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Profit Sharing Agreements & Section 106 TP Act Explained
In the complex world of Indian property and business law, profit sharing agreements often intersect with tenancy regulations under Section 106 of the Transfer of Property Act, 1882 (TP Act). Whether you're a landlord terminating a tenancy, a partner in a business operating from leased premises, or a tenant facing eviction, understanding this interplay is crucial. This post breaks down key legal principles, drawing from Supreme Court and High Court judgments to clarify how profit-sharing arrangements influence tenancy notices and disputes.
We'll examine when a profit-sharing deal constitutes a partnership, the validity of Section 106 notices in such scenarios, and practical implications for eviction and mesne profits. Note: This is general information based on case law; consult a qualified lawyer for advice specific to your situation.
Understanding Profit Sharing Agreements in Indian Law
Profit sharing is a common arrangement in partnerships, joint ventures, and even informal business dealings. Under the Indian Partnership Act, 1932, Section 4 defines a 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. However, courts emphasize that profit sharing alone does not create a partnership.
Key Tests for Partnership
- Mutual agency: Each partner acts as an agent of the firm.
- Sharing of losses: Mere profit entitlement without loss-sharing often indicates agency, not partnership. Chockalinga Chettiar VS Muthuswami Chettiar - 1924 Supreme(Mad) 783
- Explicit agreement: Partnership deeds specifying profit/loss ratios supersede defaults under Section 13(b). COMMISSIONER OF INCOME TAX vs DR.ASHA V.SARAF - 2017 Supreme(Online)(KER) 39719
In one case, a dispute over profit shares led courts to examine accounts and agreements, ruling the claimant an agent, not partner, restoring a preliminary decree for loss-bearing. Chockalinga Chettiar VS Muthuswami Chettiar - 1924 Supreme(Mad) 783
Profit-sharing clauses in leases or occupancy arrangements can blur lines with tenancy, especially when businesses operate from rented spaces.
Section 106 TP Act: The Tenancy Termination Notice
Section 106 TP Act governs notice periods for terminating tenancies:
In absence of a contract or local law or usage to the contrary, a lease of immovable property for agricultural or manufacturing purposes shall be deemed... to be... terminable on the part of either lessor or lessee by six months' notice... and a lease of immovable property for any other purpose shall be deemed... to be terminable... by fifteen days' notice. Osmanabad Janata Sahakari Bank Ltd. VS Pandharinath Gyanba Gunale - 2014 Supreme(Bom) 1522
Essential Requirements for Valid Notice
- Proper duration: 15 days for monthly tenancies (non-agricultural).
- Mode of service: Registered post (even if unclaimed), affixation with affidavit. Dasa VS Ajay Kumar Singh Dasa VS Ajay Kumar Singh
- No contract to contrary: Unregistered agreements don't override if invalid under Section 107 TP Act. Osmanabad Janata Sahakari Bank Ltd. VS Pandharinath Gyanba Gunale - 2014 Supreme(Bom) 1522
Courts have upheld notices sent by registered post returned unclaimed, followed by affixation, as compliant under Section 106(4). For partnership firms at business premises, service at the situs suffices. Dasa VS Ajay Kumar Singh
Interplay: Profit Sharing Agreements and Section 106 Notices
When a profit sharing agreement exists alongside a tenancy (e.g., business partners sharing leased space profits), does it exempt Section 106 notice requirements?
Lease vs. License Distinction
Profit-sharing doesn't automatically convert a tenancy into a license. In a cinema theater case:
Plaintiffs sought possession; defendant claimed tenancy protection under Kerala Land Reforms Act. Court ruled licensee status—no exclusive possession, no KLR Act protection. G. Viswanathan Vs. Abraham Salamma W/o. T.V Abraham - 2025 Supreme(Ker) 453
Tests:
- Lease: Transfers interest, exclusive possession.
