Circular No. 260

919. Liability of registered firm to retain percentage of share of each partner in certain income of firm - Whether arises even before tax is levied and is communicated to partners

What this is

Circular No. 260 was issued by the Central Board of Direct Taxes on 31 July 1979. Its subject is 919. Liability of registered firm to retain percentage of share of each partner in certain income of firm - Whether arises even before tax is levied and is communicated to partners.

What it does

Reminds registered firms that the duty to retain under section 182(4) arises before any tax is demanded from the partners. That sub-section lets a registered firm retain out of each partner's share in the firm's income a sum not exceeding 30 per cent until the tax leviable on the partner in respect of that share is paid by him, and makes the firm liable for the tax to the extent of the amount retained or that could have been retained where it cannot be recovered from the partner. A case had come to the Board's notice of a firm that had retained nothing for several years, apparently on the belief that retention starts only after a notice of demand reaches the partners. The Board says that reading is wrong: the legal liability to retain arises even before the Income-tax Officer levies the tax and communicates it, the amount being held as a sort of security towards the partner's tax and to be released only when that liability has been discharged by him or on his behalf.

Why it was issued

The Board found a firm that had never made the retention and suspected others were in the same position through a misconception about when the duty starts.

Who it reaches

Registered firms distributing profits to partners
Partners of such firms whose share income bears tax
Chambers of commerce, to whom the circular is addressed
Recovery officers proceeding against a firm for a partner's tax

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.182	no counterpart recorded

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

919. Liability of registered firm to retain percentage of share of each partner in certain income of firm - Whether arises even before tax is levied and is communicated to partners
1. Attention of the Chambers of Commerce is invited to the provision contained in sub-section (4) of section 182 which requires that "a registered firm may retain out of the shares of each partner in the income of the firm a sum not exceeding 30 per cent thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him ; and where the tax so levied cannot be recovered from the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or could have been so retained".
2. A case has recently come to the notice of the Board where for several years the registered firm had not retained any amount out of the shares of the partners in its income for the payment of the tax liabilities of the partners. It is likely that there may be some other such cases also where the aforesaid provision has not been complied with by the registered firms presumably under the misconception that the amounts have to be retained only after the receipt of notice of tax demanded from the partners of the firm. As is clear from sub-section (4) of section 182, the legal liability to retain the amount equal to 30 per cent of the share of each partner in the income of the firm arises even before the tax is levied by the Income-tax Officer, and is communicated to the partners. In other words the amount has to be retained as a sort of security by the registered firm towards the payment of the tax liabilities of the partners and has to be released only after the said liability has been duly discharged by the partner or on his behalf.
Circular : No. 260 [F. No. 385/65/79-IT(B)], dated 31-7-1979.

What to watch

The exposure is the firm's: where the partner's tax cannot be recovered, the firm pays to the extent of what it retained or could have retained, so a firm that retained nothing is not thereby safe.
The ceiling is 30 per cent of the share, and the retention is held as security, not applied to the tax by the firm itself.
Release is proper only once the partner's liability on that share has actually been discharged.
The scheme of registered firms and the assessment of partners on their shares has since been replaced, so this speaks to assessments of that era.

Where you meet it

In a recovery proceeding against a firm for a defaulting partner's tax, and in a firm's own accounts where partner drawings were released in full.

← Circular No. 261 · Circular No. 259 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.