How Retiring Partners' Accounts Are Settled in a Firm or LLP

Q: Will a court automatically draw an adverse inference if accounts are withheld?

No. Gopal Krishnaji Ketkar allows an adverse inference against a party withholding the best evidence, but Union of India v. Ibrahim Uddin holds that mere withholding is not enough and that the applicant's own diligence is examined. A notice to produce and an application under Order XI should come first.

Vikrant D. Shetty

1 hour ago

13 min read

How Retiring Partners' Accounts Are Settled in a Firm or LLP

Section 37 of the Indian Partnership Act, 1932 entitles a retiring partner, absent a contract to the contrary, to a share of profits earned on his share of the firm's property, or to interest at six per cent per annum, until accounts are settled. Section 24(5) of the Limited Liability Partnership Act, 2008 gives a former LLP partner only the capital contributed plus accumulated profits fixed at the date of cessation, with no share in later profits. Both entitlements depend on the firm's books, which is why exit disputes turn on whether receipts collected during an appeal count as income, and whether the books produced are reliable.

What Is an Outgoing Partner Entitled to Receive?

Section 37 of the Indian Partnership Act, 1932 (the Partnership Act) bites where a partner has ceased to be a partner and the continuing partners carry on the business with the property of the firm "without any final settlement of accounts". Absent a contract to the contrary, the outgoing partner may take either the share of subsequent profits attributable to the use of his share of the firm's property, or interest at six per cent per annum on the amount of that share. The choice is his, not the firm's. And the interest runs on the value of his share in the firm's property, not on whatever his capital account happens to show.

M/s Crystal Transport Private Limited v. A. Fathima Fareedunisa [Civil Appeal Nos. 7709-7710 of 2023, decided on 8 November 2024] put it plainly: where a continuing partner runs the business on the firm's assets, the outgoing partner keeps his right to accounts and to a share of the profits derived from his share of those assets until a final settlement is made.

He owns a number, not a shelf of assets. Addanki Narayanappa v. Bhaskara Krishnappa [AIR 1966 SC 1300] treats a partner's interest in partnership assets as movable property, so what he becomes entitled to on retirement is the money value of his share in the net assets. Which is exactly why withholding accounts hurts. The claim cannot be quantified without them.

The Narrower LLP Entitlement Under Section 24(5)

Section 24(5) of the Limited Liability Partnership Act, 2008 (the LLP Act) gives a former partner the capital contribution actually made plus a share in accumulated profits net of losses, fixed as at the date of cessation, and even that applies only "unless otherwise provided in the limited liability partnership agreement". Post-exit profits are simply not shared. That is the sharpest structural difference between the two regimes.

Issue	Partnership firm	LLP
Provision governing exit	Section 37, Partnership Act	Section 24(5), LLP Act
Post-exit profits	Share of profits or six per cent interest, at the outgoing partner's option	Not shared; entitlement fixed at the date of cessation
Statutory inspection right	Section 12(d) for partners; Maharashtra adds a clause for heirs of a deceased partner	None; the First Schedule contains no inspection paragraph
Duty to render true accounts	Section 9, owed to any partner or his legal representative	Paragraph 10, First Schedule, in the same terms
Publicly inspectable accounts	Registrar of Firms filings only	Section 36: Form 8 and Form 11 open to any person
Default dispute forum	As agreed; otherwise civil or commercial suit	Paragraph 14, First Schedule refers disputes to arbitration

Since the LLP Act has no analogue to Section 12(d), a books-and-records clause in the LLP agreement is not boilerplate. It is the whole of a partner's information right, and drafters treat it far too casually. Section 34(1) separately requires the books to be kept at the registered office, so an LLP whose answer is that the records sit with its accountant elsewhere is already in default.

Receipts Collected While an Appeal Is Pending

Firms in this position reach for a familiar argument: the decretal or awarded sum already collected should stay out of the exit computation because an appeal is pending, so the money is contingent. Order XLI Rule 5(1) of the Code of Civil Procedure, 1908 (the CPC) disposes of it. An appeal "shall not operate as a stay of proceedings under a decree or order appealed from except so far as the Appellate Court may order, nor shall execution of a decree be stayed by reason only of an appeal having been preferred".