- License: Mere permission to occupy, revocable. Profit-sharing alone doesn't confer lease rights. G. Viswanathan Vs. Abraham Salamma W/o. T.V Abraham - 2025 Supreme(Ker) 453
Impact on Eviction Suits
- Notice mandatory: Even post-HC judgments setting aside decrees for want of notice, fresh Section 106 notices validate new suits. Acquiescence (e.g., accepting mesne profits) waives objections. Kumud Kumar VS Central Bank Of India LTD. - 2000 6 Supreme 492
- Partnership firms: Treated as tenants; notice to firm at business address valid. Dasa VS Ajay Kumar Singh
In partnership dissolution disputes with profit-sharing issues, arbitration clauses may apply, but don't negate Section 106 for underlying tenancies. SOMA JACOB ALIAS SOMA KURUVILLA vs MOHAN JACOB - 2009 Supreme(Online)(KER) 28868
Mesne Profits After Tenancy Termination
Post-Section 106 termination, tenants become trespassers. Mesne profits are calculated at market rates, not controlled rents:
Once the tenancy is terminated under Section 106... the status of the tenant becomes that of a trespasser, and the mesne profit shall be determined based on the prevailing market rate. Punjab National Bank Earlier Oriental Bank Of Commerce Vs. Sanjeevani Shiksha Samiti - 2024 Supreme(Online)(ALL) 772 Punjab National Bank Earlier Oriental Bank Of Commerce VS Sanjeevani Shiksha Samiti - 2024 Supreme(All) 882
- UP Urban Premises Tenancy Act, 2021: Limits enhancements (e.g., 7-15%), but inapplicable to pre-enactment suits. Market rate prevails. Punjab National Bank Earlier Oriental Bank Of Commerce VS Sanjeevani Shiksha Samiti - 2024 Supreme(All) 882
- Enhancement upheld: 15% p.a. based on evidence, triable issue. Dasa VS Ajay Kumar Singh
Case Studies: Profit Sharing Meets Section 106
1. Partnership Dispute with Tenancy Overlap
In a brick business, co-partners alleged cheating over unpaid profit shares (IPC 420/120B). Court quashed proceedings:
Allegations primarily reflected a civil dispute over profit sharing rather than criminal intent. Samima Absar vs The State of West Bengal - 2023 Supreme(Online)(HC) 14274
Civil remedies (dissolution, accounts) preferred over criminal. S. P. Muthiah VS R. Ethiraju - 2017 Supreme(Mad) 1184
2. Eviction of Partnership Firm
Landlord's notice via RPAD (unclaimed) + affixation held valid. Suit maintainable despite prior withdrawn suit—fresh cause of action. Dasa VS Ajay Kumar Singh
3. Unregistered Agreements
Unregistered profit-sharing leases invalid under Section 107; no Section 53A protection, notice still required. Osmanabad Janata Sahakari Bank Ltd. VS Pandharinath Gyanba Gunale - 2014 Supreme(Bom) 1522
Practical Tips for Compliance
- Draft clear agreements: Specify if profit-sharing creates partnership or mere agency; register leases >1 year.
- Serve notices properly: Use RPAD + affixation; retain proofs.
- Post-termination: Claim market mesne profits with evidence.
- Disputes: Opt for arbitration if clause exists, but tenancy suits need Section 106 compliance. SOMA JACOB ALIAS SOMA KURUVILLA vs MOHAN JACOB - 2009 Supreme(Online)(KER) 28868
| Scenario | Section 106 Notice Required? | Profit Sharing Impact |
|----------|------------------------------|----------------------|
| Pure Partnership (no lease) | No | Governs internal shares COMMISSIONER OF INCOME TAX vs DR.ASHA V.SARAF - 2017 Supreme(Online)(KER) 39719 |
| Tenancy + Profit Share | Yes | Doesn't exempt notice Dasa VS Ajay Kumar Singh |
| License Arrangement | Often No | Revocable permission G. Viswanathan Vs. Abraham Salamma W/o. T.V Abraham - 2025 Supreme(Ker) 453 |
| Post-Termination Holdover | N/A | Mesne profits at market rate Punjab National Bank Earlier Oriental Bank Of Commerce Vs. Sanjeevani Shiksha Samiti - 2024 Supreme(Online)(ALL) 772 |
Key Takeaways
- Profit sharing agreements under Partnership Act don't override Section 106 TP Act tenancy termination rules. Valid notices are essential for eviction.
