FDR v/s FUND IN BUSINESS

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This query is : Resolved

anckoora (Querist)

14 July 2011 Dear Sir,
A partnership Firm, having 4 partners, All partners are in highest tax slab (30%).
One year back, Firm had excess fund of 4 crores-which was transferred to two partners' a/c and this two partners invested in FDR of 2 crores for one year @ 7%. Moreover, against this FD, OD limit of 90% was allowed @ 8% interest. On maturity, it was found as under :
14.00 lacs Interest earned.
4.20 lacs I.Tax
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09.80 lacs net int earned.
05.64 lacs Int on Overdraft paid
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04.16 lacs Net Int Earned.
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From this picture, my observation is as under :
(1) Only 70 lacs of OD was used - as OD int paid is 5.64 lacs (70lacs * 8%).
(2) So there was no need of putting 2 crores in FD (instead of fund utilised is 70 lacs).
(3) suppose, this 2 crores was not blocked in FD and rotated in business (working capital) and assuming that working capital turnover is 4 times and if, on each cycle co's N.P. is 4% (after depreciation, tax, interest & partners' remuneration), THEN FIRM WOULD HAVE EARNED 32 LACS (2 CRORES * 4% * 4 TIMES). AM I RIGHT ??
(4) If so, how much extra share of net profit each partner will receive ?
Awaiting your reply & thanks in advance.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

14 July 2011 You may guess anything but the ground realities of business are always different.
Profit never comes with a fixed flow. Some times losses are also sustained when the time is not right.

When the OD facility even could not be utilised efficiently, how can we predict or justify that the whole amount of Rs 2 Crore could have been utilised.

You are forgetting the TDS amount also, which is nothing but income.

So, the best judgement can be made only after knowing the business of the firm.

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