If the deed clearly says interest on capital will be allowed as expense before profit what will be its treatment in loss year?

Correct answer: It may be treated as expense as per deed

The governing concept is the priority given by an express partnership-deed clause. Interest on capital is ordinarily treated as an appropriation of profit, and under the usual rule it is allowed only when profit is available. However, the question specifically states that the deed authorises it as an expense before determining profit. Such an explicit agreement governs the partners’ accounting treatment, so the amount may be charged before profit even in a loss year, subject to the clause’s exact wording and applicable law. Thus option A is correct. It is not drawings, because it is not a withdrawal, and it does not become a reserve.