- Courts prioritize proper service and market-based mesne profits post-termination.
- Distinguish civil partnership disputes from criminal claims; latter rarely succeed without fraud proof.
- Unregistered documents fail to create enforceable interests, reinforcing notice needs.
This analysis draws from landmark rulings, highlighting that while profit-sharing fosters business, tenancy laws demand strict compliance. For tailored guidance, seek professional legal counsel.
Disclaimer: This post provides general insights from public judgments and is not legal advice. Laws evolve; verify with current statutes and precedents.
Search Results for "Profit Sharing Agreements & Section 106 TP Act Explained"
1973 0 Supreme(SC) 163 • India - Supreme Court
S. M. SIKRI, J. M. SHELAT, K. S. HEGDE, A. N. GROVER, A. N. RAY, P. JAGANMOHAN REDDY, D. G. PALEKAR, H. R. KHANNA, K. K. MATHEW, M. H. BEG, S. N. DWIVEDI, A. K. MUKHERJEA, Y. V. CHANDRACHUD
as money, profit comes before political opinions. ... A minority party has been sharing power in one State for several years. ... They are States of the Commonwealth. Section 106.
2006 5 Supreme 662 • India - Supreme Court
B.P.SINGH, S.B.SINHA
Arbitration and Conciliation Act, 1996, Sections 34, 2(e) and 8 -Application under S. 34 of the Act- Arbitrator was appointed by Supreme Court observing that ... Section 2(1)(b) of the 1996 Act reads as under:"2(1)(b) "arbitration agreement" means an agreement referred ... revenue/profits, loss or escape of product, etc." ... profit as part of damages.
1978 0 Supreme(SC) 78 • India - Supreme Court
JASWANT SINGH, M. H. BEG, P. N. BHAGWATI, V. D. TULZAPURKAR, V. R. KRISHNA IYER, Y. V. CHANDRACHUD, D. A. DESAI
of "industry". ... It is needless to emphasise that in the case of liberal professions, the contribution of the usual type of employees employed by ... political life and vicissitudes of times. ... " by Section 2 (rr), "workmen" by Section 2 (s), and of "employer" by Section 2 (g)." ... Its income is mostly from donations and distribution of surplus as profit is prohibited. ... ....
1997 1 Supreme 684 • India - Supreme Court
B. N. KIRPAL, A. S. ANAND, B. L. HANSARIA, B. P. JEEVAN REDDY, K. S. PARIPOORNAN, S. C. AGRAWAL, SUHAS C. SEN, A. M. AHMADI, J. S. VERMA
I am entirely in agreement with the views expressed by him and the reasoning on points E , F and G of the concluding part of ... Section 72 of the Contract Act, or for that matter Section I express my respectful agreement with the views expressed by my ... loss of profit. ... made up of cost plus profit plus tax. ... Every type of tax, except only those whi....
1981 0 Supreme(SC) 511 • India - Supreme Court
A.C.GUPTA, V.D.TULZAPURKAR, S.MURTAZA FAZAL ALI, R.S.PATHAK, P.N.BHAGWATI, D.A.DESAI, E.S.VENKATARAMIAH
motives to punish Judges for sharing a particular ideology. ... Section 7. ... State" within the meaning of that section.
2017 Supreme(Online)(KER) 39719 • India - High Court of Kerala
ANTONY DOMINIC, A. Muhamed Mustaque, JJ
explicit agreements in the partnership deed concerning profit and loss sharing. ... the importance of mutual agreements among partners on profit-sharing, ruling against the Revenue's reliance on this section due ... Ratio Decidendi: The court concluded that an explicit agreement among partners on profit distribution precluded the application ... So long as this clause reflects an....
2022 0 Supreme(Guj) 1695 • India - Gujarat
J. B. PARDIWALA, NISHA M. THAKORE
– Privilege of profit sharing imposes on each partner obligation to advance interests of partnership business, to apply his time ... Finance Act, 1994 – Section-83 – Central Excise Act, 1944 – Section-35G – General Clauses Act, 1897 – Section ... – High Court observed that a partnership is an agreement between two or more persons to place their capital, labour and skill, or ... than sharing of profit between partne....
