Q.Ramesh lends ₹5,00,000 to a firm run by three friends. As per their written agreement, instead of charging a fixed rate of interest, Ramesh is to receive 10% of the firm's annual profits until the loan is repaid. Ramesh takes no part in running the business and has no authority to bind the firm in any transaction. Is Ramesh a partner in the firm? Explain with reference to the relevant provision.

Ramesh's situation matches the Explanation to Section 6 exactly — a lender paid in a share of profits instead of fixed interest, with no management role or power to bind the firm.

Sharing of profits alone is only prima facie evidence of partnership; the real test is mutual agency, which is expressly absent here.

Step 1 — Identify what makes Ramesh's arrangement look like partnership. Ramesh receives a share of the firm's profits, and sharing of profits is, under Section 6, prima facie evidence of partnership.

Step 2 — Apply the real test: mutual agency. Section 6 makes clear that sharing profits is not conclusive by itself; the decisive test is whether the person is both principal and agent for the others — able to bind them, and bound by their acts. The facts state Ramesh takes no part in running the business and has no authority to bind the firm in any transaction. Mutual agency is therefore entirely absent.

Step 3 — Match the fact pattern to the Explanation to Section 6. The Explanation expressly lists a lender who receives a share of profits (or a rate of interest that varies with profits) in place of a fixed rate of interest as a situation that does NOT create a partnership. Ramesh's arrangement is a textbook example of exactly this.

Step 4 — Conclusion. Ramesh remains a lender/creditor of the firm, entitled to be repaid his ₹5,00,000 with his profit-linked return, but he is not a partner, has no partner's rights (management, access to books as a partner), and bears no partner's liability for the firm's other debts.