SECTION 194T… A VIEWPOINT

– CA Dr Vardhaman L. Jain

The Union Budget of 2024 brought in Section 194T in the Income Tax Act, 1961 effective from April 1, 2025. This section imposes an obligation for Tax Deducted at Source (TDS) on certain payments made to partners of a firm, in the nature of salary, bonus, commission, interest, or remuneration. The aim of introduction of this obligation may be improved tax compliance. However, it comes with a fair share of issues in implementation. Whilst enough has been written about the implications of this new section, this article endeavours to highlight a maverick view

Sec 194T finds place in Chapter XVII of the Income Tax Act, 1961 which deals with collection and recovery of Tax. This Chapter has Part “A-General” which precedes Part “B-Deductions at source”.

Section 190 is the first section therein which, as the heading to the section suggest deals with Deduction at Source and Advance Payment.

Section 190 read as under:
(1) Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment or by payment under sub-section (1A) of section 192, as the case may be, in accordance with the provisions of this Chapter.

(2) Nothing in this section shall prejudice the charge of tax on such income under the provisions of sub-section (1) of section 4.

A cursory appraisal of the subsection (1) makes it apparent that the deduction of tax(TDS) or collection at source(TCS) or advance payment(AT) has to be of the tax on income. Impliedly, neither TDS nor TCS nor AT can be in relation to any sum/amount which is not income.

Further, subsection 2 refers to change of tax on such income under the provisions of subsection (1) of section 4.

Section 4 finds place in Chapter II which has it as its heading “Basis of Charge” It is also preceded by the heading “Charge of Income Tax”.

Section 4 reads as under:
(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

An apparent reading makes it clear that the charge of income tax is on ‘income’ Subsection 2 provides that in respect of income chargeable to tax, income tax shall be deducted at source or paid in advance, where it is so deductible or payable. Impliedly, TDS provisions can be applied only to the income chargeable.

A combined reading of the above with reference to the provisions of section 194T shall bring out an irresistible conclusion that the provisions of section 194T cannot in any manner expand the scope of provisions of TDS so as to oblige a tax deduction on payments which are not income.

If this is to be so, asking a firm to deduct tax on all payments in the nature of salary, remunerations, commissions, bonus or interest to a partner, which may not constitute income shall be a dichotomy of sorts.

Ultimately, any payment to partners during the year, especially other than interest, shall be confirmed as taxable only when it passes the test laid out in Section 40(b). Until then, such payments shall be mere withdrawal on capital account and to that extent not liable to the rigours of section 194T.

This position shall be notwithstanding the fact that most of the other sections relating to tax deduction at source use either the phrase –
“any income chargeable under….” or
“any income by way of….” or
“any sum….” (as in section 194C/194DA) or
“any sum by way of consideration…” (as in section 194IA/194IC) or
“any sum, by way of fees….” (as in section 194J).

The author is conscious of the provisions of section 194N which deals with payment of certain amount in cash or section 194O which deals with payment of certain sums to e-commerce operator to e-commerce participants or 194Q which deals with payment of certain sum for purchase of goods. However, the present write up does not propose to deal with these sections.

In the context of section 194T, it is interesting to appreciate the provisions of section 198 which has a heading “Tax deducted is income received”.

Section 198 read as under:

All sums deducted in accordance with the foregoing provisions of this Chapter 11 and income-tax paid outside India, by way of deduction, in respect of which an assessee is allowed a credit against the tax payable under this Act, shall, for the purpose of computing the income of an assessee, be deemed to be income received:

Provided that the sum being the tax paid, under sub-section (1A) of section 192 for the purpose of computing the income of an assessee, shall not be deemed to be income received:

Provided further that the sum deducted in accordance with the provisions of section 194N for the purpose of computing the income of an assessee, shall not be deemed to be income received.

It is thus evident that TDS is deemed to be income received. It is also made clear by the two provisos’ that tax paid/deducted pursuant to section 192(1A) and 194N is not deemed to be income received.

Juxtapose these provisions in the context of section 194T and the contradiction and predicament stares you in the eyes. This also provides room for inference that section 194T cannot be blindly used for all payments termed as salaries, etc. to partners during the year until these reach a point of validation as income, at which point section 194T shall trigger.

Further section 199 provides for credit for tax deducted. Subsection 3 of Section 199 empowers the Board to make rules, inter alia for deciding the assessment year for which credit for tax deducted may be given.

Rules 37BA provides the rules in terms of Section 199. Clause (i) of sub-rule 3 of Rule 37BA provides that credit for tax detected at source shall be given for the assessment year for which such income is assessable.

This Rule makes the dilemma of the partner very obvious as he may have tax deducted but no corresponding income being offered to tax at all.

A holistic reading leads one to believe that the provisions of section 19T should not be invoked without a proper appreciation of the above legal position.

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Posted on: September 27th, 2025