The Indian Partnership Act, 1932

Q1. Discuss the concept of partnership. Explain various features/essentials /characteristics

of partnership as per Indian Partnership Act, 1932.

Ans: According to Indian Partnership Act, 1932

Partnership is:-
(a) the relation between persons
(b) who have agreed to share the profits
(c) of a business
(d) carried on by all or
(e) any of them acting for all

Essentials/features/characteristics of partnership:-

(1) Number of partners: The minimum number persons require to form a partnership is two. In
banking business the maximum number of partners is 10 and in case of non-banking business the
maximum number of partners is 20. All persons entering into partnership must have the capacity
to enter into the contract.

(2) Agreement: The agreement is necessary to form the partnership between the persons. The
relation of partnership arises from an agreement and not from the status of partners. The
partnership agreement must satisfy all the essentials of contract.

(3) Business: Partnership is always formed only to carry on a business. The term „business‟ is
referred to a lawful activity. It includes every trade, occupation and profession. Partnership may
also exist for a single venture.

(4) Sharing of profits: The word „partnership‟ is derived from the word „to part‟ which means
„to divide‟. Thus, sharing of profits is an essential element of a partnership. The purpose of
partnership is to earn profits. The term profits means „net profits‟ i.e., the surplus money left
after deducting for all the expenses. The profits can be shared in any ratio as agreed between the
partners.

(5) Mutual Agency: The business in partnership is carried on by all or any of them acting for all.
There must exist a mutual agency relationship amongst the partners. It means that each partner is
both an agent and a principal. A partner is an agent of the other partner in the sense that by his
acts he can bind the other partners. He is principal in the sense that he can be held liable for the
acts of the other partners

(6) Essentials of a contract: Partnership comes into existence after entering into an agreement.
Therefore, it must satisfy all the requirements of a contract.
Q2. Explain the true test of partnership with the help of relevant examples under the
Indian Partnership Act, 1932. OR

Q2. ‘Sharing of profits is not the true test of partnership’. Explain the statement with the
help of relevant examples under the Indian Partnership Act, 1932.

Ans: According to Indian Partnership Act, 1932

Partnership is 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.

In order to determine, whether or not a group of persons constitute partnership or not, three tests
need to be undertaken:

(1) There should be an agreement to share the profit. Relation of the partnership arises from an
agreement and not from status.

(2) The business must be carried on by all or any one of them acting for all. There must exist a
mutual agency relationship amongst the partners. Mutual agency relationship means that each
partner is an agent and a principal. Thus, a partner is an agent of the other partner in the sense
that by his action can bind the other partners. He is the principal in the sense that can be held
liable for the acts of other partners.

(3) Intention of the persons should be clear to enter into a partnership. Intention can be gathered
from conduct of the parties, course of their dealings, their circumstances for entering into the
business.

However, there are certain non-partnership interests where profits are shared yet there is relation
of partnership. Following are such circumstances (examples):

(a) Joint owners sharing profits on gross returns: Joint owners who share the profits on gross
returns are not partners. For example: „A‟ and „B‟ jointly purchase a building by contributing
equally and converted into a hotel. They rent it out for Rs.3,60,000/- annually. They are not
partners.

(b) Money lender receiving profits: Sometimes money lenders receive in addition to or in place
of interest, a share in profits of a business. He cannot be said to be a partner.

(c) Member of Hindu undivided family: A member of a Hindu undivided family enjoys his
share of profits of the business of the family he cannot be called as a partner as he enjoys the
profits being the member of Hindu undivided family. Partnership is created by an agreement and
not by status.

(d) Widow or child of a deceased partner: Sometimes a widow or child of a deceased partner
receives a portion of profits as annuity. They will not be called as partner.

(e) Seller of goodwill: When a person sells his business along with the goodwill, is given a share
in the profits of the business sold. In such cases, the person does not become partner. For
example: „A‟, sold his business of dry cleaning to „B‟ along with goodwill. It was agreed „A‟
would be given 10% of the profits for 6 months during which he shall introduce his customers to
„B‟. „A‟, is not a partner.
Q3. State the contents of partnership deed as per Indian Partnership Act, 1932. OR

Q3. Write a brief note on partnership deed as per Indian Partnership Act, 1932.

