A, B and C are partners in a firm. In the middle of the year C retries from the firm without settling his dues. Remaining partners continues the business. C is entitled to get _______ till the final settlement.

Question

Accepted Answer

The correct option is 4:
This question addresses the critical statutory provision under Section 37 of the Indian Partnership Act, 1932, concerning an outgoing partner whose amount remains unsettled and is still used by the continuing partners to earn a profit. When a retiring partner's capital is retained and employed in the business, the law recognizes this as an asset being utilized for the benefit of the remaining partners. To ensure fairness, Section 37 grants the retiring partner, C, an *option* to claim whichever benefit is greater: either simple interest at a fixed rate of 6% per annum on the unsettled amount (Option 1) *or* a share of the profits earned after retirement, calculated proportionately (Option 3). The retiring partner is legally protected and has the right to choose the most advantageous of the two available methods for final settlement, which is why 'Either option (1) or (3) on his choice' is the correct and comprehensive answer.

The incorrect option is 1:
Stating only the "Interest at the rate of 6% per annum on the unsettled amount till settlement" is an incomplete answer, as it ignores the retiring partner's statutory right to an alternative claim. Section 37 of the Indian Partnership Act specifically provides *two* distinct options for the outgoing partner. The 6% interest is simply the default or minimum claim, but the partner has the prerogative to assess the firm's post-retirement profitability. If the proportionate share of profit (Option 3) yields a higher return than the fixed 6% interest, the partner will naturally choose the profit share option. Therefore, offering only the interest rate misrepresents the full extent of the partner's legal entitlement.

The incorrect option is 2:
The option to receive a "Share in profit earn by firm till settlement of his account, in the profit sharing ratio" is incorrect because the retiring partner is no longer sharing profits based on the old profit-sharing agreement. Upon retirement, the old profit-sharing ratio (e.g., C's 1/3 share) ceases to be the basis for distribution. The law does not entitle the retiring partner to the *full* old profit share from the date of retirement, but only a share proportionate to the use of their capital. This is because the remaining partners are also contributing capital and effort to earn the subsequent profit. Profit distribution post-retirement must therefore be calculated in proportion to the unsettled amount relative to the total firm capital/assets, as correctly detailed in Option 3.

The incorrect option is 3:
This option accurately describes one of the two entitlements available to the retiring partner under Section 37: the 'Share in profit earn by the firm till settlement of his account, proportionate to his unsettled amount to total capital of the firm'. This formula is the correct method for calculating the proportionate profit share, which is a legitimate option under the Act. However, similar to Option 1, offering this as the sole entitlement is incorrect. The retiring partner is given a choice between this proportionate profit share and the fixed 6% interest. This choice is a key legal safeguard allowing the partner to select the economically more beneficial method, and only by including the element of 'choice' can the answer be fully correct.