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Partnership firm - Interest on capital and depreciation

CA Vitrag S Modi (Chartered Accountant) (186 Points)

25 December 2010

Dear Friends,

I am citing a case, please give me whether the following is possible.

A Partnership firm has 6 partners. They are using the Building of one of the partners (Personal asset) for carrying their business.

My Questions are:
1. Can we charge "Interest on Capital" treating the Asset as CAPITAL CONTRIBUTION.

2. Can we charge Depreciation on that Asset?

OR

3. Can we consider it as an Asset on rental basis by executing a deed between the partner and firm whereby the former agrees to give the asset on rental basis to the firm for business purpose.
If the above is true, whether the rent expense is allowed under IT ACT? And the rent income can be treated as Rent Income under HOUSE PROPERTY for the partner?

Thanks in Advance..

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4 Replies

CA Mandar Joshi (PRACTICE) (418 Points)
Replied 28 December 2010

dear Vitrag

I would like to answer your 2nd question first.

as far as depreciation on an asset is concerned, it is usage which is important and not ownership. if the building is used only and only by the firm and solely for carrying on the business, the firm can claim depreciation on building.

again in case of your 3rd question, we can say that executing a Rent/ lease agreement will always be better in such cases. rent will be allowed as expense and Rental income will be added in partner's income

now we come to your first question.

we cannot treat the personal building of the partner as "deemed capital". what we can do is, we can execute a change to that effect in the partnership deed with due consent of all the partners as to treating the building as Capital Contribution and that the interest should be charged on the opening or closing book value or market value as the case maybe (to be decided by partners) and then interest can be paid as per the deed. because, if remuneration and interest are not mentioned exclusively in the deed, Income Tax Act does not allow it as deduction.

This are of course my personal views, any corrections/ improvements are most welcome

CA MAYANK WADHERA (CA CS CMA(I)) (789 Points)
Replied 09 January 2011

mandar sir is absolutely correct according to section-184 of income tax act

Shruthi (ipcc) (496 Points)
Replied 11 May 2012

hello,

I hav a doubt regarding interest on capital and interest on drawings.wat is int on drawings and income or expense? and is int on capital income or expense.

sorry i noe it is a small doubt but i am confused.

plz reply.

DIBYENDU (SERVICE) (266 Points)
Replied 11 May 2012

interest on Capital is a sum by the way of Interest paid over capital conrributed by the parter towords business . It is a allowable business expenditure and Interest on drawings is any sum receive from partners by the way of interest over withdrawl of capital from business. It is a business Income.