Interest before salary

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

27 July 2012 Dear expert,
In case of a partnership firm total sale amount is Rs. 4400000/- and if firm opt section 44AD then its net profit comes to Rs. 352000/-.
Interest on capital @ 12% comes to Rs. 293000/-, and after deducting interest out of net profit remaining profit comes to Rs. 59000/- which can be distributed to partners as salary amount and firm’s tax liability comes to nil.
Here I want to know that whether the firm can distribute interest first and salary after that from remaining net profit
Or
Firm has to distribute salary first and interest after that. If said firm does so, then its profit goes negative, as computed below –
On the first 3 lac @ 90% – 270000/-
On the remaining 52000/- @ 60% -31200/-
Total salary comes to Rs. 301200/- and remaining net profit Rs. 50800/- is not sufficient to pay interest on capital.
And I am not willing to file return with negative profit.
Please advise me.

Amol S Joglekar

Amol S Joglekar (Expert)
Follow

27 July 2012 Choice is with you. You need to decide the same in consultation with the partnership deed.

Querist : Anonymous

Querist : Anonymous (Querist)

27 July 2012 generally, what should be distribute first between interest and salary?

Upgrade to CAclubindia Pro. Subscribe Now!

CA Rahul Jain

CA Rahul Jain (Expert)
Follow

28 July 2012 Generally, Interest shall be deducted from the profit and thereafter salary.

Because, Sec 44ab have prescribes some limit for salary which is to be computed on the basis of book profit.

and book profit is calculated after deducting interest. So interest shall be deducted first and thereafter salary.