Enforcement Officer / Accounts Officer (EO/AO) 2017 recruitment test. Transcribed from the Commission's own booklet (series A, GRS-A-TNS); answer as per the official UPSC final answer key. This question is in Part B. Answer last reviewed 24 August 2026.

In the absence of any provision in the partnership agreement, profits and losses are shared by the partners

(a)in the ratio of the capital of partners
(b)equally
(c)in the ratio of loans given by them to the partnership firm
(d)in the ratio of the initial capital introduced by the partners

Answer

Why

Correct — B, (b) equally. The rule is in section 13(b) of the Indian Partnership Act, 1932, which provides that 'the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm'. Note that the equality runs both ways: the same clause fixes the sharing of losses, so a partner cannot claim an equal share of profits and then argue for a smaller share of a loss. Everything in section 13 is governed by its opening words, 'Subject to contract between the partners'. That phrase is what the stem means by 'in the absence of any provision in the partnership agreement'. The section is a set of default rules that operate only where the partners have not agreed otherwise; a partnership deed may distribute profits in any ratio the partners choose, and where it does, the deed governs and section 13 falls away. The section matters precisely in the situations where recruitment papers set it — an oral partnership, a deed that is silent on the point, or a firm carrying on after the period fixed by its deed has expired. The rest of section 13 supplies the answers to the questions that follow naturally from this one, and they are worth learning together because they contradict what intuition suggests. Under clause (a) a partner is not entitled to receive remuneration for taking part in the conduct of the business, so a working partner gets no salary unless the deed gives him one. Under clause (c), where a partner is entitled to interest on the capital he has subscribed, that interest is payable only out of profits — so it cannot be allowed if the firm has made a loss. Under clause (d) a partner who makes a payment or advance for the purposes of the business beyond the capital he agreed to subscribe is entitled to interest on it at six per cent per annum; that is a loan to the firm rather than capital, and the interest on it is a charge against profits rather than an appropriation of them. Clauses (e) and (f) complete the picture on indemnity, the firm indemnifying a partner for payments made in the ordinary and proper conduct of the business or in an emergency, and a partner indemnifying the firm for loss caused by his wilful neglect. So the default position of a firm with no agreement is easily stated: no salary to anybody, no interest on capital, interest at six per cent on advances beyond agreed capital, and profits and losses divided equally however unequal the capitals or the effort.

Why the others are wrong

(a)in the ratio of the capital of partners — Sharing in the ratio of capital is the intuition a candidate carries over from company law, where a shareholder's return follows the number of shares he holds. It does not apply to a partnership, and section 13(b) makes no mention of capital at all. A partnership is a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all; it is a contract between people, not a subscription of capital, and the Act therefore treats the partners as equals unless they have said otherwise. A partner who has put in more capital may be compensated for it through interest on capital — but only if the deed provides for interest, and even then only out of profits under section 13(c).
(c)in the ratio of loans given by them to the partnership firm — A loan to a firm confers no share in its profits whatever. If a partner advances money beyond the capital he agreed to subscribe, section 13(d) gives him interest at six per cent per annum on that advance, and that is the whole of his entitlement in respect of it; the advance is a debt of the firm, ranking for repayment, not an additional stake in its earnings. The Act is careful on the point in the other direction too: under Explanation 2 to section 6, a lender who receives a share of the profits of a business does not become a partner merely by receiving it. Profit sharing and lending are separate relationships, and this option mixes them.
(d)in the ratio of the initial capital introduced by the partners — This is the capital-ratio answer restricted to the capital originally introduced, and it fails for the same reason: section 13(b) fixes equality without reference to capital in any form. The narrowing makes it slightly worse rather than better, because it would freeze the sharing ratio at the position on the first day of the firm and ignore every later introduction or withdrawal of capital, so that a partner who had since withdrawn most of his capital would continue to take the largest share of the profits.

Concept

Section 4 of the Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all, and section 5 makes clear that the relation arises from contract and not from status. Because it rests on contract, the Act is largely a set of default rules that yield to the partners' own agreement — which is why sections 12 and 13, on the conduct of the business and on mutual rights and liabilities, both open with the words 'subject to contract between the partners'. The defaults under section 13 are: no remuneration for taking part in the business; equal shares in profits and equal contribution to losses; interest on capital, where allowed, payable only out of profits; interest at six per cent per annum on advances beyond agreed capital; indemnity by the firm to a partner for payments made in the ordinary and proper conduct of the business or in an emergency; and indemnity by a partner to the firm for loss caused by his wilful neglect. Registration of a firm is optional under the Act, but section 69 makes an unregistered firm unable to sue to enforce a contractual right, which is the practical pressure to register.