Shree Chamundi Mopeds Ltd. v. Church of South India Trust Association [(1992) 3 SCC 1] drew the conceptual line. A stay means only that the order will not operate from the date of the stay; it does not wipe the order out of existence. If even a stay leaves the underlying order standing, the bare pendency of an appeal, which is no stay at all, cannot convert a completed receipt into a contingency.

Reversal produces a right of restitution under Section 144 of the CPC. So the money is real but defeasible. Contingent is something else.

Unconditional Receipt Against a Refund Undertaking

The accrual cases draw the line in the same place. In Commissioner of Income Tax v. Hindustan Housing and Land Development Trust Ltd. [(1986) 161 ITR 524], enhanced compensation was withdrawn from court only against a security bond to refund it if the appeal succeeded, and the whole amount was in dispute; it was held not to have accrued.

Compare The K.C.P. Ltd. v. Commissioner of Income Tax [(2000) Supp. 2 SCR 302], where excess sugar price collected under interim orders was a trading receipt of the year of receipt. Hindustan Housing was distinguished for a precise reason: there the receipt carried a refund obligation, while the interim order in K.C.P. imposed none.

What matters is whether an ascertained, court-imposed obligation to refund attaches to the receipt. A pending appeal on its own does not.

Applying the Money and Then Calling It Contingent

Conduct undercuts the contingency argument faster than authority does. A firm that has run a disputed receipt through its working capital, paid its own liabilities out of it, or distributed it among the continuing partners has treated the money as its own.

R.N. Gosain v. Yashpal Dhir [(1992) 4 SCC 683] holds that the law does not permit a person to both approbate and reprobate, a principle resting on the doctrine of election, under which no party may accept and reject the same instrument. In Mumbai International Airport (P) Ltd. v. Golden Chariot Airport [(2010) 10 SCC 422] what decided the case was that the party had taken a stand before a court and pocketed a benefit for taking it.

Where Does the Election Doctrine Stop Applying?

Election is narrower than it is usually pleaded to be, and overpleading it is a good way to lose the point. Nagubai Ammal v. B. Shama Rao [AIR 1956 SC 593] makes clear that a party may still claim relief on inconsistent grounds; the doctrine operates where there has been an actual election between two inconsistent rights or remedies and a benefit has been taken under one of them. In Bhau Ram v. B. Baijnath Singh [AIR 1961 SC 1327] a Constitution Bench rejected the objection that a vendee who withdrew the pre-emption price deposited in court had thereby elected to accept the decree. A benefit taken independently of the merits is not a benefit under the decree.

So receiving money does not bar a challenge. Spending it as one's own while calling it contingent is the inconsistency worth pressing.

What Do a Firm's Books of Account Actually Prove?

Section 34 of the Indian Evidence Act, 1872 makes entries in books of account, including those in electronic form, relevant where they refer to a matter the court has to inquire into, "but such statements shall not alone be sufficient evidence to charge any person with liability". The Bharatiya Sakshya Adhiniyam, 2023 (the BSA), in force from 1 July 2024, carries that rule over word for word, together with the rest of the provisions that govern this area.

Indian Evidence Act, 1872	Subject	Bharatiya Sakshya Adhiniyam, 2023
Section 17	Admission defined	Section 15
Section 21	Proof of admissions against persons making them	Section 19
Section 31	Admissions not conclusive proof, but may estop	Section 25
Section 34	Entries in books of account when relevant	Section 28
Section 65B	Admissibility of electronic records	Section 63, with certificate in the Schedule
Section 114, illustration (g)	Presumption from withheld evidence	Section 119, illustration (g)
Section 165	Judge's power to order production	Section 168

Chandradhar Goswami v. Gauhati Bank Ltd. [AIR 1967 SC 1058] holds that such entries cannot by themselves charge a person with liability unless that person accepts their correctness. Central Bureau of Investigation v. V.C. Shukla [(1998) 3 SCC 410] goes further: loose sheets are not books of account at all, and even where a document qualifies, Section 34 forbids fastening liability on the entries alone. A party cannot manufacture evidence for itself by what it writes in its own ledgers behind the back of the other side.

