The premise of Section 37 of the Indian Partnership Act, 1932 section is to ensure that after the retirement or death of a partner, the remaining partners settle their dues as quickly as possible. Even if there is a delay then the outgoing partner is given a certain extra incentive as has been mutually agreed or as per this section.
Benefits of Indian Partnership Act, 1932 (Section 37)
- He will be entitled to interest or share in profits or nothing as has been mutually decided among the partners.
- If nothing is agreed among the partners, then the outgoing partner or his representative can choose to get either of the following till the final settlement
- Interest on the balance amount @6% per annum.
- Share in the profits earned to his amount outstanding to total capital.
Share in Profit = [ Outstanding Amount of Outgoing Partner / (Capital of all Partners + Balance of Outgoing Partner)] x [Profit from the date of death/retirement till the date of next balance sheet]
Example: X, Y, and Z were partners in firm sharing profits in the ratio of 2:2:1. Z retired on 1st August 2018 on which date the capitals of X, Y, and Z after all necessary adjustment stood at Rs. 70,000; Rs. 60,000 and Rs. 55,000 respectively. X and Y carried on the business for another 5 months without settling the account of Z. During the period of 5 months ended 31st December 2018, a profit of Rs. 45,000 was earned by the firm. State which of the two options available as per Section 37 of the Indian Partnership Act, 1932 will be exercised by Z?
Answer: Z has the following two options:
i. Interest @ 6% on his balance amount = Rs. 55,000 x 6/100 x 5/12 = Rs. 1375
ii. Share in the subsequent profits attributable to the use of his balance
= (55,000/1, 85,000*x 45,000) = Rs. 13,378.40 (Approx.)
*Capitals of X and Y + Balance of Z = Rs. (70,000 + 60,000 + 55,000) = Rs. 1,85,000
Hence, Z will be exercising the option (ii) because it pays him more as compared to the other option
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