Rent received from Bank Building

[Satbir singh wahi]

A partnership firm has rented building to Bank.Now whether interest on Partners capital is deduductible as interest paid from rental income after deducting municipal taxes and 30 percent .

[Mohit Jain]

As per Sec 24 (b), states also that no deduction shall be made under the second proviso unless the assessee furnishes a certificate, from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of such acquisition or construction of the property, or, conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan.

In my view, if the partnership deed does not contain any specific provision for Interest on capital and Funds (Capital by partners) have been specifically introduced to acquire, construct the building with a written interest payment clause mentioning the percentage and if the partners submit an interest certificate in this regard to the firm, the same may be claimed as an expense under Sec 24 (b),.

However, if the partnership deed contains a general clause of interest on capital, then it will be difficult for the assessee to show the nexus between fund utilized for business purpose and funds utilized for purchase of property and the amount outstanding thereon. And, A.O. will reject the deduction prima facie.

AI Summary

Deductibility of partners' capital interest: allowed only with written interest clause and payee certificate proving nexus to property.
Deductibility of interest on partners' capital against rental income requires that partners' funds be specifically used to acquire or construct the building, that the partnership deed contain a written interest provision specifying rate and payment, and that the firm obtain a certificate from the payee evidencing the interest payable; absent these elements the nexus to the property will be questioned and the deduction may be disallowed.