2017 0 Supreme(Mad) 1184 • India - Madras
P.KALAIYARASAN
The defendant breached the agreement by not following the terms related to profit sharing and decision-making. ... Dispute arose over profit sharing and construction costs. ... Partnership Agreement - Dissolution of Partnership Firm - Indian Partnership Act, 1932 - Section 69, Section 4, Section 44 ... In this case on hand, cursory perusal of the agreement discl....
2019 3 Supreme 550 • India - Supreme Court
A.K.SIKRI, S.ABDUL NAZEER, M.R.SHAH
undertaking such an exercise whatever is profit component is to be considered as sharing of profit/distribution of profit and rest ... of profit/sharing of profit – Assessing officer will have to take into account manner in which business works, modalities and manner ... said to be sharing of profit and therefore is to be included in return of income; and (ii) Whether any amount of sugarcane purchase ... of #HL_STA....
2025 Supreme(Online)(Mad) 56847 • India - IN THE HIGH COURT OF JUDICATURE AT MADRAS
Honourable Mr.Justice SENTHILKUMAR RAMAMOORTHY
After amicable communications, divergence arose on profit sharing resulting in the plaintiff's non-continuation on the project. ... profit share from collaborative digital project for memorial; however, disagreement on compensation and lack of written agreement ... (A) Copyright Act, 1957 - Section 55 - Suit for permanent injunction and damages for copyright infringement - Plaintiff claims 50% ... over the profit-sharing clause in the draft #HL_START....
2025 0 Supreme(Ker) 453 • India - IN THE HIGH COURT OF KERALA AT ERNAKULAM
MR. JUSTICE A. BADHARUDEEN, J
(A) Code of Civil Procedure, 1908 - Section 96 and Order XLI Rule 1 - Kerala Land Reforms Act, 1963 - Section ... 106 - Appeal against trial court's decree for recovery of possession and compensation - Plaintiffs sought possession of property ... Section 106(1) of the KLR Act provides as under:106. ... To be on necessity of notice under Section 106 of TP Act. ... In the case of a lease, a suit could not be brought without serving a Termination Notice as required under....
2000 6 Supreme 492 • India - Supreme Court
V.N.KHARE, S.N.PHUKAN
Act-Appeal to Supreme Court thereagainst-Fresh notice under Section 106 and suit for eviction in meanwhile-Suit decreed with mesne ... 106 T.P. ... Appeal-Maintainability of-Decree for eviction and mesne profit @ 10,000 per month set aside in second appeal for want of notice under Section ... After the judgment of the High Court, the landlady terminated the tenancy by giving notice under Section 106 of the Transfer of Property Act and thereafter filed a suit for possession and mesne #H....
2014 0 Supreme(Bom) 1522 • India - Bombay
T.V.NALAWADE
Section 106(1) of the T.P. Act reads as under :- ... “106. ... In this case the Apex Court has reiterated that such unregistered agreement is not enforceable. Thus, the agreement contained in such unregistered document, is not excepted under section 106 of the T.P. Act. The term “contract to contrary” used in the starting line of section 106 of the T.P. ... The term “contract” used in section 106(....
• India - Bombay High Court - Bench at Aurangabad
In this case the Apex Court has reiterated that such unregistered agreement is not enforceable. Thus, the agreement contained in such unregistered document, is not excepted under section 106 of the T.P. Act. The term “contract to contrary” used in the starting line of section 106 of the T.P. ... The term “contract” used in section 106(1) is necessarily an agreement enforceable under the Contract Act. In section 4....
2011 0 Supreme(Cal) 1147 • India - Calcutta
I.P.MUKERJI
then the notice under section 111 (h) which brings in section 106 of the Transfer of Property Act will not be required at all. ... Perhaps keeping the defective agreement in mind, subsequent paragraphs of the notice said that the plaintiff intended to terminate the “tenancy” after 31st December, 2007, under Section 106 of the Transfer of Property Act, 1882. ... He also placed sub-Section (h) read with Section 106 of the Transfer of ....
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