowed in the hands of the firm. But the firm has to mandatorily deduct tax on 3 lakh u/s 194T. In the above situation, how the partner can offer income 2 lakh as per section 28(v) while TDS is done on 3 lakh. Plz clarify..

[YAGAY andSUN]

At the outset, the premise requires correction. Section 194T of the Income-tax Act, 1961 mandates TDS on any sum paid by a firm to its partner by way of salary, remuneration, commission, bonus or interest. The obligation to deduct tax is on the amount credited or paid, i.e. Rs. 3,00,000 in the present case, irrespective of allowability under Section 40(b).

Section 28(v) provides that any interest, salary, bonus, commission or remuneration received by a partner from the firm shall be chargeable to tax under the head "Profits and gains of business or profession." Notably, the provision does not restrict taxation in the hands of the partner to the amount allowable under Section 40(b).

Section 40(b) operates only as a limitation on deduction in the hands of the firm. Disallowance of Rs. 1,00,000 (i.e., excess over Rs. 2,00,000) results in augmentation of the firm's taxable income; it does not alter the character or quantum of receipt in the hands of the partner.

Judicial position has consistently upheld that remuneration, even if disallowed u/s 40(b), remains taxable in full in the hands of the partner u/s 28(v). There is no statutory linkage restricting partner's taxation to the firm's allowable deduction.

Accordingly, in the given facts:

• The firm shall deduct TDS u/s 194T on Rs. 3,00,000.
• The partner is liable to offer the entire Rs. 3,00,000 to tax u/s 28(v).
• The TDS credit shall be available against the partner's total tax liability as per Section 199.

Hence, offering only Rs. 2,00,000 in the partner's return is not legally tenable.

[Ryan Vaz]

Yes, there will be a mismatch.

• Firm must deduct TDS on Rs. 3,00,000 (actual payment)u/s 194T.
• Partner is taxable only on Rs. 2,00,000 (allowed u/s 40(b))u/s 28(v).

The partner can still claim full TDS credit on Rs. 3,00,000, and the excess TDS will result in a refund when filing the return.

[Ethirajan Parthasarathy]

Disclosing only 2,00,000/- as income against 3,00,000/- for which TDS is done is bound to trigger query or even scrutiny. To avoid this, my doubt is whether we can reflect one lakh as exempt income under proviso to section 28(v) (IT Act 1961) & section 26(2) of IT Act 2025

AI Summary

Partner remuneration TDS under section 194T raises a mismatch between firm deduction limits and partner taxability. Section 194T was discussed in relation to remuneration paid by a firm to a partner where the actual payment exceeds the amount allowable under section 40(b). One view stated that TDS must be deducted on the full amount paid and that section 40(b) only limits deduction in the firm's hands, while section 28(v) taxes the partner on the full receipt with TDS credit available under section 199. A contrary view raised the issue of mismatch and queried whether the excess could be treated as exempt income.