Provisions in the Absence of Partnership Deed
The provisions of Indian Partnership Act, 1932 apply
Oral or Written Agreement
A partnership agreement can be either oral or written. It is not mandatory to have a written agreement, but having one helps avoid disputes by clearly defining terms and conditions.
When agreement or Deed is Absent
There provisions apply when there's no partnership agreement
When agreement or deed is incomplete
These provisions also apply when agreement is available but does not have some particular relevant provision
Key Provisions in Absence of Partnership Deed
According to the Indian Partnership Act, 1932, the following rules apply when there is no partnership deed or when the deed is silent on specific matters:
Interest on Partner's Loan
If a partner gives loan to the firm beyond their capital contribution, they are entitled to interest at 6% per annum on such loan.
Profit and Loss Sharing
Profits and losses are shared equally among all partners
Interest on Capital
No interest is allowed on the capital contributed by partners
Interest on Drawings
No interest is charged on drawings made by partners from the firm.
Partner's Salary
No partner is entitled to receive any salary, commission, or remuneration for participating in the business.
Admission of New Partner
A new partner cannot be admitted into the firm without the consent of all existing partners.
Interest on Firm's Loan to Partner
No interest is charged on loans given by the firm to a partner.
Practice Questions with Solutions
Test your understanding with these example questions based on provisions in the absence of partnership deed.
Solution:
Step 1: In the absence of partnership deed, interest on partner's loan is allowed at 6% per annum.
Step 2: Loan amount = ₹50,000
Step 3: Period of loan = 9 months (1st July, 2023 to 31st March, 2024)
Step 4: Interest = ₹50,000 × 6% × 9/12 = ₹50,000 × 0.06 × 0.75 = ₹2,250
Answer: The firm must pay ₹2,250 as interest on A's loan.
Solution:
Step 1: In the absence of partnership deed, profits are shared equally among partners regardless of their capital contributions.
Step 2: Total profit = ₹3,00,000
Step 3: Number of partners = 3
Step 4: Each partner's share = ₹3,00,000 ÷ 3 = ₹1,00,000
Answer: Each partner (X, Y, and Z) will receive ₹1,00,000 as their share of profit.
Note: Even though their capital contributions are different, they share profits equally in the absence of a partnership deed.
Solution:
Step 1: According to the provisions in the absence of partnership deed, no partner is entitled to receive any salary, remuneration, or commission for participating in the business.
Step 2: The rule applies equally to all partners regardless of the time spent or effort put into the business.
Answer: No, P is not entitled to receive any salary. In the absence of a partnership deed, partners cannot claim salary even if they contribute more time or effort to the business.
Additional Note: If partners want to provide salary to a partner, they must include this provision in a partnership deed.
Solution:
Step 1: In the absence of partnership deed, no interest is charged on drawings made by partners.
Step 2: This rule applies regardless of the amount withdrawn or the period for which the amount was used.
Answer: No interest is charged on A's drawings. The firm cannot charge any interest on the ₹20,000 withdrawn by A.
Important: This is different from interest on partner's loan to the firm (which is allowed at 6%). Drawings are not loans; they are withdrawals against profit share.
Key Takeaways
- Partnership agreement can be oral or written - Written agreement is advisable but not mandatory
- Interest on partner's loan is 6% per annum - Only applicable for loans beyond capital contribution
- Profits and losses shared equally - Regardless of capital contribution or involvement
- No interest on capital, drawings, or firm's loan to partner
- No salary/remuneration to partners - Even for managing the business
- New partner requires consent of all existing partners
Key Point Even if there is an oral agreement, it is sufficient and these rules will not apply