Partnership Rules Without a Partnership Deed

A partnership is formed when two or more persons agree to share the profits of a business carried on by all or any of them acting for all. A partnership deed is a written agreement among the partners which specifies the terms and conditions of the partnership, such as profit/loss sharing ratio, interest on capital, interest on drawings, partners' salaries, etc.

When there is no partnership deed or the deed is silent on a particular matter, the provisions of the Indian Partnership Act, 1932 apply. These provisions lay down certain rules that govern the partnership in the absence of a specific agreement.

Rules Applicable When Partnership Deed is Absent

According to the Indian Partnership Act, 1932, in the absence of any specific agreement (partnership deed) to the contrary, the following rules apply:

• Profit and Loss Sharing: Profits and losses are to be shared equally among all partners, irrespective of their capital contribution or the time spent in the business.
• Interest on Capital: No interest on capital is allowed to any partner.
• Interest on Drawings: No interest is charged on drawings made by the partners.
• Remuneration (Salary/Commission) to Partners: No partner is entitled to any salary or commission for taking part in the business.
• Interest on Loan by Partner: If a partner has given a loan to the firm, they are entitled to interest on such loan at the rate of 6% per annum.

Analyzing the Given Options

Let's evaluate each option based on the rules applicable in the absence of a partnership deed:

Option 1: Interest on Capital is allowed @ 6% p.a.

This statement is incorrect. In the absence of a partnership deed, the rule is that no interest on capital is allowed to partners.

Option 2: Interest on drawing are charged @ 6% p.a.

This statement is incorrect. The rule states that no interest is charged on drawings made by partners when there is no partnership deed.

Option 3: Profits and Losses are shared equally

This statement is correct. According to the Indian Partnership Act, 1932, profits and losses are shared equally among the partners when there is no partnership deed or the deed does not specify the ratio.

Option 4: Profits and Losses are shared according to capital contribution

This statement is incorrect. Profit and loss sharing is not based on capital contribution unless specifically agreed upon in the partnership deed. In the absence of a deed, the equal sharing rule applies.

Therefore, the rule followed in the absence of a partnership deed is that profits and losses are shared equally.

Revision Table: Rules Without Partnership Deed

Additional Information on Partnership Deed

While a partnership deed is not legally compulsory, it is highly recommended to avoid disputes among partners. It serves as a written record of the agreed terms. A partnership deed typically includes details like:

• Name and nature of the business.
• Duration of the partnership (if any).
• Capital contributed by each partner.
• Profit and loss sharing ratio.
• Rules regarding interest on capital, drawings, and loans.
• Provisions for partners' salaries or commission.
• Duties and obligations of partners.
• Rules for admission, retirement, or death of a partner.
• Procedure for dissolution of the firm.

Having a clear partnership deed helps ensure smooth functioning and legal clarity for the partnership business.