Section 37 Indian Partnership Act | Heirs of Deceased Partner Entitled to Post-Death Profits If Buyout Clause Not Executed : Bombay HC Upholds Arbitral Award

The Bombay High Court has affirmed that the legal heirs of a deceased partner are entitled to a share in post-death profits if the surviving partners fail to fully comply with the contractual mechanism for buying out the deceased’s interest. This ruling reinforces the primacy of statutory rights under Section 37 of the Indian Partnership Act, 1932 when contractual conditions are not met in all material respects.

Background & Facts

The Dispute

The dispute arose from the partnership firm engaged in the sale of foreign-made Indian liquor, established under a partnership deed dated 1st July 1987 between two brothers, Ravindra Laxman Thorat and Nakul Laxman Thorat. The partnership deed stipulated a profit-sharing ratio of 60% (Nakul) : 40% (Ravindra). The business operated from a rented shop at Shop No.2, Integrated Bhoomi, LBS Marg, Ghatkopar (West), Mumbai. Rukhminibai Thorat, their aunt, was initially a partner but retired in 1987, after which Ravindra joined the firm.

Key Facts

• The partnership deed included an addendum dated 13th March 1993 and another dated 1st April 1993.
• Ravindra died on 11th January 2001.
• Nakul died on 15th September 2009.
• Nakul’s wife, Malti, took over the business and died on 24th May 2020.
• The business continued under Nakul’s sons, Respondent Nos. 1 to 4.
• In 2020, the Claimants (Ravindra’s legal heirs) sent a legal notice demanding winding up of the partnership, settlement of accounts, 40% share in profits since 2001, and 40% share in the partnership property.
• The Respondents claimed that a balance sheet dated 2001 showed Ravindra’s capital account balance at Rs. 11,365/-, which Claimant No.1 had signed.
• The Respondents further asserted that Rs. 32,000/- was paid to Ravindra during his lifetime.
• No documentary evidence was produced to prove payment of the capital account balance to Ravindra’s estate after his death.
• The shop premises and liquor license were used continuously by the Respondents after Ravindra’s death.

Procedural History

• 1st October 2024: Sole Arbitrator passed award directing:
  • Winding up of partnership affairs
  • Settlement of accounts
  • Payment of 40% share in profits from 11.01.2001 onwards at 12% p.a.
  • Payment of 40% share in the partnership property (shop premises)
• April 2025: Petitioners filed Arbitration Petition No. 522 of 2025 under Section 34 of the Arbitration and Conciliation Act, 1996 seeking setting aside of the award.
• 12th March 2026: Arguments concluded before the Bombay High Court.
• 1st April 2026: Judgment pronounced.

Relief Sought

The Petitioners sought:

• Setting aside of the Arbitrator’s award dated 1st October 2024
• Declaration that the Rs. 11,365/- balance and Rs. 32,000/- payment extinguished all claims
• Ruling that the shop and liquor license were not partnership assets after Ravindra’s death
• Dismissal of the claim as barred by limitation

The Legal Issue

The central question was whether Section 37 of the Indian Partnership Act, 1932 entitles the legal heirs of a deceased partner to a share in post-death profits when the surviving partners claim to have discharged the deceased’s interest under Clause 10 of the partnership deed, but fail to prove actual payment to the estate.

Arguments Presented

For the Petitioner

Mr. Drupad Patil contended that:

• Clause 10 of the partnership deed provided that upon death, the deceased’s share vested absolutely in the surviving partner upon payment of the capital account value.
• Claimant No.1 signed the 2001 balance sheet acknowledging Ravindra’s capital account balance of Rs. 11,365/-.
• Rs. 32,000/- was paid during Ravindra’s lifetime, further evidencing settlement.
• The claim filed in 2020 was barred by limitation under Section 10 of the Limitation Act, 1963, as the cause of action arose in 2001.
• The Arbitrator erred in invoking Sections 88 and 95 of the Indian Trusts Act, 1882, as no fiduciary relationship existed.
• The shop and liquor license were not partnership assets after 2001, as per Clause 10.