Ans: According to Indian Partnership Act, 1932

Partnership is 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

Partnership is formed by an agreement. The agreement may be oral or in writing or may be

implied from the conduct of the partners. To avoid future disputes and differences between
partners, it is necessary to have a written agreement. The relation of partnership arises from an
agreement entered and not from status. The written agreement between or among the partners is
known “Partnership Deed” or “Articles of Partnership”. It must be signed by all partners.

Contents of Partnership Deed:

The partnership deed includes the following matters:-

(1) Name and address of the firm.

(2) Name and addresses of all the partners.

(3) Nature of business to be carried on and the place where the business is set up.

(4) Date of commencement of partnership.

(5) Duration of partnership.

(6) Capital contribution by each partner.

(7) Profit sharing ratio among the partners.

(8) Maintaining bank accounts

(9) Mode of admission and retirement of partners.

(10) Methods of dissolution of partnership firm.

Q4: Explain various the types of partnership and partners as per Indian Partnership Act,
1932.
Ans: According to Indian Partnership Act, 1932
Partnership is:-
(a) the relation between persons
(b) who have agreed to share the profits
(c) of a business
(d) carried on by all or
(e) any of them acting for all
Types of partnership:

(1) Partnership at will: It is a partnership in which the duration of the partnership or the
termination of partnership is not fixed. It can be dissolved by any partner by giving notice in
writing to all other partners of his intention to dissolve the firm. When such notice is given, the
firm gets dissolved as from the date mentioned in the notice as date of dissolution or, if no date is
so mentioned as from the date of communication of the notice. The notice should be clear
intimation of a final intention to dissolve the partnership, and should be served on all the other
partners.

(2) Particular partnership: When a person becomes a partner with another person or persons in
particular venture or undertakings, such partnership is known as “particular partnership”. It
comes to an end as soon as the business or venture or undertaking gets completed. If it continues
after completion of the venture, it becomes partnership at will.

(3) Partnership for a fixed period: It is partnership, where the time period for carrying out the
partnership business is fixed. Such a partnership gets dissolved at the expiry of the time period
fixed. Before the expiry of the fixed period, it may get dissolved by mutual consent of all the
partners. The partners may, however continue to carry on the business after the expiry of fixed
period. In such case the mutual rights and duties remains the same as they were before the expiry
of fixed period and the partnership becomes partnership at will.

Types of partners:

(1) Active partner: An active partner is one who actively participates in the conduct of the
business of the partnership firm. He shares profits of the partnership business. He is liable to the
third person for the acts of the firm. He must give public notice on his retirement from the
partnership firm.

(2) Sleeping or Dormant partner: He is the one who does not take active part in the conduct of
the business of the firm. He shares the profits. He is unknown to the outsiders. He occupies the
same position of an undisclosed principal. Hence, third parties can sue him on discovering that
he is a partner. He is not required to give public notice on his retirement nor the firm is dissolved
when he becomes insane.

(3) Sub-partner: When a partner agrees to share his profits with a third person, that third person
is known as sub-partner. The sub-partner cannot represent the firm nor is he liable to the acts of
the firm.

(4) Partner by estoppel: Where a person causes, by his conduct, another to believe him to be
partner and on that belief such other person gives credit to the firm, he is stopped from denying
that he is a partner. For example: X, Y and Z are partners of a firm. „X‟ in the presence and
within the hearing range of „A‟, represents to „D‟ that „A‟ is a partner of their firm. „A‟ does not
contradict this representation. „D‟ on faith of representation made by „X‟, lent Rs. 5000/- to the
firm. „A‟ is also liable as a partner.

(5) Partner by holding out: Where a person represents himself or allows others to represent him
as a partner of particular firm, he becomes liable to all those who act and lend money to the firm,
on the faith of such representation. For example: „A‟ represents himself as a partner of a
particular firm. „D‟ on the faith of the representation lends credit to the firm. „A‟ becomes liable.

