Partnership Without a Deed: Salary, Interest and a Partner's Loan
On 1 April 2023, Aarav and Bhavna formed a firm with capitals of ₹6,00,000 and ₹4,00,000. No partnership deed was written. Aarav manages the business full time; Bhavna contributed the premises and insists this justifies a larger share. During 2023-24, Aarav advanced ₹2,00,000 to the firm on 1 October 2023. Bhavna withdrew ₹60,000 on 1 July 2023 for her daughter's admission. Profit before any adjustment is ₹5,40,000. At the year end, Aarav claims a salary of ₹20,000 per month, interest on capital at 10% p.a., and interest on his loan at 10% p.a. Bhavna claims 10% interest on her capital, argues that no interest should be charged on her drawings, and says Aarav's salary is not payable because the firm has no deed. She also proposes that profits be divided in the ratio of capitals. Both partners ask you to settle the accounts before the accounts are signed.
1. Evaluate each claim made by Aarav and Bhavna, stating the rule that governs it in the absence of a deed.
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Governing rule. When there is no deed, the Partnership Act, 1932 supplies the terms: profits are shared equally; no partner is entitled to salary, commission, interest on capital or interest on drawings; a partner who advances a loan is entitled to interest at 6% p.a.
- Salary to Aarav: not allowed. Working full time does not by itself create a right to salary when the deed is silent.
- Interest on capital: not allowed to either partner. Bhavna's contribution of premises does not change this; capital earns no interest without an agreement.
- Interest on Bhavna's drawings: not chargeable. A firm cannot charge interest on drawings without an agreement.
- Aarav's loan: allowed, but at 6% p.a., not 10%. It is a charge against profit, not an appropriation. ₹2,00,000 × 6% × 6/12 = ₹6,000.
- Profit-sharing ratio: equal, not capital ratio. Capital contribution and managerial effort do not alter the statutory equal share.
- Bhavna is right that Aarav's salary is not payable, but her claim to a capital-ratio share is wrong.
2. Prepare the Profit and Loss Appropriation Account for the year ended 31 March 2024 and show how ₹5,40,000 is distributed.
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Profit before interest on loan is ₹5,40,000. Interest on Aarav's loan is ₹6,000, leaving ₹5,34,000. Since no appropriations are allowed, the whole ₹5,34,000 is divisible equally: Aarav ₹2,67,000 and Bhavna ₹2,67,000.
Profit and Loss Appropriation Account
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| To Aarav's Capital A/c | 2,67,000 | By Profit transferred from P&L A/c | 5,34,000 |
| To Bhavna's Capital A/c | 2,67,000 | ||
| Total | 5,34,000 | Total | 5,34,000 |
Interest on loan is shown in the Profit and Loss Account as a charge before appropriation. The capitals remain ₹6,00,000 and ₹4,00,000; Bhavna's drawings of ₹60,000 are deducted from her capital account, with no interest.
3. Would your answer change if the partners had signed a deed on 31 March 2024 giving retrospective effect to salary and interest on capital? Explain the condition.
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A deed signed on 31 March 2024 can give retrospective effect only if all partners consent and the rights of third parties, creditors and tax authorities are not affected. If it validly provides salary and interest on capital, the figures are recomputed from the beginning: salary 12 × ₹20,000 = ₹2,40,000; interest on capital Aarav ₹60,000 and Bhavna ₹40,000; loan interest may rise to 10% if the deed says so (₹10,000). Profit would then be ₹5,40,000 − ₹2,40,000 − ₹60,000 − ₹40,000 − ₹10,000 = ₹1,90,000, shared equally. Without unanimous consent, the statutory treatment above stands, because a deed cannot rewrite the accounts of a completed year at the expense of a dissenting partner.