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Section 40(b) : interest on capital

CA Vishal Jain (Chartered Accountant) (137 Points)

23 September 2012

If partnership Deed provides 10% interets on capital but it is silent about the amount of capital i.e. interest will be paidd on opening capital or on monthly basis than in that case for the purpose of section 40(b) which amount of capital should be taken for the purpose of allowability of interest on capital to partner.

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7 Replies

pooja (student cpt) (93 Points)
Replied 23 September 2012

Nitesh Matta (Nothing) (198 Points)
Replied 23 September 2012

interest will be calculated as per accounting.. Openign , Drawings, further introduction of capital everything has to be adjusted accordingly!!

Srikanth M S (finalist) (88 Points)
Replied 23 September 2012

Dear Vishal Sir,

As per my opinion these things can be noted:

1. In case where there is a both the Fixed capital and the Current Account maintained by the Firm for Capital Accounts then ul not be having any problem in calculating the same as it will be calculated on the Fixed Capital account i.e., on a prorata basis.

2. If the same is a Single account maintained then there is ambiguity in such calculation. In this case pple follow two methods either take the avg investment which is existing through out the yr and calculate ythe interest on dat sum directly for 12 months only OR take the calculation as per Mr.Nitesh Matta's opinion, as above.

Conclusion: If the firm is maintaining the records in accordance with (1) above then the same will not having any ambiguity.. Thus the same method can be suggested for the client too..

Regards,

Srikanth.M.S

Devendra (Chartered Accountant) (4775 Points)
Replied 23 September 2012

Provide Interest on Average Balance of the Capital Account (Fixed and Current Account) @ 10%.

Regards,

Devendra Kulkarni

CA CWA CS MBAYashoda Meenawala (DGM ( Fin )with a BIG MNC) (130 Points)
Replied 23 September 2012

Sir Interest shall be calculated on Opening balance Only

*RENU SINGH * (✩ §m!ℓ!ñġ €ม€§ fℓม!ñġ ђ♪gђ✩ ) (21627 Points)
Replied 24 September 2012

As deed is silent ... interest should be given on average balance ......as per my opinion ...but still waiting for

expert's reply

Nupur Sharma (CA) (426 Points)
Replied 06 December 2014

I have a query to ask here. What if the partnership firm is based on a slightly different business model? Like in case there are 3 partners and they undertake IT projects from overseas clients. Suppose, Project A has been undertaken by first partner and project B by the second partner, Project C by the third partner and a Project D on which first and second partners are working. Now first partner will get all the income generated from project A plus 50 % from Project D and similarly second partner will get all income generated from Project B plus 50% from Project D.

Will limits of section 40(b) apply here as well? But under what head? This is not salary. Should all this sharing of income from projects be simply treated as sharing of profits because this cannot be treated as remuneration in my opinion.

I would really appreciate if somebody could guide me on this. Quite a technical issue for me.

Thanks in advance