Loan Interest and Appropriations When the Deed Is Silent
Ritika and Suman are partners sharing profits in the ratio 2:1. Their fixed capitals on 1 April 2024 were ₹6,00,000 and ₹4,00,000. The partnership deed provides interest on capital at 10% per annum and a salary of ₹8,000 per month to Suman. It is silent on interest on a partner's loan and on whether salary and interest on capital are payable when profits are insufficient. Ritika advanced ₹2,00,000 to the firm as a loan on 1 July 2024; no interest has been recorded in the books. Profit before interest on loan, interest on capital and salary for the year ended 31 March 2025 was ₹5,65,000. Suman contends that the loan interest cannot be paid because the deed does not mention it, and that even if payable it should rank after interest on capital and salary. The firm follows the financial year as its accounting year.
1. Compute the amount available for appropriation and the final profit credited to each partner's capital account. Show your workings.
Read the worked answer
Step 1 - Interest on Ritika's loan (a charge): ₹2,00,000 × 6% × 9/12 = ₹9,000. The Partnership Act, 1932, Section 13(d), allows 6% per annum when the deed is silent. This is a charge against profit, so it is deducted first.
Step 2 - Profit available for appropriation: Profit before loan interest = ₹5,65,000 Less loan interest = ₹9,000 Available = ₹5,56,000
Step 3 - Appropriations: Interest on capital: Ritika ₹60,000; Suman ₹40,000 = ₹1,00,000 Salary to Suman: ₹8,000 × 12 = ₹96,000 Total appropriations = ₹1,96,000
Step 4 - Residual divisible profit: ₹5,56,000 − ₹1,96,000 = ₹3,60,000 Ritika 2/3 = ₹2,40,000; Suman 1/3 = ₹1,20,000
Step 5 - Final credit: Ritika: ₹60,000 + ₹2,40,000 = ₹3,00,000 Suman: ₹40,000 + ₹96,000 + ₹1,20,000 = ₹2,56,000 Total = ₹5,56,000, which agrees with the profit after the loan charge.
2. Evaluate Suman's two objections: that loan interest is not payable because the deed is silent, and that it should rank after interest on capital and salary.
Read the worked answer
Both objections are incorrect.
Silence of the deed does not deny loan interest. Section 13(d) of the Partnership Act, 1932, supplies the missing term: a partner who advances money beyond capital is entitled to interest at 6% per annum. The deed would have to exclude such interest expressly for Suman's view to succeed. Silence therefore supports Ritika, not the firm.
Loan interest is a charge, not an appropriation. Interest on a partner's loan is a debt-like payment for the use of funds. It is deducted before divisible profit is ascertained and is payable even if the firm makes a loss. Interest on capital and salary, by contrast, are appropriations of profit; they depend on profit being available and on the deed's terms. They cannot be given priority over a charge.
Correct order:
- Deduct interest on loan ₹9,000.
- Then apply salary and interest on capital as appropriations.
- Then divide the residual profit in the profit-sharing ratio.
So Suman's proposed ranking reverses the legal character of the two claims.
3. Suppose profit before loan interest was only ₹80,000. State with reasons how the claims would be settled.
Read the worked answer
Loan interest of ₹9,000 is paid first because it is a charge, leaving ₹71,000 available for appropriation.
Interest on capital (₹1,00,000) and salary (₹96,000) total ₹1,96,000, so they cannot be paid in full. They are appropriations, not charges. Unless the deed expressly makes them a charge or specifies an order of priority, they are restricted to the available ₹71,000. If the deed gives no priority, the practical exam treatment is to allocate the ₹71,000 in the ratio of the amounts due (₹1,00,000 : ₹96,000); if the deed specifies that salary is paid first, follow that order. No residual profit remains for sharing in 2:1.
The key judgement is that the loan interest is never sacrificed, whereas salary and interest on capital cannot create or increase a loss. If the year had ended in a loss before loan interest, the loan interest would still be payable, but salary and interest on capital would not be charged unless the deed expressly made them charges.