Joint and several liability of partners for tax payable by firm.

329

Every person who was, during the tax year, a partner of a firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the tax year, and all the provisions of this Act, so far as may be, shall apply to the assessment of such tax or imposition or levy of such penalty or other sum.

Explanation

Section Summary:

Section 329 of the new income tax law establishes the principle of joint and several liability for partners of a firm. This means that every partner of a firm, including the legal representative of a deceased partner, is collectively and individually responsible for the firm's tax liabilities, penalties, or other sums payable for the tax year. The section ensures that the tax authorities can recover dues from any or all partners if the firm fails to pay its tax obligations.

Key Changes:

• Joint and Several Liability: This concept is not entirely new but is now explicitly stated in the new law. Previously, similar principles existed under the Income Tax Act, 1961, but the new law reinforces this liability more clearly.
• Inclusion of Legal Representatives: The section explicitly includes the legal representatives of deceased partners, ensuring continuity of liability even after a partner's death.

Practical Implications:

• For Partners: Partners must be aware that they are personally liable for the firm's tax dues, even if they are no longer associated with the firm or if the firm dissolves. This could impact their personal finances and creditworthiness.
• For Legal Representatives: Legal heirs or representatives of deceased partners must ensure that the firm's tax liabilities are settled to avoid personal liability.
• For Tax Authorities: This provision strengthens the tax department's ability to recover dues, as they can pursue any partner or legal representative for the full amount owed.

Critical Concepts:

• Joint and Several Liability: This means that each partner is individually responsible for the entire tax liability of the firm, not just their share. If one partner cannot pay, the others must cover the shortfall.
• Legal Representative: Refers to someone who legally represents a deceased person, such as an executor, administrator, or heir, and assumes their rights and obligations.

Compliance Steps:

1. Maintain Accurate Records: Partners should ensure the firm maintains accurate financial records to avoid disputes over tax liabilities.
2. Monitor Tax Payments: Partners should actively monitor the firm's tax payments to ensure compliance and avoid personal liability.
3. Settle Liabilities Promptly: Legal representatives of deceased partners should promptly address any outstanding tax liabilities to avoid personal responsibility.

Example:

Suppose a firm has three partners: A, B, and C. The firm owes ₹10 lakh in taxes for the year. If the firm fails to pay, the tax authorities can recover the entire ₹10 lakh from Partner A, even if Partners B and C are unable to contribute. Partner A can later seek reimbursement from B and C, but the tax authorities are not concerned with internal arrangements among partners. If Partner A passes away, their legal representative (e.g., their spouse or child) would also be liable for the unpaid tax.

This section ensures that the tax authorities have multiple avenues to recover dues, reducing the risk of unpaid taxes.