For the Respondent

Mr. Firoz Bharucha argued that:

• No payment of the Rs. 11,365/- was made to Ravindra’s estate after his death.
• Respondent No.2 admitted on record that no document proved payment to the heirs.
• The balance sheet merely reflected the capital account balance; it did not constitute proof of payment.
• The business continued using the same partnership assets - the shop and liquor license - without settlement.
• The Arbitrator correctly applied Hasina Mohamad Shafik Lalji v. Fatima Correa, where the Bombay High Court held that claims for profits under Section 37 are not barred by limitation if accounts remain unsettled.
• Section 37 applies unless the contractual buyout is fully complied with - which was not proven.

The Court's Analysis

The Court examined Section 37 of the Partnership Act, which grants the estate of a deceased partner the right to a share of subsequent profits if the business continues without final settlement of accounts, unless a contractual provision to the contrary is duly exercised.

"The proviso to Section 37 carves out an exception to the substantive provision by providing that where the contractual arrangement gives right to the surviving partner to purchase interest of the deceased, which option is duly exercised, there cannot be any claim to further share in profits."

The Court held that Clause 10 of the partnership deed constituted such a contractual provision. However, the proviso demands compliance in all material respects. The Respondents bore the burden to prove payment to the estate of Ravindra. The Arbitrator found, and the Court agreed, that no such proof existed. The signature on the balance sheet was insufficient to establish payment under Section 48 of the Partnership Act, which requires actual disbursement.

The Court further held that the shop premises and liquor license were partnership assets. The rent receipt (Exhibit C-8) showed the shop was held in the firm’s name, and the business continued using the same assets. The Arbitrator’s inference that the redeveloped premises replaced the old tenanted shop was reasonable.

On limitation, the Court upheld the Arbitrator’s reliance on Hasina Mohamad Shafik Lalji v. Fatima Correa, where the Bombay High Court applied Sections 88 and 95 of the Trusts Act to hold that claims for profits arising from fiduciary use of partnership property are not time-barred if accounts remain unsettled. The Court found no error in this application, noting that the surviving partners’ continued use of the deceased’s share created a continuing obligation.

The Court rejected the argument that Section 37 limits profit-sharing to 6% interest, noting that the Arbitrator awarded 40% of profits - the same ratio agreed in the partnership deed - because the profits were demonstrably attributable to the use of the deceased’s share in the partnership assets. The Apex Court’s ruling in V. Subramaniam v. Rajesh Raghuvendra Rao was cited to affirm that partners are co-owners of partnership property.

The Verdict

The petition was dismissed. The Bombay High Court upheld the Arbitrator’s award dated 1st October 2024. The Respondents were directed to pay:

• 40% share in profits earned by the partnership firm from 11.01.2001 until final settlement
• Interest at 12% per annum on the unpaid profit share
• 40% share in the partnership property - Shop No.2, Integrated Bhoomi, LBS Marg, Ghatkopar (West), Mumbai-400086
• Full settlement of accounts within 12 weeks

What This Means For Similar Cases

Contractual Buyout Must Be Proven, Not Assumed

• Practitioners must now prove actual payment to the estate of a deceased partner to invoke a contractual buyout clause - mere acknowledgment of a balance sheet is insufficient.
• The burden of proof lies squarely on the surviving partner to demonstrate compliance with the contractual condition.

Limitation Does Not Bar Claims Where Accounts Remain Unsettled

• Claims for post-death profits under Section 37 are not subject to ordinary limitation periods if the partnership accounts were never settled.
• Courts may apply Sections 88 and 95 of the Trusts Act to treat the continuing use of a deceased partner’s share as a fiduciary obligation.

Profit-Sharing Ratio May Be Applied Even Under Section 37

• While Section 37 speaks of "share attributable to use of property," courts may adopt the original profit-sharing ratio if the business continues using the same assets and no other factors justify deviation.
• This provides clarity for arbitrators and courts in determining quantum of profit entitlement.