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Interest paid on partners capital by the partners

Ashish Modi (article ) (43 Points)

03 September 2011

I have a negative balance in my capital a/c in a firm........ i need to pay interest.....................should i deduct TDS and than pay the same?????? or no TDS is to be deducted on the same

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6 Replies

C.A SHASHANK GOYAL (Chartered Accountant) (362 Points)
Replied 03 September 2011

Hi , I am of the opinion that as per the provision of section 194A : "Interest other than Interest on Securities" no Tds to be deducted in case interest is paid to partners.

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PRERNA JAIN (ARTICLE) (24 Points)
Replied 03 September 2011

First of all there is no logic of paying interest on negative capital.

Also the TDS is not deductible on Intt on partners capital.

CA ADITYA SHARMA (CA IN PRACTICE ) (16719 Points)
Replied 03 September 2011

NO TDS

Dhanabal Ramasamy (CHARTERED ACCOUNTANT) (105 Points)
Replied 03 September 2011

Hai..

There is no need to pay interest on the negative balance. Even then if you are supposed to pay then why should you deduct TDS. TDS is to be deducted if you are liable for audit under 44 AB

Ashish Modi (article ) (43 Points)
Replied 03 September 2011

Thanks to all f

*Prerna .... can u elaborate about the logic for not paying interest on overdrawn capital....

*ADITYA............. can u give any refrence for not deducting on the same

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Wally Walter (Article) (35 Points)
Replied 05 September 2011

I concur with Prerana for not to pay interest on overdrawn capital. Logic being - a business & its owner are separate entities as per company's act. Hence at all times, the business need to look at its capacity to pay to preferential creditors or stakeholders. In the given case, the business is not earning or doing well; in such case owner/ proprietor/ shareholder should not lay claim or be paid interest on his capital.

And now assuming, interest is paid - I disagree with Aditya. Income tax act does not distinguish a business with eroded capital or otherwise. It requires the entity in question to deduct TDS at all times if it falls within the ambit e.g. not a bank or such institution as notified.