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TDS on Commission paid to Partners (Income Tax)

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( Author )
20 June 2009

Please advice me of the following facts finding of AO and my view :

FACTS OF THE CASE :

A partnership firm having two partners is paying salary, interest and commission to the partners.

The partnership deed is having the appropriate clause to authorise such payments to partners.

As per partnership deed sales commission @ 5% of the total turnover is being paid to partners.

The payment of salary and commission is with in the limits prescribed u/s 40(b).


AO FINDING

The AO has while framing assessment for AY 06-07 has disallowed the commission paid to partners on the ground that TDS has not been deducted by the firm on the said payment.

AO has quoted section 194H in the order which reads as under …..


194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon.


As per AO the section 194 H covers payments made by Any person to all resident and hence TDS should have been deducted.


MY VIEW

The firm has paid salary, interest and commission to partners.

The provision for TDS on salary is not applicable as there is no employer employee relationship.

Moreover section 194A i.e. TDS on interest other than interest on securities clearly specify that section do not apply to income credited / paid by a firm to its partners.

However section 194H is silent regarding commission paid or credited by firm to its partners.

The disallowance by AO is substantial and will have complications in the subsequent years also.


Please advice in light of any judgement / provisions of the Income Tax Act.
--
CA. Anil K Kalia


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