Interest deduction in partnership firm

 RULES APPLICABLE IN THE ABSENCE OF PARTNERSHIP DEED

As we know from the previous discusion that it is not cumpulsory to have a partnership deed for a partnership firm. Hence if a firm is not having any written agreement or a partnership deed or if partnership deed is there but it is silent on certain issues the following provisions of the Indian Partnership Act 1932 will be applicable.

1. Profit sharing Ratio : Profits and losses would be shared equally among partners.

2. Interest on capital : No interest on capital would be allowed to partners. If thEre is an agreement to allow interest on capital it is to be allowed only in case of profits.

3. Interest on drawings: No interest on drawings would be charged from partners.

4. Salary: No salary or commission is to be allowed to partners.

5. Interest on Loan : If apartner has provided any Loan to the firm, he would be paid Interest at the rate 6% p.a. This interest on laon is a charge against profits i.e. it is to be allowed even if there are losses to the firm.

6. Admission of a new partner: A new Partner can be admitted only with the consent of all the existing partners.

7. Right to participate in the business: Each partner has a right to participate in the proceedings of the business.

8. Inspection of the accounts of the firm: Each partner has the right to inspect the accounts of the firm and can have a copy of the same.

Any of the above provisions can be changed by the partners after an agreement.

AND AS PER SECTION 40(B) OF INCOME TAX

INTEREST WOULD BE ALLOWED

a) 12%

B) MENTION IN DEED(HERE IT IS ZERO SINCE DEED IS SILENT)

WHICHEVER IS LOWER

sO, INTEREST WOULD NOT ALLOWED BY VIRTUE OF SECTION 40b

HOPE IT IS CLEAR NOW

No interest will be allowed because

As per Income Tax interest would be allowed at least of the following

1. interest calculated @ 12%

2. Rate provided in parnership deed (in this case it is 0%)

As per section 40(b) only that salary, remuneration, bonus, commission etc payable to working partners or any payment of interest payable to any partner will be allowed as deduction only if it is authorized by the partnership deed. If the partnership deed doesnot contain such provisions then the such deductions may be disallowed if the same is claimed by the partnership firm.

IN CASE OF INADEQUATE PROFIT WHAT IS TO BE DEDCUTED FIRST INTEREST ON CAPITAL OR REMUNERATION ?