Income tax
n v sudhakar
(Querist) 10 September 2011
This query is : Resolved
A partnership firm is running for the last 7 years. The firm got business income and lease income. In FY 2010-11 there is not much of a business and the partners are also not interested in continuing the business. But they would not like to close the firm since they are getting some lease income from the building owned by the firm. One of the partnership deed clause is as follows:
"THE PARTNERS SHALL BE ENTITLED TO INTEREST AT 12% PER ANNUM ON CAPITAL INVESTED BY THEM IN THE FIRM. HOWEVER, THE SAME MAY BE WAIVED BY ANY PARTNER, IF HE DESIRES NOT TO CHARGE ANY INTEREST FOR ANY PERIOD"
Basing on the above
1. is it obligatory on the part of the firm to provide interest on capital?
2. Out of 2 partners, one partner is only interested in getting interest because of his obligations where as the other partners they are not interested in getting interest on capital since there is no business income to the firm.
3. Can we work out interest to only one partner basing on the above clause or is it necessary to provide interest to all the partners?
Kindly clarify the above points.
Thanks
N V Sudhakar
B.R. BHALLA, ADVOCATE
(Expert) 10 September 2011
As soon as the firm discontinues doing business and only the rental/lease income would arise, the firm would lose the status as "firm" under the Income-tax Act. It would then be assessed as "Association of Persons" (AOP). The PAN card of the firm be got modified to have the status as AOP. Interest and salary to partners would continue to be allowed even if the status changes.
R.Ramachandran
(Expert) 10 September 2011
In the light of the clause in the Partnership Agreement, if other partners are not interested in getting any interest income on their capital, you have to get a categorical declaration from them stating that they waive their claim for interest on capital. On that basis, you neither need to pay any interest to them on their capital, nor make any provision for the purpose. However, you have to continue to pay the interest in respect of one partner who is interested in getting (and not ready to waive) interest on his capital.
Since the partnership does not want to dissolve, the suggestion of Mr. Bhalla may not be suitable.
