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. 

 

AI Summary

Firm's Unequal Interest Payments to Partners May Lead to Tax Issues Under Indian Partnership and Income Tax Acts A registered partnership firm with four partners, including one female, is engaged in manufacturing. The partnership deed stipulates a 12% annual interest on partners' capital. However, the firm only provides this interest to the female partner. The query concerns the legal and tax implications of this practice under the Indian Partnership Act and Income Tax Act. The response indicates potential tax issues, as tax authorities may consider the interest as taxable income for all partners, leading to double taxation since the firm has not claimed it as an expense.