6) Nominal partner: Nominal partner is a person who lends his name to the firm without
having any real interest in it. He does not share the profits of the partnership firm, but he is liable
to the outsiders for all the debts of the firm.
Q5. State the rights and duties of a partner as per Indian Partnership Act, 1932 OR

Q5. Explain the concept of partnership. Discuss in detail the Rights and Duties of a
partner.

Ans: According to Indian Partnership Act, 1932

Partnership is:-
(a) the relation between persons
(b) who have agreed to share the profits
(c) of a business
(d) carried on by all or
(e) any of them acting for all

Rights of a partner:

(1) Right to take part in business: Every partner has a right to take part in the conduct of the
business of the firm. This is based on the general principle, that partnership business is the
common business of all the partners.

(2) Right to be consulted: Every partner had an inherent right to be consulted in all matters
affecting the business of the partnership and express his views before any decision is taken by
the partners.

(3) Right of access to accounts: Every partner has a right to have an access to and inspect and
copy of the books of the firm.

(4) Right to share in profit: Every partner has the right to share the profits in the agreed
proportion or equally in the absence of any agreement.

(5) Right to interest on capital: Partners are usually not having right to any interest on their
contribution to the capital. However, if agreed, interest shall be only paid out of the profits, if
any, earned by the firm.

(6) Right to indemnify: Every partner has right to be indemnified (protected) by the firm in
respect of the payments made and liabilities incurred by him in the ordinary and proper conduct
of the business and doing any act in an emergency for the purpose of protecting the firm from
loss, as would be done by a person in ordinary prudence, in his own case, under similar
circumstances.

(7) Right to remuneration: Partners are usually not entitled to receive salary or remuneration
for taking part in the business. However, partnership agreement may provide for payment of
remuneration to working partners.

(8) Right to retire: A partner has a right to retire-

(a) with the consent of all the partners, or

(b) in accordance with an express agreement between the partners, or

(c) in case of partnership at will, by giving notice to all the other partners of his intention to
retire.
(9) To use the partnership property: The property of the firm shall be held and used by the
partners exclusively for the purpose of the business of the firm.

(10) Right of an outgoing partner: An outgoing partner can carry on a competing business
within the reasonable restrictions imposed by the firm.

Duties of a partner:

(1) Duty of good faith: The partners must act with utmost good faith as the very important basis
of partnership is mutual trust and confidence.

The general duties of partners: All partner are bound

(a) to carry on the business of the firm to the greatest common advantage,

(b) to be just and faithful to each other, and

(c) to render true accounts and full information of all things affecting the firm to any partner or
his legal representatives.

(2) Duty not to compete: It is the duty of every partner not to carry on any business similar to or
in competition with that of the firm. If any partner carries on such competing business, then, he is
liable to account for and pay to the firm all profits made by him in that business.

(3) Due diligence: It is the duty of every partner to attend diligently (carefully) to his duties in
the conduct of the business of the firm. He must use his knowledge and skill to the common
advantage of all the partners of the firm.

(4) Duty to share losses: It is the duty of every partner to contribute to the losses of the firm. In
the absence of an agreement to the contrary, the partners are bound to contribute equally to the
losses suffered by the firm. The partner will not be liable for the acts done in good faith.

(5) Proper use of property: It is the duty of every partner of the firm to hold and use the
property of the firm exclusively for the purpose of the business of the firm.

(6) Duty to indemnify: Every partner shall indemnify (protect) the firm for any loss caused to it
by his fraud in the conduct of the business of the firm or by his willful neglect in the conduct of
the business of the firm. The partner will not be liable for acts done in good faith.

(7) Duty to act within authority: Every partner is bound to act within the scope of his actual or
implied authority. Where he exceeds the authority given to him and the firm suffers a loss, he
shall have to compensate the firm for any such loss.

(8) To account for the personal profits made: Every partner shall make over to the firm any
personal profits made by him without the consent of the other partners. The relationship between
the partners must be of trust no partner is entitled to make personal profit.

(9) Duty not to transfer his right and interest: It is the duty of every partner not to assign
(transfer) his rights and interest in the firm to an outsider so as to make him the partner of the
firm.

