S.194A: Deduction at source – Interest – Firm – Partner – Interest paid by partner to firm, tax is deductible at source on such interest.
The assessees borrowed money from the firms in which they were partners and paid interest to the firms. The Dy. CIT (TDS) noticed that the assessee did not deduct tax at source under the provisions of section 194A on the interest so paid to the firms. After hearing the assessees, the Dy. CIT (TDS) levied penalty under section 201(1) of the Act equivalent to the amount of tax liable to be deducted at source and levied interest under section 201(1A) of the Act for the period from the closing of the relevant financial year to May 31, 2009 for the assessment years 2005-06 to 2007-08. The Commissioner (Appeals) confirmed the penalties and interest. On appeal to the Tribunal held that t the Income-tax Act recognises a partner and a firm as different "persons", despite the legal relationship between them as prevailing under the Partnership Act. Further section 194A provides exemption from the obligation imposed under that section only in respect of interest paid or credited by a firm to its partner. The Act does not provide such exemption to the interest paid or credited by a partner to his firm. Tax is deductible at source on the interest paid by the partner to the firm. Penalty levied was directed to be deleted after verification of facts. (A.Y.2005-2006 to 2008-2009 )
Thomas Muthoot v. Dy. CIT  21 ITR 133/55 SOT 390(Cochin.)(Trib.)