Explain in detail the circumstances which lead to liability of firm for misapplication by partners as per provisions of the Indian Partnership Act, 1932.

Liability of Firm for Misapplication by Partners (Section 27 of Indian Partnership Act, 1932): The two clauses of Section 27 bring out an important point of distinction between the two categories of cases of misapplication of money by partners. Clause (a) covers the case where a partner acts within his authority and due to his authority as a partner, he receives money or property belonging to a third party and misapplies that money or property. For this provision to be attracted, it is not necessary that the money should have actually come into the custody of the firm. On the other hand, the provision of clause (b) would be attracted when such money or property has come into the custody of the firm, and it is misapplied by any of the partners. The firm would be liable in both cases.