The Deed Says Nothing: Salary, Loan Interest and the Interest-on-Capital Claim
Ananya and Bhavna formed a partnership on 1 April 2023 with capitals of ₹4,00,000 and ₹2,50,000, sharing profits 3:2. The written deed provides a monthly salary of ₹5,000 to Bhavna and interest on drawings at 6% per annum, but it says nothing about interest on capital or interest on a partner's loan. During the year Ananya withdrew ₹60,000 on 1 October 2023 and Bhavna withdrew ₹40,000 on 1 January 2024. On 1 October 2023 Bhavna advanced ₹1,00,000 to the firm as a loan when the firm ran short of cash; no interest has been recorded on it. The year's profit, before any of these adjustments, was ₹3,60,000. At the year end Ananya argues that she should receive interest on capital because her capital is larger, and Bhavna insists her loan must carry interest at 12% per annum since she could have earned that elsewhere.
1. Compute the profit available for distribution and each partner's share, deciding clearly which of the two claims is admissible and why.
Read the worked answer
The outcome turns on whether an item is a charge against profit or an appropriation of it.
| Claim | Admissible? | Reason |
|---|---|---|
| Interest on Bhavna's loan | Yes - ₹3,000 | A partner's loan is a debt of the firm. Where the deed is silent the firm must allow 6% p.a., and it is deducted before profit is divided. ₹1,00,000 × 6% × 6/12 (1 Oct to 31 Mar). |
| Interest on capital | No | This is an appropriation, credited only if the deed provides for it. Silence means nothing is credited, however unequal the capitals. |
Bhavna's demand for 12% also fails: the statutory fallback is 6% p.a., not her opportunity cost.
Working
Profit before adjustments 3,60,000
Less: salary to Bhavna (5,000 × 12) (60,000) → 3,00,000
Less: interest on Bhavna's loan (3,000) → 2,97,000
Add: interest on drawings - Ananya 60,000 × 6% × 6/12 = 1,800; Bhavna 40,000 × 6% × 3/12 = 600 → 2,400
Distributable profit = 2,99,400
Ananya 3/5 = ₹1,79,640; Bhavna 2/5 = ₹1,19,760.
Note the direction of each adjustment: salary and loan interest reduce the pool, drawings interest enlarges it.
2. Suppose the deed had allowed interest on capital at 5% p.a. Recompute the shares and explain what would happen if the profit after salary and loan interest had been only ₹20,000.
Read the worked answer
Interest on capital would be Ananya ₹4,00,000 × 5% = ₹20,000 and Bhavna ₹2,50,000 × 5% = ₹12,500, total ₹32,500.
Distributable profit = 2,99,400 − 32,500 = ₹2,66,900.
Ananya 3/5 = ₹1,60,140; Bhavna 2/5 = ₹1,06,760.
The second part exposes the key distinction. Interest on capital is an appropriation, not a charge: it can never create or increase a loss. If only ₹20,000 were available after salary and loan interest, the full ₹32,500 could not be credited; the ₹20,000 would simply be divided 3:2 (₹12,000 and ₹8,000) and no partner would end with a debit balance on this account. Contrast the loan interest of ₹3,000, which would still be paid in full even if it produced a loss, because it is a charge.