If the partnership deed states that interest on capital is payable only when there is profit, what is its treatment in a year of loss?

Correct answer: It will not be allowed

The governing principle is that interest on capital is allowed according to the partnership agreement, subject to the stated condition. Here, the deed expressly makes payment conditional upon the existence of profit. In a loss year that condition is not satisfied, so no interest on capital is credited or charged to the partners’ capital accounts. Option A is therefore correct. Option B would be relevant only if the deed permitted interest even when profit was insufficient or there were a specific legal provision requiring it. Interest is not automatically converted into a loan, so option C is incorrect. Drawings are a separate matter and cannot replace the agreed condition, making option D incorrect.