Partnership - Interest on Capital

This query is : Resolved

CA Vitrag S Modi (Querist)
Follow

25 December 2010 Dear Experts,

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..

CA ASHISH GUPTA

CA ASHISH GUPTA (Expert)
Follow

25 December 2010 1. Interest on capital cannot be claimed.
2. Depreciation can nt be claimed.
3. Rent can be given, will be allowed under IT. Partners income will be taxable in house property head.

You can claim int. on capital and dep., only if the assets is introduced in firm.

CA Vitrag S Modi

CA Vitrag S Modi (Querist)
Follow

25 December 2010 Dear Ashish Sir,

Thanks for your guidance.

Please May i know what is the meaning of "Introduced in firm".. i am unable to comprehend it i.e whether it should be in the Name of the Firm, or it should appear only in the Balance Sheet of firm.

Upgrade to CAclubindia Pro. Subscribe Now!

Hitender Gaur

Hitender Gaur (Expert)
Follow

25 December 2010 Introduce in firm means to hand over the building to the firm(Business) as his capital. His capital will raise equal to value of building and you can take the benifit of Depriciation and Int. on Capital (if provided in Partnership Deed) into your P& L A/c.

CA ASHISH GUPTA

CA ASHISH GUPTA (Expert)
Follow

25 December 2010 One another important thing is stamp duty will also involved in the matter. If you introduced the building in the firm through partnership deed then stamp duty will nt be levied. many case has been deceided, bt no revenue authority will entertain the same. So best way is renting method.

CA Vitrag S Modi

CA Vitrag S Modi (Querist)
Follow

25 December 2010 Dear Ashish Sir,

Thanks for your advice once again.

I have one doubt here. In House Property head we can not take the Rent Income if the property has been used in the business and in the given case property of a partner is being used by the partnership firm. So, It can be deemed to be used in business.

If we take rent income then we can have 30% std. deduction available on rental income also. Whether the same will be allowed as an expense to the firm fully.

CA ASHISH GUPTA

CA ASHISH GUPTA (Expert)
Follow

27 December 2010 Deduction will be allowed. Refer Heastie vs. Veitch & Co. (1934) 2 ITR 456 (CA). Income of partner chargeble under house property u/s 22.
However Gujrat high court in CIT v. rasiklal bhandari (1979) 119 ITR 303 held that the income of partner is not house property income.

But the amount is deductable, that is undisputed.