Interest on Partner'sDebit Balance
This query is : Resolved
22 October 2008
A firm has 3 partners,2partners are having credit balance in thier Capital account the third partner has a debit balance.The firm pays interest @ 12%pa on the capital of the partners,it does not charge interest on the debit balance of the partner having Dr Balance in his capital account.
The Income Tax officer says it is mandatory to charge such interest and cerdit it to P&L account of the firm.Is he correct? If yes ,why?
The Income Tax officer says it is mandatory to charge such interest and cerdit it to P&L account of the firm.Is he correct? If yes ,why?
22 October 2008
Income Tax officer is not correct .
22 October 2008
Dear Mr.Goswami,Can you further elaborate why he is not correct.Thanks for the reply.
22 October 2008
if in your partnership deed,interest is not charged on debit balance of partnership deed then you will not charged the same & you are right & income tax officer is not correct
thanks a lot
thanks a lot
22 October 2008
It depends on the Interest clause in your partnership deed. If the deed does not have a clause to charge interest on debit balance, the contention of the ITO is not right
22 October 2008
I support the views of Mr.Hemant and Mr.Bharath.
23 October 2008
I am thankful to all the experts for their learned replies and not only because it suits my opinion but they have confirmed the legal position as it should be!
In our case,there is no provision for Interest on Debit balance in the Deed.
Secondly,in my opinion, "Interest" on the capital balance is not at all in the nature of Interest as such but it is an appropriation of the profits,it is not added to the partner's income under the head Income from Other sources but it is added to Business income.As it is,the partner who is having a debit balance is being penalised by not giving him the interest.By charging interest on his debit balance will put him to double loss.Hence the ITO is not correct.
Regards to the experts.
In our case,there is no provision for Interest on Debit balance in the Deed.
Secondly,in my opinion, "Interest" on the capital balance is not at all in the nature of Interest as such but it is an appropriation of the profits,it is not added to the partner's income under the head Income from Other sources but it is added to Business income.As it is,the partner who is having a debit balance is being penalised by not giving him the interest.By charging interest on his debit balance will put him to double loss.Hence the ITO is not correct.
Regards to the experts.
23 October 2008
Suppose, in ur case:
U have taken Rs 20 lakhs of unsecured loans and giving int @ 12% to the loan creditors which comes to Rs 2.40 lakhs and claiming it as business exp stating the loan is taken for the purpose of business. Right?
Now, Suppose further that ur partners capital is showing Rs 10 lakhs Dr balance and u r not charging any interest on it.
This can be perceived by the ITO as u r utilising Rs 10 lakhs of loan for personal use and may disallow the int paid on the above to the loan creditor by treating the same as personal exp routed through the firm.
U never know how will they perceive ur case. Hence, Its better to charge interest on partner's dr balance in such a case
U have taken Rs 20 lakhs of unsecured loans and giving int @ 12% to the loan creditors which comes to Rs 2.40 lakhs and claiming it as business exp stating the loan is taken for the purpose of business. Right?
Now, Suppose further that ur partners capital is showing Rs 10 lakhs Dr balance and u r not charging any interest on it.
This can be perceived by the ITO as u r utilising Rs 10 lakhs of loan for personal use and may disallow the int paid on the above to the loan creditor by treating the same as personal exp routed through the firm.
U never know how will they perceive ur case. Hence, Its better to charge interest on partner's dr balance in such a case
23 October 2008
Dear Shailesh, You have a point.But what if there are no loan creditors, at the same time no loan debtors,the partner is the only person having a debit balance then is the ITO on the right side?
23 October 2008
Interest is to be allowed in accordance with the provisions of the partnership deed. Now you say that the deed does not contain such a provision. So the ITO is wrong.
23 October 2008
Yes, then the contention of ITO is incorrect
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