Partner's interest on capital in case of partnership firm

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CA Sanjay Baheti (Querist)
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11 March 2013 Dear Experts,

One of my client being a Registered Partnership Firm having 4 Partners engaged in Manufacturing activities.Out of 4 Partners 3 are Male Partners & 1 is Female Partner. As per Partnership Deed clause that Interest is to be provided on Partner's Capital @12% p.a.as agreed among the partners mutually for each F.Y.Accordingly the Firm only provides the Interest on Female Partner's Capital at the end of each F.Y.

Now query is whether the same is tenable under law i.e. both as per Indian Partnership Act & Income Tax Act or have to provide interest on all Partner's Capital at end of F.Y. Moreover if any adverse consequence from the Tax Point of view in future by following the same practice i.e. only providing interest on female partners's capital Balance at the end of each F.Y.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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11 March 2013 The word used in the deed is partner's meaning thereby interest has to be levied to all the partners.
If interest is not provided to all the partners, provision of interest is 'not in accordance with the terms of the partnership deed' leading to disallowance u/s 40(b)(iv) of the income tax Act,1961.

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