Delhi High Court prompts clarity on tax treatment of LLP partner bonuses amid new TDS regime

The Delhi High Court has called for the CBDT to clarify how bonuses and performance-linked payments to partners should be taxed, highlighting wider concerns over double taxation and compliance following recent changes in Indian tax law and regulations.

A routine disallowance of partner pay in an LLP return now sits inside a much wider tax question. On 1 April 2026, the Delhi High Court told the Central Board of Direct Taxes to clarify how bonuses and performance-linked payments to partners should be taxed, while staying recovery against one partner, after petitions argued that sums already taxed in the firm’s hands were being pursued again in the partner’s assessment. The court said the point could have “larger implications” for taxpayers across professional firms, pushing what often begins as a Schedule BP mismatch into a broader debate over double taxation and corresponding relief. (economictimes.indiatimes.com)

The compliance backdrop changed sharply a year earlier. Budget 2024 introduced Section 194T, effective from 1 April 2025, bringing firms and LLPs into a TDS regime for partner salary, remuneration, commission, bonus and interest once aggregate annual payments cross ₹20,000. At the same time, the Finance (No. 2) Act, 2024 raised the ceiling for deductible remuneration under Section 40(b). Until then, partner payments of this kind were outside the TDS net, so many firms that were used to a deduction-only calculation suddenly had to manage deduction, withholding and reporting together. (incometaxindia.gov.in)

That means an LLP facing a processing adjustment should not assume it is merely a portal glitch. The first question remains whether the payment was deductible at all: Section 40(b) allows remuneration only where it is paid to a working partner, authorised by the deed and within the statutory cap. For periods from 1 April 2025, that cap is the higher of ₹3,00,000 or 90% of the first ₹6,00,000 of book profit, or loss, and 60% of the balance. In other words, a wrong figure in the return can trigger an adjustment, but an excessive or poorly authorised claim can still fail on substance. (incometaxindia.gov.in)

Section 194T has also created timing traps that are easy to miss in practice. According to the Income Tax Department, tax must be deducted at the earlier of payment or credit, and a credit to the partner’s capital account counts as a trigger. ClearTax notes that a capital withdrawal is outside the rule, while Moneycontrol’s Hindi edition reported that profit share remains outside TDS and warned that firms can be caught even when cash has not moved because the entry alone is enough. For LLPs that determine partner remuneration only when the books are closed, the year-end accounting entry can therefore create a March TDS obligation that still has to be deposited on time. (incometaxindia.gov.in)

This is where the real reconciliation problem begins. Taxguru points out that TDS under Section 194T is applied to the amount actually paid or credited, whereas deductibility under Section 40(b) can still be restricted when the firm computes taxable income. The result is that the whole payment may show up in the partner’s Form 26AS even when part of it has been disallowed to the firm. Taxmann says the new rules require firms and partners to realign tax computations, accounting and documentation, because withholding, deductibility and partner-side taxability may no longer move in step. (taxguru.in)

When an LLP receives an intimation after return processing, the practical response is to compare the filed ITR-5, the business income schedule, the tax computation and, where relevant, the audit report against the CPC working before choosing a remedy. Under Section 143(1), the department can adjust arithmetical errors and incorrect claims apparent from the return. The e-filing help centre says rectification is available only for a “mistake apparent from record”; where the original return already carried the correct data, a reprocess request may fit better, while a taxpayer error can call for revision if that route is still open. For returns governed by the new Income-tax Act, 2025, which replaced the 1961 law from 1 April 2026, the equivalent processing provision is Section 270(1) and the rectification provision is Section 287. (incometaxindia.gov.in)

The court fight shows why that distinction matters. Speaking to The Economic Times, Nemin Shah of EQX Business Consultancy said partner remuneration should be “taxable in the hands of the partner to the extent the same has been allowed as a deduction to the firm”. The same report said tax offices in Delhi, Mumbai, Chennai, Indore and Bhubaneshwar had pursued similar issues. It also quoted chartered accountant Ashish Karundia as saying that where remuneration is later found disallowable under Section 40(b), the law contemplates a matching change in the partner’s assessment as well, rather than leaving the same amount exposed in two places. (economictimes.indiatimes.com)

For most LLPs, then, the safest approach is not litigation but prevention: reconcile the deed, working-partner status, book-profit calculation, remuneration ledger, Schedule BP, audit disclosures and TDS records before filing. That matters especially for smaller partnerships and LLPs, which Moneycontrol noted often finalise partner salary and interest at year end, and for any firm still adapting to the post-Budget 2024 shift from a lighter-touch regime to one that now links deduction limits, withholding and partner reporting. A disallowance may still turn out to be a reporting error, but after Section 194T it is far more likely to expose a gap in the underlying paperwork as well. (cleartax.in)