Default rules are ideal recruitment-paper material because they can be tested in one line and because candidates reliably answer them from intuition instead of from the statute. Intuition says the man who put in the most money should get the most back, and the Act says the opposite unless the partners have agreed on it. The Enforcement Officer's work makes this more than academic: the constitution of an employing firm, who its partners are and how they share, bears on liability under the social security enactments, and the answers come from the deed where there is one and from section 13 where there is not. The habit to build is to read a question about partnership twice — once for what the parties agreed, and once for what the Act supplies when they agreed nothing.

Key facts

Section 13(b) of the Indian Partnership Act, 1932: partners share equally in the profits and contribute equally to the losses.
Section 13 opens with 'Subject to contract between the partners', so all of its rules are defaults displaced by a partnership deed.
Section 13(a): a partner is not entitled to remuneration for taking part in the conduct of the business.
Section 13(c): interest on capital, where a partner is entitled to it, is payable only out of profits.
Section 13(d): interest at six per cent per annum is payable on a payment or advance made beyond the capital a partner agreed to subscribe.
Section 4 defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Explanation 2 to section 6: receiving a share of profits does not by itself make a lender a partner.
Registration of a firm is optional, but under section 69 an unregistered firm cannot sue to enforce a contractual right.

Section 13 is a set of defaults, and each of them contradicts intuition

(b) Equally→Section 13(b) of the Indian Partnership Act, 1932: the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm. The equality runs both ways, so a partner cannot claim an equal share of profits and then argue for a smaller share of a loss.

Why the defaults matter at all→Section 13 opens 'Subject to contract between the partners', which is what the stem means by the absence of any provision in the agreement. A deed may distribute profits in any ratio the partners choose, and where it does the deed governs. The section bites on an oral partnership, a deed silent on the point, or a firm carrying on after its fixed period has expired.

(a) and (d) — the capital-ratio intuition→Carried over from company law, where a shareholder's return follows the shares he holds. Section 13(b) mentions capital nowhere. A partnership is a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all — a contract between people, not a subscription of capital. Option (d) is worse for being narrower: it would freeze the ratio at the first day of the firm.

(c) The ratio of loans→A loan to a firm confers no share in its profits. Section 13(d) gives a partner interest at six per cent per annum on a payment or advance made beyond the capital he agreed to subscribe, and that is the whole of his entitlement in respect of it — the advance is a debt of the firm, ranking for repayment, not an additional stake in its earnings.

The rest of section 13→Clause (a): no remuneration for taking part in the conduct of the business, so a working partner gets no salary unless the deed gives him one. Clause (c): interest on capital, where allowed, is payable only out of profits, so it cannot be allowed if the firm has made a loss. Clauses (e) and (f): the firm indemnifies a partner for payments made in the ordinary and proper conduct of the business or in an emergency, and a partner indemnifies the firm for loss caused by his wilful neglect.

The whole default position, stated once→No salary to anybody, no interest on capital, interest at six per cent on advances beyond agreed capital, and profits and losses divided equally however unequal the capitals or the effort.

Study next

Sections 12 and 13 in full, and the difference between a charge against profits and an appropriation of profitsThe true test of partnership under section 6 and the position of a person who shares profits without being a partnerRegistration of firms under sections 58 to 59 and the consequences of non-registration under section 69Admission, retirement and death of a partner — goodwill, revaluation and the new profit-sharing ratioDissolution of a firm, the settlement of accounts under section 48, and the rule in Garner v. Murray

Common traps

Assuming profits follow capital. Section 13(b) fixes equality and does not mention capital.
Forgetting that the same clause divides losses equally as well as profits.
Allowing a working partner a salary in the absence of a deed; section 13(a) denies it.
Confusing capital with an advance. Interest at six per cent under section 13(d) attaches to advances beyond agreed capital, not to capital itself.
Overlooking the opening words 'subject to contract'. Where a deed provides a ratio, the deed governs and the section is irrelevant.

Partnership items in recruitment papers cluster around the default rules of section 13, because each of its clauses makes a self-contained question: the sharing ratio, the absence of salary, interest on capital out of profits only, and the six per cent on advances. A second cluster asks what the consequences of non-registration are, and a third asks whether a described person — a lender, a widow receiving an annuity, a servant paid out of profits — is a partner. All of them are answered by reading the Act rather than by reasoning from commercial common sense, which points the wrong way on nearly every one of them.

Related PYQs

No directly related past PYQ was found.

Practice

practice — not a real PYQ
In the absence of any agreement, a partner who makes an advance to the firm beyond the capital he agreed to subscribe is entitled to interest on that advance at
- (a)no interest at all
- (b)six per cent per annum
- (c)nine per cent per annum
- (d)twelve per cent per annum
Answer(b) six per cent per annum
practice — not a real PYQ
Where the partnership deed is silent, a partner who devotes his whole time to the business of the firm is entitled to
- (a)a salary fixed by the other partners
- (b)no remuneration for taking part in the conduct of the business
- (c)remuneration equal to the interest on his capital
- (d)a commission of six per cent on the profits
Answer(b) no remuneration for taking part in the conduct of the business

Why