40(b)(iv) interest to partners

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CA JAYESH RELKAR (Querist)
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14 September 2013 Interest can be paid maximum 12% simple interest p.a..

But is it allowed to calculate interest on closing balance of partner's capital a/c which remains at the end of EACH DAY (in practice it is called as "cut-miti basis".)

i.e. Shall we calculate at flat rate of 12% p.a. simple interest on closing balance on 31st march OR on "cut-miti" basis (daily basis)??

Vijay Thadani

Vijay Thadani (Expert)
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14 September 2013 Please refer your partnership deed.

CA JAYESH RELKAR

CA JAYESH RELKAR (Querist)
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15 September 2013 in partnership deed interest should be calculated on daily basis...

But does partnership deed provisions has over-riding effect over income tax act???

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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15 September 2013 Interest calculation {for 40(b)(iv)}should be strictly 'in accordance with the provisions of the partnership deed' meaning thereby, in the cited case, flat rate at 12% on closing balance can't be charged.

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Vijay Thadani

Vijay Thadani (Expert)
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15 September 2013 U/s 40 (b) "any payment of interest to any partner which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of 12[twelve] per cent simple interest per annum" is allowable

Section 40(b) is silent about the ‘base amount’, with reference to which the interest of 12% is to be calculated. Also it also does not specify the manner in which such base amount is to be calculated. What it specifies that the rate should be simple interest and the manner of computation must be authorized by the partnership deed.

So, in my opinion if your partnership deed is allowing interest on daily basis then there should not be any problem. But there are other factors also which needs consideration. I suggest you to refer section 40 of the Act.

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