Application of the provisions of the Indian Partnership Act, 1932 in the absence of partnership deed

Application of the provisions of the Indian Partnership Act, 1932 in the absence of partnership deed

If there is no partnership deed or when there is no express statement in the partnership deed, then the following provisions of the Act will apply:

(i) Remuneration to partners

No salary or remuneration is allowed to any partner. [Section 13(a)]

(ii) Profit sharing ratio

Profits and losses are to be shared by the partners equally. [Section 13(b)]

(iii) Interest on capital

No interest is allowed on the capital. Where a partner is entitled to interest on capital contributed as per partnership deed, such interest on capital will be payable only out of profits. [Section 13(c)]

(iv) Interest on loans advanced by partners to the firm

Interest on loan is to be allowed at the rate of 6 per cent per annum. [Section 13(d)]

(v) Interest on drawings

No interest is charged on the drawings of the partners.

Illustration 1

A, B, C and D are partners in a firm. There is no partnership deed. How will you deal with the following?

a)     A has contributed maximum capital. He demands interest on capital at 12% per annum.

b)    B has withdrawn ₹ 1,000 per month. Other partners ask B to pay interest on drawings @ 10% per annum to the firm. But, B does not agree to it.

c)     Loan advanced by C to the firm is ₹ 10,000. He demands interest on loan @ 9% per annum. A and B do not agree with this.

d)    D demands salary at the rate of ₹ 5,000 per month as he spends full time for the business. B and C do not agree with this.

e)     A demands the profit to be shared in the capital ratio. But, B, C and D do not agree.

Solution

Since there is no partnership deed, provisions of the Indian Partnership Act, 1932 will apply.

a)     No interest on capital is payable to any partner. Therefore, A is not entitled to interest on capital.

b)    No interest is chargeable on drawings made by the partner. Therefore, B need not pay interest on drawings.

c)     Interest on loan is payable at 6% per annum. Therefore C is to get interest at 6% per annum on ₹ 10,000.

d)    No remuneration is payable to any partner. Hence, D is not entitled to salary.

e)     Profits should be distributed equally.