(10) No remuneration: The partner is not having right to claim remuneration for the services
given by him in the firm as the partner.
Q6. State the difference/distinguish between Partnership and Hindu Undivided Family
(HUF) under the Indian Partnership Act, 1932.

Partnership Hindu Undivided Family (HUF)

1. Definition/ Meaning
Partnership is the relation between persons who A joint Hindu family which carries on
have agreed to share the profits of a business business handed down from its ancestors.
carried on by all or any of them acting for all.

2. Agreement

It can arise only by an agreement of the partners It arises by operation of law. It cannot be
created by an agreement of the members

3. Number of partners/ members

Minimum two (2) partners and maximum ten There is no statutory limit on maximum
(10) partners in case of banking and twenty (20) number of members
in any other business.

4. Admission of a new members

A new partner can be admitted in the A person becomes a member only by birth
partnership, only with the consent of all the in the family.
partners

5. Acquisition of interest

A partner acquires interest in the business only A person acquires interest in the business by
by an agreement birth in the family.

6. Minor members

A minor cannot become a full-fledged partner. A male minor is the full-fledged member.
He can only be admitted to the benefits of He becomes member merely by birth in the
partnership with the consent of all the partners. family.

7. Mutual agency

There is a relationship of agency between the There is not such agency relationship
partner i.e., all the partners are mutual agents. between all the members of the family. The
Karta (i.e., the manager) of the family is the
only representative of the family.

8. Effect of death/insolvency

It is dissolved on the death or insolvency of any It is not dissolved on the death or

one partner. insolvency of any member.

9. Right to demand accounts

A partner has a right to demand, inspect and A member has not right to ask for any
copy any accounts of the firm. Moreover, he accounts of the past dealings of the family.
also has the right to demand the dissolution of There is no concept of dissolution of the
the firm. family.
 10. Dissolution/partition

A partner has right to demand for dissolution A member has a right to demand for
partition of the joint family property.

11. Registration

The partnership is usually registered as an There is no concept of registration of Hindu

unregistered firm suffers from certain undivided family and thus, no disabilities on
disabilities. account of non-registration.

12. Liability

A partner is personally liable for the business
obligations of the firm. The share of each
partner in the partnership property and profits
along with his private property is liable for the
discharge of debts of the partnership.
A member is not personally liable for the
business obligations of the family. Only his
share of property and profits in the family is
liable for the discharge of the debts of the
family. However, the Karta is personally
liable for the business obligations of the
family.

Q7: State the various modes of dissolution of partnership under the Indian Partnership
Act, 1932. OR

Q7. Write a note on Dissolution of Partnership.

Ans: Dissolution of partnership means, the relationship between some partners comes to an
end while the firm continues

Dissolution of the firm means complete breakdown of the relations amongst all the
partners.

Modes of dissolution:

I Voluntary dissolution:

(1) By consent: All partners may consent for the dissolution of the firm. This can happen
whether the firm is for a fixed duration or not.

(2) By agreement: A firm may be dissolved in accordance with a partnership agreement entered
between the partners. For example: partnership for a fixed term i.e., for 2 years.

(3) By notice: Whenever a partnership is at will, any partner can give a notice for dissolution and
dissolve the firm.

II Dissolution by operation of law:

(1) Compulsory dissolution:

(a) By insolvency: When all partners of the firm become insolvent or all except one become
insolvent, the firm gets dissolved.

(b) Some event making partnership business unlawful: Sometimes an event happens, which
makes the business of the firm unlawful. In such cases the firm gets dissolved. For example: A
firm importing rice from another country. Subsequently, the government puts restrictions on the
import of rice. The firm gets dissolved, as the business has become unlawful.

(c) Some event making the business unlawful, if carried on in partnership: Sometimes
business may be lawful but carrying on it partnership is unlawful. In such cases the firm gets
dissolved. For example: A firm carrying on business of stationery items having twenty-one (21)
partners. Here the business of partnership is not unlawful but it has exceeded the maximum
number of partners required in a non-banking business. If the partnership firm continues to carry
on the business with twenty-one (21) partners then the business will be termed as unlawful.

