TRUE TEST OF PARTNERSHIP

The Indian Partnership Act 1932 clearly defines a partnership. But how can we decide if a given
association of persons is truly a partnership or not? So the Act has also given us a litmus test to
determine if a firm is a partnership. This is known as the True Test of a Partnership. Let us study this.

 Introduction of True Test of a Partnership

The true test of a partnership is a way for us to determine whether a group or association of persons
is a partnership firm or not. It also helps us recognize the partners of the firm and separate them
from the third parties. The idea behind such a true test is to examine the relevant facts and
determine the real relations between parties and conclude about the presence of a partnership.

Let us take a look at the three important aspects of a true test of a partnership, namely agreement,
profit sharing and mutual agency.

 Elements of a Partnership

1] Contract for Partnership

A partnership is contractual in nature. As the definition states a partnership is an association of two

or more persons. So a partnership results from a contract or an agreement between two or more
persons. A partnership does not arise from the operation of law. Neither can it be inherited. It has to
be a voluntary agreement between partners.

A partnership agreement can be written or oral. Sometimes such an agreement is even implied by
the continued actions and mutual understanding of the partners.

2] Association of Two or More Persons

A partnership is an association between two or more persons. And persons by law only includes
individuals, not other firms. The law also prohibits minors from being partners. But minors can be
admitted to the benefits of a partnership.

The Act is actually silent on the maximum number of partners. But this has been covered under the
Companies Act 2013. So a partnership can only have a maximum of 10 partners in a banking firm and
20 partners in all other kinds of firms.
3] Carrying on of Business

There are two aspects of this element. Firstly the firm must be carrying on some business. Here the
business will include any trade, profession or occupation. Only that some business must exist and
the partners must participate in the running of such business.

Also, the business must be run on a profit motive. The ultimate aim of the business should be to
make gains, which are then distributed among the partners. So a firm carrying on charitable work
will not be a partnership. If there is no intention to earn profits, there is no partnership.

4] Profit Sharing

The sharing of profits is one of the essential elements of a partnership. The profit sharing ratio or the
manner of sharing profits is not important. But one partner cannot be entitled to the entire profits of
the firm.
However, the sharing of losses is not of any essence. It is up to the partners whether the losses will
be shared by all the partners. If nothing is said then the losses are also split in the profit sharing
ratio.
Say for example two individuals are operating out of the same warehouse. So they agree to divide
the rent amongst themselves. This is not a partnership since there is no profit sharing between the
two.

5] Mutual Agency

The definition states that the business must be carried out by the partners, or any partner/s acting
for all of them. This is a contract of mutual agency another one of the five elements of a partnership.

This means that every partner is both a principle as well as an agent for all the other partners of the
firm. An act done by any of the partners is binding on all the other partners and the firm as well. And
so every partner is bound by the acts of all the other partners. This is one of the most important
aspects of a partnership. It is, in fact, the truest test of a partnership.

 Example

Q: Why is a HUF not considered as a partnership?

Ans: One of the most important elements of a partnership is a contract/agreement for partnership.
There has to be a voluntary and contractual agreement between partners. A HUF is born out of
statues and all its members are born into it. So these members cannot be partners in the eyes of the
law, and the HUF is not a partnership
  Example

Q: Sharing of Profit is the truest test of a partnership. True or False?

Ans: This statement is False. The truest test of a partnership is the existence of a Mutual Agency.
There are other instances where the sharing of profit exists but there is no partnership. But if an
agency exists between the parties who run a business together and share profits it will be deemed
that a partnership exists

 Cases Related to Partnership

 Karumuthu Thiagarajan vs E. M. Muthappa Chettiar on 27

February, 1961

It is provided that the retirement of a partner would not terminate the partnership and
there was an option for the purchase of the retiring partner's share by other partners. It
was held that in the circumstances the partnership was not at will and it was pointed out
that only when all the partners except one retired that the partnership would come to
an end because there could not be a partnership with only one partner. We are,
therefore, in agreement with the High Court that the contract in this case disclosed
a partnership the determination of which is implied, namely, the termination of the
managing agency and, therefore, under sec. 7 of the Act it is not a partnership at will. In
the circumstances it is unnecessary to consider whether the case will also come under
sec. 8 of the Act.

 Talakchand Kanji Vora vs Keshavlal Dullabajji Sheth on 5 October,

1972

The fact that in the instant case there are two partners only, does not make any
difference. The law of partnership does not say that a different law will apply if there are
two partners only. All that the Partnership Act provides is that there cannot
be partnership Unless there are at least two partners. Thus whether there are two
partners or more than two partners the Partnership Act will equally apply.
 SCHOOL OF LAW

Topic: TRUE TEST OF PARTNERSHIP

Submitted to: Submitted by:

Dr. NAMITA JAIN AMAN JANGID
School of Law BBA LLB (Hons.)
JECRC University 17BBLN022
 Bibliography

 https://www.google.com/search?ei=HMucXNPHD8XHvgT0ybCIBQ&q=contract+for+partners
hip+case+study&oq=+contract+for+partnership+cas&gs_l=psy-
ab.1.0.33i22i29i30l4.22765.31009..33085...0.0..0.294.2469.0j4j7......0....1..gws-
wiz.......0i71j0i67j0i7i30j0j0i5i30j0i13j0i13i30j0i13i5i30j0i8i13i30j0i22i30.bB3ftDjAJOs

 CASES-
https://indiankanoon.org/docfragment/1967243/?formInput=cases%20on%20partnership

 BOOK- CONTRACT 2nd (R.K. BANGIA)

 Certificate
This is to certify that AMAN JANGID of BBA LL.B (Hons) has completed his
project work during the academic session 2018-2019 as per the guidelines issue
by the School of Law, JECRC University.

Dr. NAMITA JAIN

HOD School of Law
JECRC University
 Acknowledgement

I would like to express my special thanks of gratitude to my respected Dean Prof. Mahesh
Koolwal as well as my teacher Dr. NAMITA JAIN who gave me this golden opportunity to
do this research on the topic " TRUE TEST OF PARTNERSHIP " which also helped me in
doing my research work more accurately and successfully and I came to know so many new
things about this and I am really thankful to them.

AMAN JANGID
 INDEX
 CERTIFICATE
 ACKNOWLEDGMENT
 INTRODUCTION OF TRUE TEST OF PARTNERSHIP
 Elements of a Partnership
 Contract for Partnership
 Association of Two or More Persons
 Carrying on of Business
 Profit Sharing
 Mutual Agency
 EXAMPLES
 CASES
 BIBLIOGRAPHY