No TDS on salary/commission paid to partners. No disallowance under section 40(b) if ‘remuneration’ paid to working partners is within the limit under section 40(b)(v)

As per the Income Tax Act, salary, bonus, remuneration, or commission are collectively referred to as “remuneration” for the purpose of Section 40(b)(v) of the Act. This means that the Assessing Officer is not required to make any disallowance when the ‘remuneration’ (aggregate of salary, bonus, commission, and remuneration) paid to working partners during the year is within the permissible limit provided under this section. This is because, if the aggregate of salary and commission paid to working partners is within the limit stipulated by section 40(b)(v), no disallowance is to be made in respect of the same.

Furthermore, when it comes to TDS (Tax Deducted at Source), there is no requirement to deduct TDS under section 194H of the Act from the commission payable to partners. This is because, as per section 40(b)(i) of the Act, any payment of salary, bonus, commission, or remuneration is collectively referred to as “remuneration.” Therefore, it is incorrect for the Assessing Officer to contend that the provisions of Section 194H of the Act, which is applicable in cases of commission or brokerage (not being insurance commission referred to in Section 194D of the Act) being paid, are also applicable in cases where the commission is paid by a partnership firm to its partners, as authorized by the partnership deed.

Explanation 2 to Section 15 of the Act also provides specific clarification that salary, bonus, commission, remuneration etc by whatever name called due to or received by a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section. Therefore, the provisions of Section 192 related to salary would also not be applicable in cases where remuneration has been paid by partnership firm to its partners. This has been upheld in the case of [ACIT, Shillong v. Dhar Construction Company – Date of Judgement : 02.01.2023 (2023) 146 81 (ITAT Gauhati)] for the assessment year 2017-18.

It is important to note that the above-mentioned provisions are applicable only when the remuneration paid to the working partners is within the limit specified in section 40(b)(v). If the remuneration exceeds the limit specified in this section, then the Assessing Officer may make a disallowance under section 40(b) of the Act. It is also essential for the partnership firm to maintain proper records and documentation to prove that the remuneration paid to the partners is within the permissible limit.

In summary, there is no requirement for TDS to be deducted on salary/commission paid to partners,

What is a Partnership firm?

A partnership firm is a business structure in which two or more individuals come together to carry on a business with the objective of earning profits. Partners share the profits and losses of the business according to the terms of the partnership agreement, which is typically established in a formal document called the partnership deed. The partners are jointly and severally liable for the debts of the partnership. Partnerships can be either general partnerships, in which all partners are actively involved in the management and operations of the business, or limited partnerships, in which some partners have limited liability. Partnerships are not separate legal entities like corporations and therefore do not have the same legal rights and protections as corporations.

Who is Working Partner?

Working partners in a partnership firm are individuals who are actively involved in the day-to-day management and operations of the business. They are also referred to as active partners or general partners. They contribute capital, skills, and time to the partnership, and are usually entitled to a share of the profits as well as a salary or commission for their services. They also have the right to participate in the management of the partnership and have unlimited personal liability for the partnership’s debts. In contrast, non-working or dormant partners are individuals who invest in the partnership but do not actively participate in the management of the business. They are also known as limited partners and have limited liability for the partnership’s debts.

How to Register a Partnership Firm

Partnership firm registration in Gurgaon is a relatively simple process that can be accomplished by following these steps:

  • Choose your partners: Decide on the individuals who will be partners in the business. It is important to have a clear understanding of the roles, responsibilities, and expectations of each partner before forming the partnership.
  • Draft a Partnership agreement: A partnership agreement is a legal document that outlines the terms and conditions of the partnership. It should include details such as the partners’ capital contributions, profit and loss sharing ratios, and management responsibilities.
  • Register the Partnership: Depending on the state in which you are operating, you may need to register your partnership with the state government by filing articles of partnership or a certificate of partnership.
  • Obtain any necessary licenses and permits: Depending on the type of business you are operating, you may need to obtain licenses and permits from the state or local government.
  • Open a business bank account: Open a separate bank account for your partnership to keep your business finances separate from your personal finances.
  • Keep accurate records: Maintaining accurate financial records is important for the smooth functioning of the partnership and for compliance with tax laws.

It is important to note that the process of forming a partnership may vary depending on the state you are in, so it may be a good idea to consult with a chartered accountant in Faridabad, Gurgaon to ensure that you are following the correct process.

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