Partner's Interest on their Capital in case of Partnership Firm

[SANJAY BAHETI]

Dear Experts,

One of my client being a Registered Partnership Firm having 4 Partners engaged in Manufacturing activities.Out of 4 Partners 3 are Male Partners & 1 is Female Partner.

As per Partnership Deed clause that Interest is to be provided on Partner's Capital @12% p.a.as agreed among the partners mutually for each F.Y.

Accordingly the Firm only provides the Interest on Female Partner's Capital at the end of each F.Y.

Now query is whether the same is tenable under law i.e. both as per Indian Partnership Act & Income Tax Act or have to provide interest on all Partner's Capital at end of F.Y.

Moreover if any adverse consequence from the Tax Point of view in future by following the same practice i.e. only providing interest on female partners's capital Balance at the end of each F.Y. 

 

[CAGOPALJI AGRAWAL]

Of course, it would have tax implication under income tax as the AO of the partners can treat the accrued interest taxable in the hands of male partners since it is authorized by deed and can be treated as income foregone. Since firm would not have claimed the same as expenses so would have double tax implications.

AI Summary

Partner's interest on capital: unequal payment can trigger income inclusion for non recipient partners and double tax consequences. If a partnership deed authorises interest on partners' capital but the firm pays or provides interest to only some partners, the assessing officer can treat interest as accrued to all partners and assess non recipient partners on that income; since the firm will not claim a deduction for interest not allowed as an expense, this may create adverse tax consequences including double taxation due to income being assessed in partners' hands without corresponding firm deductions.