TaxTMI 
TaxTMI 
Joint and Several Liability of LLP Partners in Liquidation: Clause 331 of Income Tax Bill, 2025 vs. Section 167C of Income-tax Act, 1961
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....ns the LLP structure. By imposing joint and several liability on partners for tax dues that cannot be recovered from the LLP itself, these provisions serve as a critical mechanism for safeguarding the government's revenue interests in situations of insolvency or liquidation of LLPs. This commentary undertakes a detailed examination of Clause 331, exploring its objective, structure, and implications, followed by a comparative analysis with Section 167C of the Income-tax Act, 1961. Objective and Purpose The legislative intent behind both Clause 331 and Section 167C is to ensure that the LLP structure, which offers limited liability to its partners, is not misused as a shield for evading tax liabilities. The provisions are designed to pi....
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....of tax claims. 2. Scope of Liability The clause applies to situations where any tax, including penalty, interest, fees, or any other sum payable under the Act, is due and cannot be recovered from: * (a) the LLP itself in respect of any income of any tax year; or * (b) any other person in respect of any income of any tax year during which such other person was a LLP. This broadens the scope to cover not only the present LLP but also any person who was a LLP in a relevant tax year, thus capturing scenarios where there may have been restructuring, conversion, or other changes in status. 3. Imposition of Joint and Several Liability Clause 331 imposes joint and several liability on every person who was a partner of the LLP at any time d....
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....ause refers to "any income of any tax year," aligning with the terminology used in the new Income Tax Bill, 2025, which replaces the concept of "previous year" in the 1961 Act. This is a terminological update but does not alter the substantive scope of the provision. 7. Situational Trigger: Non-recovery from LLP The liability of partners is triggered only when the tax authorities are unable to recover the dues from the LLP itself. This means that the provision operates as a secondary liability, not a primary one, and is contingent upon the failure of recovery from the LLP. Practical Implications Clause 331 has significant implications for various stakeholders: * Partners of LLPs: Partners must exercise heightened diligence in tax comp....
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....nce of gross neglect, misfeasance, or breach of duty. * Trigger liability only upon failure to recover from the LLP. * Cover not only tax but also penalty, interest, and other sums payable under the Act. 2. Key Differences * Terminology: Section 167C refers to "previous year," while Clause 331 uses "tax year." This reflects the shift in terminology under the proposed Income Tax Bill, 2025, but does not affect substance. * Comprehensive Scope: Section 167C, as originally enacted, covered only "tax due." The Explanation added in 2013 expanded this to include penalty, interest, and any other sum. Clause 331 incorporates this expanded scope in the main provision itself, ensuring clarity and avoiding reliance on an Explanation. * Fees....
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....ement. While the exculpatory clause provides a defense, the burden of proof remains with the partner, which may be challenging in practice. 5. Comparison with Other Jurisdictions Similar provisions exist in other jurisdictions, such as the United Kingdom, where tax authorities can pursue former partners for unpaid LLP taxes under certain conditions. The Indian provisions are consistent with international best practices, balancing the need for tax recovery with fair opportunity for partners to defend themselves. Conclusion Clause 331 of the Income Tax Bill, 2025, reaffirms and refines the principles established in Section 167C of the Income-tax Act, 1961. By imposing joint and several liability on LLP partners for unrecovered tax du....