Interest on partners' capital

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Udaya Kishore (Querist)
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02 August 2011 Is it allowed to charge different rates of interest each year on the partners's capital subject to a maximum of 12% as allowed U/s 40 (b) with out changing the partnership deed and arguing that the rate charged is with in the maximum allowed. I feel that the firm is manipulating the profit with this method. Is there any case law in favour or against the assessee in this regard.Partnership deed did not specify any rate but it is mentioned that interst is allowed on the partners' capital suject to the limitation of section 40 (b). I want to know what is the solution for the Auditor who is signing 44AB audit report.Is it required to qualify the report? If so how? What is the ground or case law on which we have to counter the arguments of the party or sustantiate our stand. Is there any circular / Notification / clarification from the Income Tax Department in this regard.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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02 August 2011 Partner ship accounts are to be prepared strictly in accordance with the "provisions of the partnership deed". The partnership deed ,therefore, should contain specific clauses especillay for interest and remuneration, otherwise chances of litigation are more. In view of the above, I do not accept / draft a clause as said in the query.

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