Accounts Drawn Up After the Dispute Began

The sufficiency bar bites hardest where accounts were prepared unilaterally after the dispute had crystallised and were never shared with the partner they are now being used against. Where he has not signed, approved or adopted them, there is nothing to treat as his admission.

Even signed accounts do not settle entitlement. Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income Tax [(1971) 82 ITR 363] holds that the presence or absence of entries in the books cannot be conclusive of a party's rights. The same reasoning governs drawings, where whether a sum taken by a partner was a loan or a share of profit turns on the evidence as a whole rather than on the ledger heading.

There is an admissibility hurdle before any of this. Accounts kept in Tally or comparable software are electronic records, and printouts need a Section 63 certificate in the form specified in the Schedule to the BSA.

Audited Statements Cut Both Ways

Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal [(2021) 6 SCC 366] holds that a balance sheet entry can amount to an acknowledgement of liability under Section 18 of the Limitation Act, 1963. The Court was careful about the limits: there is a statutory compulsion to prepare and file a balance sheet, but none to make any particular admission, so each entry has to be read with the notes to accounts and the auditor's qualifications. An audit vouches for the process by which the books were compiled. It proves nothing about the underlying transaction.

Inspection After Retirement, and the Adverse Inference That Must Be Earned

Section 12(d) of the Partnership Act gives every partner the right to have access to and to inspect and copy any of the books of the firm. Section 12 speaks of "every partner", and the Central Act goes no further; in Maharashtra a state amendment adds a clause for the heirs of a deceased partner, though not for a living retired one.

A former partner's entitlement to see the books therefore rests elsewhere: on Section 9, which obliges partners to render true accounts and full information of all things affecting the firm to any partner or his legal representative, read with Section 37 and the right to an account confirmed in Crystal Transport. Neither the Section 37 nor the Section 24(5) computation can be done without the books. Inspection follows the right to be paid, and survives until the accounts are settled in full.

The Principle and Its Precondition

Gopal Krishnaji Ketkar v. Mahomed Haji Latif [AIR 1968 SC 1413] holds that even where the burden of proof does not lie on a party, the court may draw an adverse inference where that party withholds important documents in its possession which could throw light on the facts in issue, and that it is not sound practice to hold back the best evidence and fall back on the abstract doctrine of onus. The firm is always the party holding that evidence.

That principle does not run by itself. Union of India v. Ibrahim Uddin [(2012) 8 SCC 148] holds that mere withholding is not enough and that the diligence of the party asking for the inference will be examined; none was drawn there because no application for inspection or production under Order XI of the CPC had ever been made.

Letters of demand, in other words, buy nothing. The inference is earned by a notice to produce and an application under Order XI Rules 12, 14 and 15, with Rule 21 held in reserve, under which a defaulting defendant may have his defence struck out. In a commercial suit the ground is firmer: Order XI Rule 5(4), as substituted by the Commercial Courts Act, 2015, expressly allows an adverse inference against a party refusing production after notice.

A Refusal to Agree on a Valuer Is Not a Veto

Where a firm declines to jointly appoint an independent valuer, its consent is not needed. Order XX Rule 15 of the CPC allows a preliminary decree in a suit for dissolution or for the taking of partnership accounts, declaring the proportionate shares and directing accounts to be taken. Order XXVI Rule 11 allows a commission to issue to a chartered accountant to examine and adjust those accounts, and Rule 12(2) makes the report evidence in the suit.

Arbitration offers the same machinery. Section 9(ii)(c) of the Arbitration and Conciliation Act, 1996 permits orders for preservation and inspection of property, Section 26 lets the tribunal appoint its own expert, and Section 27 puts court process behind the production of documents. A refusal to cooperate does not stop the valuation. It is material the tribunal or court is entitled to weigh.

Frequently Asked Questions

Does filing an appeal stop a firm from having to account for money it has already received?

No. Order XLI Rule 5(1) of the CPC says an appeal does not operate as a stay and that execution is not stayed merely because an appeal has been preferred. Absent a stay, the sum stands received. If the decree is later reversed, the remedy is restitution under Section 144.

The firm says a disputed receipt is contingent, but it has spent the money. Does that matter?

It matters a great deal. Applying a receipt to the firm's own expenses, liabilities or distributions treats the money as the firm's, which sits badly beside a case that the same money is contingent. That is the territory of the election principle applied in R.N. Gosain.

