Interest clause of partnership deed

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Milan Agrawal

Chartered Accountant

207 Points Posted on 19 February 2015

Dear All,

Can a Partnership deed contain subjective clause for interest on capital.

E.g. No Interest will be provided to the partner's for initial contribution of capital. Thereafter, if additional funds are required for the business, then all the partners will contribute the capital in equal proportion. It will also be interest free. However, if any partner could not contribute his share of capital, then the remaning partner who will be contributing his share of capital will get interest @ 24% on that excess contribution.

Suppose, There are 3 partner A, B & C

Initially, A & B contribute Rs. 5 lakhs each. (Interest Free)

After that, Rs. 6 Lakhs was required for the business. So, now A, B & C all have to contribute Rs. 2 Lakhs each. But C could contribute only Rs. 50000.00. Hence, his remaning share of capital Rs. 1.50 Lakhs has been contributed by A & B equally i.e. Rs.75000 each.

Hence, A & B will get Interest @ 24% on this Rs.75000.00

1. Is there any problem in including this type of clause in partnership deed from any point of view?

2. Further, if that 0% interest becomes 12% then what will be the scenario?

Regards,

CA Milan Agrawal

Replies (2)

Swami Ayyappa Nuli

TAX ADVISOR & CONSULTANT AT G.S.T SUVIDH

1372 Points Posted on 20 February 2015

Sir, Actually there is no provision u/s.40(b) restricting partners to decide the mode and clauses for computation of capital. It only dealt with the rate at which Interest on capital can be levied. For e.g Partnership deed may provide to pay interest either on Opening Balance or Closing balance or Proportionate basis. It is the "RATE" matters.The following paragraph is the Income tax department site Information.

"any payment of interest to any partner which is authorised 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 twelve per cent simple interest per annum will be disallowed."

From the above paragraph, it is concluded that the manner is Irrelavant , Rate is matters. So better to pay 12% p.a. In your case as you said 24% p.a is Interest rate. so Assessing officer will disallow 12% i.e Rs.37,500.