(2) Dissolution on the happening of certain contingencies (circumstances) : The firm may get
dissolved, subject to the contract between the partners in the following circumstances:

(i) Expiry of the term for which the firm was constituted (formed).

(ii) On completion of the project.

(iii) On death of a partner, and

(iv) On insolvency of a partner.

III Dissolution of the firm by Intervention of the Courts:

On the filing of a suit (case), the Court after hearing the parties, may order for the dissolution of
the firm in a following circumstances:

(1) Insanity of a partner: When a partner becomes of unsound mind. The case may be filed by
the next friend or other partners.

(2) Permanent incapacity: Sometimes, a partner may become permanently incapable of

discharging his duties. In such case also, the Court may order for dissolution of the firm.

(3) Misconduct of a partner: When a partner, other than the partner suing, is guilty of
misconduct which is likely to affect the business of the firm, the Court may order for dissolution
of the firm.

(4) Willful or persistent breaches of agreement: Sometimes, a partner willfully or persistently

commits a breach of agreement relating to the management of the affairs of the firm or conducts
the business in such a way that the other partners find it difficult to carry on the business with
him. In such cases any partner other than the guilty partner may approach the Court for
dissolution.

(5) Transfer of interest: Sometimes, a partner may transfer the whole of his interest or share to
a third party, or the share may be charged or the share has been sold for the recovery of arrears of
land revenue, in which cases, the other partner or partners may seek for dissolution of the firm.

(6) Losses in business: Where the business of a firm incurs only loss, the Court can order for
dissolution of the firm.

(7) Any other just(fair) and equitable (reasonable) ground: Where the Court is satisfied that
it is just and equitable to dissolve the firm.
Q8. Explain the meaning of Dissolution of a partnership firm. Write the consequences of
dissolution of the firm as per Indian Partnership Act, 1932. OR

Q8. State the rights and liabilities of a partner after dissolution of partnership as per
Indian Partnership Act, 1932.

Ans: Dissolution of partnership means, the relationship between some partners comes to an
end while the firm continues

Dissolution of the firm means complete breakdown of the relations amongst all the
partners.

Dissolution of the firm is not done by a single act. Rather it involves a process. In the process of
winding up, the partners assume certain rights and liabilities. They are:

Rights of a partner:

(1) Right to have the business wound up: Every partner is having a right to have the property
of the firm, applied towards the payment of debts and liabilities of the firm. After discharging the
liabilities, surplus if any should be distributed amongst the partners according to their rights.

(2) Right to repayment of premium on premature dissolution: Where a partner has joined a
firm, which was in existence for a fixed term and had paid a premium, is having the right for
reimbursement of the amount either wholly or partly. The amount of premium to be repaid
depends on the agreement and the length of time he was a partner. The repayment shall be made
only if (i) there is an agreement between the partners to that effect or (ii) the person claiming
repayment of premium is not guilty in bringing about dissolution of the firm and (iii) the
dissolution is not on account of death of a partner.

(3) Right to restrain partners from the use of firm name or firm property: After dissolution
of the firm every partner has the right to restrain other partners from, carrying on same business,
or use of firm‟s name or property.

(4) Rights of partner in case of dissolution on account of fraud or misrepresentation: Where

the firm was dissolved on account of fraud or misrepresentation by a partner, the innocent
partners can cancel the partnership deed and also have the right to retain the surplus if any, for
the capital and sum paid, to be indemnified (protected) for all debts paid with regard to the firm.

Liabilities of a partner on dissolution of a firm:

(1) Liability for acts done after dissolution: Every partner continues to be liable to the third
parties for the acts of the firm even after dissolution until the public notice is given.

(2) Continuing authority of partners after dissolution: The partners would even on
dissolution, continue to be liable for acts of winding up as well as for transactions began but
remained incomplete at the time of dissolution of the firm.

(3) Liability to account for personal profit: Sometimes, a firm is dissolved on account of death
of a partner and before the affairs are wound up, the surviving partners continue to carry on
business. Any profit made in such a case needs to be accounted for.