Are the firm's books of account conclusive of what is owed to a retiring partner?

No. Section 34 of the Indian Evidence Act, 1872 and Section 28 of the BSA both make entries in books of account relevant but not alone sufficient to charge any person with liability. Independent evidence of the underlying transactions is needed, however regularly the books were kept.

Can a partner be bound by accounts he never prepared, saw or approved?

Not without more. Accounts prepared unilaterally, particularly once a dispute has arisen and without being shared, are the maker's own record. Signature or approval is what ordinarily makes accounts an admission. Absent that, the entries stand or fall on independent corroboration.

Can a former partner inspect the books after the retirement date?

The right to an account survives until the accounts are settled in full, and inspection follows from it. For a firm the entitlement rests on Section 9 read with Section 37 of the Partnership Act. For an LLP it depends on the agreement, on paragraph 10 of the First Schedule where the agreement is silent, and on Section 36.

Will a court automatically draw an adverse inference if accounts are withheld?

No. Gopal Krishnaji Ketkar allows an adverse inference against a party withholding the best evidence, but Union of India v. Ibrahim Uddin holds that mere withholding is not enough and that the applicant's own diligence is examined. A notice to produce and an application under Order XI should come first.

Is a dispute over a retiring partner's share arbitrable?

Usually. A claim for an account and for the money value of a share is a claim in personam and does not engage the non-arbitrability categories identified in Vidya Drolia v. Durga Trading Corporation [(2021) 2 SCC 1]. Claims requiring division of firm immovable property by metes and bounds stand differently.

What interest rate can a retiring partner claim instead of a share in post-retirement profits?

Section 37 of the Indian Partnership Act, 1932 gives the outgoing partner a choice, absent a contract to the contrary, between a share of the profits attributable to his share of the firm's property and interest at six per cent per annum on the value of that share. The choice belongs to the outgoing partner, not to the continuing partners, and runs until the accounts are finally settled.

Does the LLP agreement override the statutory entitlement of a retiring partner under Section 24(5)?

Yes. Section 24(5) of the Limited Liability Partnership Act, 2008 applies only unless otherwise provided in the LLP agreement, so the parties can contract for a different entitlement, including a share of post-exit profits that the default statutory rule denies. Where the agreement is silent, the default rule of capital contribution plus accumulated profits fixed at the date of cessation governs.

Is a partner's interest in the firm's assets treated as movable or immovable property on retirement?

A partner's interest in partnership property is treated as movable property, regardless of whether the firm itself owns land or buildings, following Addanki Narayanappa v. Bhaskara Krishnappa. What a retiring partner becomes entitled to is therefore the money value of his share in the net assets, not a transfer of any specific immovable asset the firm holds.

Can printouts from accounting software like Tally be used as evidence in a partner accounts dispute?

Yes, but only with the required certification. Entries in electronic books of account are admissible under Section 65B of the Indian Evidence Act, 1872, now Section 63 of the Bharatiya Sakshya Adhiniyam, 2023, only where accompanied by a certificate in the form specified in the Schedule to the BSA. A printout without that certificate faces an admissibility objection independent of whatever the entries actually show.

What is the limitation period for a retiring partner to file a suit for accounts against the firm?

The Limitation Act, 1963 governs a suit for accounts by a retiring partner, and the period runs from when the right to sue accrues, ordinarily from the date of retirement or the date a final settlement of accounts is refused, rather than from the date of the partnership deed. Because the right to an account survives until accounts are settled in full, a partner should check the specific starting point against the facts before assuming a claim has gone stale.

How does a Section 9(ii)(c) application under the Arbitration Act differ from an Order XXVI commission for taking partnership accounts?

Section 9(ii)(c) of the Arbitration and Conciliation Act, 1996 lets a court order preservation or inspection of property in aid of an arbitration, which can extend to a firm's books pending the constitution of a tribunal. Order XXVI Rule 11 of the Code of Civil Procedure, 1908, by contrast, lets a civil court appoint a chartered accountant as commissioner to examine and adjust accounts within a pending suit, with the report becoming evidence under Rule 12(2). The arbitration route only applies once the parties have an arbitration agreement covering the dispute.