Partners remuneration and interest on capital

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

29 May 2014 Dear Experts,

Partners Interest on capital and Remuneration calculated as per Partnership Deep and Debited to Profit and loss account, arrived Net Profit and Paid tax on the same by Partnership firm.

Query:

1. ABC is Partnership Firm. X & Y is Partners. Mr. Z is Loan given to X, Y, parterns to run the business.

2. Out of the Interest on capital and Remuneration received by the partners 90% should be transferred to Loan lender i.e Mr. Z as per MOU between partners and Lender.

3. Now can partners transfer their interest on capital and remuneration to the Lender before tax on their hand and pay tax only on 10% income ( Int on capital adn Remuneration) of the same on their individual Partners hand?

4. Remaining 90% of int on capital and Remuneration can be taxed under lender hand?

5. NO interest on money lend by the MR.Z, but 90% of Int on capital and Remuneration will be shared.

Please suggest the method is correct??? will it allowable as per IT Act??

Rupesh Jain

Rupesh Jain (Expert)
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29 May 2014 interest on capital and remuneration to partner always taxable in hand of partners hand not in other hand.

if partner accept then they make mr Z as partner in his business and then intt of capital and remuneration share will taxable in hand of Mr Z. otherwise not possible.

Querist : Anonymous

Querist : Anonymous (Querist)

29 May 2014 Yes i do agree this.

One more query cont with this, can we make lender as investor and share our 90% profit by way of Interest on capital and Remuneration?

or

Can we share partnership firm 90% profit from the business because he is investor??

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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09 August 2024 In the context of partnership firms and the distribution of interest on capital and remuneration, it is crucial to adhere to the provisions of the Income Tax Act, 1961, and the principles of taxability. Here’s how the situation described can be analyzed:

### **1. Understanding the Scenario**

- **Partnership Firm**: ABC (with partners X and Y)
- **Loan Lender**: Mr. Z
- **Agreement**: According to an MOU, 90% of the interest on capital and remuneration should be transferred to Mr. Z.

### **2. Tax Treatment of Interest on Capital and Remuneration**

**Interest on Capital and Remuneration**:

- **Taxability**: Interest on capital and remuneration received by partners is considered as income for the partners and is subject to tax in their hands. The partnership firm pays tax on its profits, which include the interest on capital and remuneration paid to partners.

**Taxation of 90% Transfer to Lender**:

1. **Transfer of Interest on Capital and Remuneration**:
- The partners cannot transfer their interest on capital and remuneration to Mr. Z before tax. This is because, for tax purposes, the partners are individually taxed on their share of the partnership firm's income, including interest on capital and remuneration.

2. **Tax on Partners’ Income**:
- Partners are taxed on the total amount of interest on capital and remuneration received, as this income is part of their personal income. This means partners X and Y will be taxed on 100% of the interest on capital and remuneration, not just 10%.

3. **Payment to Mr. Z**:
- The 90% paid to Mr. Z from the partners' share (as per the MOU) is essentially an arrangement outside the scope of direct tax calculations. However, it should be noted that this payment cannot reduce the tax liability of the partners as the income is already taxed in their hands.

4. **Tax Treatment for Mr. Z**:
- Mr. Z, who is a lender, does not receive interest on the loan but is instead getting a share of the partnership’s income (interest on capital and remuneration). Since he is not a partner, this arrangement should be carefully analyzed. If Mr. Z is not a partner, the payment to him as per the MOU would generally be classified as a business expense or a special arrangement, not an interest or remuneration.

### **3. Legal and Tax Considerations**

**Investment Sharing**:

- **Equity Sharing**: If Mr. Z is to be considered an investor rather than just a lender, this would imply an equity investment rather than a debt investment. This would require changing the terms of the arrangement and incorporating Mr. Z into the firm as a partner or shareholder.

- **Profit Sharing**: Sharing 90% of the profit with Mr. Z, if he is an equity investor, should be structured under a formal agreement and would impact profit-sharing ratios and ownership stakes. This arrangement should be compliant with partnership laws and tax regulations.

### **4. Recommendations**

- **Consult a Tax Advisor**: Given the complexity and potential for tax and legal implications, it is highly advisable to consult a tax advisor or legal expert. They can provide guidance on structuring the arrangement to ensure compliance with tax laws and proper documentation.

- **Review Agreements**: Ensure that any agreements with Mr. Z are documented clearly, and all payments are reflected accurately in financial statements.

### **Summary**

- **Partners’ Tax**: Partners must pay tax on the full amount of interest on capital and remuneration received.
- **Payments to Lender**: Payments to Mr. Z should be treated as per the contractual arrangement but will not affect the taxability of the partners.
- **Investment Structure**: If Mr. Z’s role is to be restructured as an equity investor, it would require formal changes and proper structuring under partnership laws.

Please seek professional advice to ensure compliance and appropriate structuring based on your specific situation.

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