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

Lakshmi lends Rs 4,00,000 to Prakash's cloth business in Erode. Under the loan agreement, she is paid a share of 20% of the profits each year as interest, and she takes no part in management. A creditor of the business claims she is a partner. What is the legal position?

Lakshmi is not a partner merely because she receives a share of profits as a lender's return. Under the Act, profit sharing is only a relevant factor, not conclusive proof, and the real relationship, including mutual agency, must be examined.

  1. AShe is a partner, because she receives a share of profits
  2. BShe is a partner only if the profit share exceeds 25%
  3. CShe is not a partner merely because she receives a share of profits as a lender; the receipt is only a factor to be consideredCorrect
  4. DShe is a partner because she has lent money to the business

Explanation

The Act says that receiving a share of profits, or a payment varying with profits, does not by itself make the recipient a partner. A lender paid out of profits is one such case. Actual relationship is judged from all facts, such as mutual agency. Option A ignores this rule.

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