There is no provision in the Partnership Act requiring Partnership Deed to contain profit/loss ratio-High Court

There is no provision in the Partnership Act requiring that Partnership Deed should contain the ratio of profit and loss per partner-High Court

ABCAUS Case Law Citation:
ABCAUS 2448 (2018) 08 HC

The only common question of law raised for consideration in the instant appeals was whether Section 13(b) of the Indian Partnership Act, 1932 could be invoked by the Revenue in the context of a clause of the Partnership Deed of the respondent firm.

The Hon’ble High Court observed that the section 13(b) of the Indian Partnership Act, 1932, provides that subject to contract between the partners, the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm.

It was observed that the Hon’ble Supreme Court had held that Section 13(b) of the Indian Partnership Act, 1932, reproduces the provisions of the repealed Section 253(2) of the Indian Contract Act, 1872 and referred to the judgment of Madras High Court which explained the scope of Section 253(2). In the said judgment of the High Court, it was held that only when no specific contract is proved then, the shares of the partners must be presumed to be equal. In the absence of a special agreement, this should be the presumption with which one should start and is merely a matter of common sense.

The Apex Court held that the principles stated in the context of Section 253(2) of the Contract Act, 1872, would apply equally to Section 13(b) of the Indian Partnership Act, 1932 as the the two provisions are in identical terms.

The Hon’ble High Court observed that a reading of the disputed clause of the Partnership Deed would show that the partners had agreed among themselves that an amount not exceeding 10% of the profits of the firm for the year shall be distributed among the partners, who, admittedly, were five in number. The clause also contained an agreement among the partners, regarding the manner in which the remaining 50% is to be appropriated.

The Hon’ble High Court opined that section 13(b) apply in a situation where there is no agreement among the partners dealing with the appropriation of the profits or losses in the partnership deed there was an agreement between the partners in this regard. Therefore, in such a situation, Section 13(b) of the Partnership Act could not be called in aid by the Revenue.

The Hon’ble High Court observed that there is no provision in the Partnership Act requiring that the Partnership Deed should contain the ratio of profit and loss per partner. If that be so, the partners are free to have a provision as per the instant deed of partnership, leaving the manner of apportionment to be decided by the partners. Therefore, so long as the relevant clause reflected an agreement between the partners, irrespective of its vagueness, Section 13(b) could not be invoked.  

Accordingly, the question of law raised as to whether the Revenue could rely on Section 13(b) of the Indian Partnership Act was answered against the Revenue and in favour of the assessee.

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