Question

Assertion (A): In the absence of a Partnership Deed or verbal agreement, no interest is to be allowed to partners on their capital.

Reason (R): If there is a provision for interest on capital in the Partnership Deed, it will be allowed only when there is a profit in the firm.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct and (R) is the correct reason of (A).

• Both (A) and (R) are correct but (R) is not the correct reason of (A).

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

Both (A) and (R) are correct and (R) is the correct reason of (A).

Explanation:

According to the Indian Partnership Act, 1932, in the absence of a Partnership Deed or verbal agreement, no interest is allowed on partners’ capital, so Assertion (A) is correct. Also, if the Partnership Deed allows for interest on capital, it is allowed only out of profits, not if the firm incurs a loss, making Reason (R) correct as well. Since the reason directly explains why interest is not allowed without a deed (i.e., because it depends on profit as per agreement), R is the correct explanation of A.