1. Introduction

Section 194T addresses a compliance gap by making firms responsible for deducting tax at source on certain payments to partners. Historically many payments from firms to partners were informal or treated as appropriations of profit; 194T formalises withholding obligations for specified categories, creating a reliable reporting trail and reducing under-reporting risks.

2. Background & Legislative Intent

The provision is designed to (a) plug leakages in partner income reporting, (b) bring parity between similar payment streams, and (c) ensure the government can track taxable receipts through TDS credits shown in Form 26AS. It complements existing provisions (Sections 40(b), 194J, 194IA, etc.) and narrows ambiguity around firm-to-partner transfers.

3. Scope & Applicability

3.1 Entities covered

All partnership firms and LLPs operating as firms are within scope; the provision applies irrespective of turnover or audit status.

3.2 Recipients covered

Payments to resident partners are covered. Payments to non-resident partners remain subject to Section 195 and relevant DTAA provisions.

3.3 Types of payments covered

Section 194T targets "notified" payments which typically include transfers from firm funds that are not profit shares, not salary/remuneration under Section 40(b), or not covered by other specific TDS provisions. Examples include certain reimbursements with mark-up, compensation, incentive payments, and other sums of money credited to partner accounts that are taxable in the partner's hands.

4. Payments Not Subject to 194T

• Share of profit: Income exempt in partner's hands under Section 10(2A).
• Remuneration/Interest covered by Section 40(b): Payments already taxable under partner remuneration rules.
• Capital contributions/repayments & drawings: Pure capital transactions and genuine reimbursements backed by documents.
• Reimbursements without mark-up: Pure pass-through expenses, properly evidenced.

5. Thresholds & Rate

The government notifies the threshold limit for applicability in the relevant Finance Act/notification. Where applicable, the standard rate specified has typically been 10% unless otherwise notified; non-furnishing of PAN by the partner invokes section 206AA/206AB leading to higher withholding (20% or specified rate).

6. Timing: When to Deduct

TDS must be deducted at the time of credit to the partner's account in the books or at the time of payment, whichever is earlier. Credit to any account (capital/current/other) is treated as credit to the payee, thus triggering the TDS event under 194T.

7. Compliance Obligations for Firms

1. Register for TAN before first deduction and ensure TAN is quoted on challans and returns.
2. Deposit TDS within prescribed timelines (monthly by 7th of next month; March by 30th/Apr 7th as per rules).
3. File quarterly TDS returns (Form 26Q) with accurate partner PAN mapping and payment categorisation.
4. Issue TDS certificates (Form 16A) to partners for amounts deducted.
5. Retain supporting documents to justify non-deduction where payments are exempt (e.g., pure reimbursements).

8. Impact on Partners

Partners will see increased transparency in Form 26AS, reducing scope for under-reporting. Cashflow for partners will be affected due to tax withheld at source. Partners must ensure timely filing of returns to claim credit and reconcile TDS credits with firm statements.

9. Practical Issues & Grey Areas

Key issues include:

• Classification dilemmas: Distinguishing profit appropriation from taxable payments requires careful assessment of agreements and accounting treatment.
• Overlap with other sections: Payments for services by partners may fall under 194J; simultaneously analyzing which provision governs is essential.
• Capital vs revenue: Payments that are capital in nature but paid from revenue may attract scrutiny.
• Documentation: Reimbursement evidence must be robust to avoid being treated as taxable payment.

10. Penalties & Consequences for Non-Compliance

• Interest for late deduction and late deposit (1% p.m. for late deduction; 1.5% p.m. for late deposit).
• Penalty under Section 271C equal to the TDS amount may be levied for failure to deduct.
• Disallowance risk under Section 40(a)(ia) for expenses where TDS was not deducted as required.

11. Best Practices for Firms & CAs

1. Draft partnership/LLP agreements clarifying payment nature — profit share, remuneration, reimbursement, or other.
2. Establish a policy manual for partner payments: pre-approval, invoicing, documentation and ledger posting rules.
3. Automate TDS calculations and challan generation to avoid timing errors.
4. Conduct periodic reconciliations between partner ledgers and Form 26AS entries.
5. Obtain written confirmations from partners where payments are reimbursement-only to preserve evidence in case of query.

12. Conclusion

Section 194T is a material change in the taxation landscape for partnerships and LLPs. It tightens reporting, creates obligations for firms to withhold tax, and clarifies the tax trail for partner receipts. Adopting clear agreements, robust documentation, automated TDS processes, and periodic reconciliations will ease compliance and reduce disputes. Professional advice is recommended for borderline cases and for determining whether certain payments are exempt from 194T or covered by alternate provisions.