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CA Foundation · Business Laws · The Indian Partnership Act, 1932

Farhan, Geeta and Harish are partners in a cloth firm. Farhan, while carrying on the firm's business, secretly sells a firm's consignment to his own relative and makes a private profit of Rs 40,000 from the transaction. What is the legal position of this profit?

Farhan must account to the firm for the Rs 40,000 and pay it over. A partner's duty is to account for any secret profit earned from a firm transaction or from its property without the other partners' consent, so he cannot retain it personally.

  1. AFarhan may keep it, as he did the work personally
  2. BFarhan must account for it and pay it to the firmCorrect
  3. CIt is shared by Geeta and Harish only
  4. DIt is divided equally only if all partners later agree

Explanation

A partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the firm or from use of its property, name or business connection. Hence the Rs 40,000 belongs to the firm, not to Farhan personally. Option C wrongly excludes Farhan from sharing his portion in the firm's profit.

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