Income Tax 2025

Appearance

16.—Liability of partners of limited liability partnership in liquidation

Liability of partners of limited liability partnership in liquidation. ​

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Irrespective of anything contained in the Limited Liability Partnership Act, 2008, where any tax including penalty, interest, fees or any other sum payable under the Act is due, and cannot be recovered, from––

  • (a) the limited liability partnership in respect of any income of any tax year; or
  • (b) any other person in respect of any income of any tax year during which such other person was a limited liability partnership,then, in such case, every such person who was a partner of such partnership at anytime during the relevant tax year, shall be jointly and severally liable for the paymentof such due amount, unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the limited liability partnership.
Explanation

Section Summary: ​

This section addresses the liability of partners in a Limited Liability Partnership (LLP) during liquidation when the LLP or another person (who was previously an LLP) owes taxes, penalties, interest, or other dues under the Income Tax Act. If these amounts cannot be recovered from the LLP or the relevant person, the partners of the LLP during the relevant tax year can be held jointly and severally liable for the unpaid dues, unless they can prove that the non-recovery was not due to their gross neglect, misfeasance, or breach of duty.

Key Changes: ​

  • Expanded Liability: Unlike the Limited Liability Partnership Act, 2008, which generally limits the liability of partners, this section overrides that protection in cases of unpaid tax dues. Partners can now be held personally liable for the LLP's tax obligations if recovery from the LLP or another relevant person is not possible.
  • Joint and Several Liability: Partners are jointly and severally liable, meaning each partner can be held responsible for the entire unpaid amount, not just their share.
  • Burden of Proof: Partners must prove that the non-recovery of dues was not due to their gross neglect, misfeasance, or breach of duty to avoid liability.

Practical Implications: ​

  • For Partners: Partners of an LLP must ensure proper compliance with tax laws and maintain accurate records to avoid personal liability for unpaid taxes. If the LLP faces liquidation, partners may need to demonstrate that they acted responsibly and without negligence.
  • For Tax Authorities: This provision strengthens the ability of tax authorities to recover dues by extending liability to individual partners, even after the LLP is liquidated.
  • For LLPs: LLPs must ensure timely payment of taxes and proper financial management to avoid situations where partners are held personally liable.

Critical Concepts: ​

  • Joint and Several Liability: Each partner can be held responsible for the entire unpaid amount, and tax authorities can recover the full amount from any one or more partners.
  • Gross Neglect, Misfeasance, or Breach of Duty: These terms refer to significant failures in fulfilling responsibilities, such as failing to file returns, mismanaging finances, or violating legal duties. Partners must prove they did not engage in such conduct to avoid liability.
  • Limited Liability Partnership Act, 2008: Normally, this Act protects partners from personal liability for the LLP's debts. However, this section overrides that protection in cases of unpaid tax dues.

Compliance Steps: ​

  1. Maintain Proper Records: Partners should ensure that the LLP maintains accurate financial and tax records to demonstrate compliance.
  2. Timely Tax Payments: Ensure all taxes, penalties, and interest are paid on time to avoid situations where recovery becomes an issue.
  3. Document Decision-Making: Partners should document their actions and decisions to prove they acted responsibly and without negligence.
  4. Monitor LLP’s Financial Health: Regularly review the LLP’s financial status to address any potential tax liabilities proactively.

Examples: ​

  • Scenario 1: An LLP fails to pay its income tax dues for a particular year and is liquidated. The tax authorities cannot recover the dues from the LLP. Under this section, the partners of the LLP during that tax year can be held personally liable for the unpaid amount unless they can prove they were not grossly negligent or did not breach their duties.
  • Scenario 2: An LLP is converted into a private company, and the company fails to pay tax dues related to a period when it was an LLP. The partners of the LLP during that period can be held liable for the unpaid dues, even though the entity is no longer an LLP.

This section ensures that tax authorities have a stronger mechanism to recover dues, even in cases where the LLP is no longer operational or has undergone structural changes. Partners must take proactive steps to avoid personal liability.