INDIAN PARTNERSHIP ACT, 1932

Meaning of Partnership – Section 4

• "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.
• Persons who have entered into partnership
with one another are called individually
"partners" and collectively a "firm", and the
name under which their business is carried on
is called the "firm name".
 Essential elements to constitute partnership firm

• At least 2 parties. Persons must be competent to

enter into a contract. Parties may be natural or
artificial
• Agreement between the parties. Agreement may
be oral or in writing. It may be express or implied.
• Agreement must be to share the profits of the
business; and
• Business must be carried on by all or any of them
acting for all;
Persons Capable of becoming Partners
• The agreement to form partnership has to be between two or more
persons. Since the creation of partnership itself requires a contract
between persons, such persons, therefore, must be competent to
contract. A minor or person of unsound mind who is not competent
to contract can’t become partner.
• Section 30 of the Indian Partnership Act, 1932 makes it expressly
clear that “a person who is minor according to the law to which he is
subject may not be a partner in a firm, but with the consent of all
the partners for the time being, he may be admitted to the benefits
of partnership.
• Such a minor has a right to such share of property and profits as may
be agreed upon. Moreover, such minor’s share is liable for the acts
of the firm but the minor is not personally liable for any such act.
 H.U.F as a Partner
• An HUF cannot become a partner of a partnership firm. Section 4 of
the Partnership Act, 1932 explains of “persons” who enter into
partnership with one another. It can only be individuals and not a
body of persons, who can be a partner. A firm has been described as ‘a
compendious way of describing the individuals constituting the firm’.
• 1. The Apex Court in Rashiklal & Co. v. I.T. Commissioner, explained AIR
1998 SC 401: An HUF directly or indirectly can’t become a partner of a
firm because the firm is an association of individuals. A Karta who
enters into a contract of partnership with a stranger may be
accountable to the other members of the HUF for the profits received
from the partnership business. But that is something between the
Karta and the HUF. The partner may have to account for the monies
received from the firm to another person or another firm or an
association of persons or a HUF.
 Company as Partner
• The Partnership Acts permits partnership
between any two or more persons. Such
persons may be either natural or artificial.
Thus a partnership could be formed between
the number of companies.
• B. Agreement
• The first essential ingredient of partnership is that
there must be an agreement between the persons
constituting partnership. The word ‘agreement’ is
defined under clause (e) of section 2 of the Indian
Contract Act, 1872 as follows:
• (1) Every promise as set of promises forming the
consideration for each other is an agreement. An
agreement is an essential part of partnership and
without it no partnership can come into existence. In
order to establish the relation of partners an
agreement either express as implied must be proved.
• According to Kent—
• “Partnership is an agreement of two or more competent
persons to place their money, effects, labour and skill or
some or all of them in lawful commerce or business and to
share the profit and bear the loss in certain proportions.
• In the words of Pathak, J—“The foundation of a partnership
and therefore of a firm is a partnership agreement. A
partnership agreement is the source of partnership. It also
gives expression to other ingredients defining the
partnership, specifying the business agreed to be carried
on, the persons who will actually carry on the business, the
share in which the profits will be divided and several other
considerations which constitute such an organic
relationship.
• In the case of Abdul v. Century Wood Industries, [1954], it had
been held that it is not necessary that there should be a very
formal or written agreement. An agreement to create a
partnership may well arise from the conduct of the parties
concerned. The facts of the case are:
• “Two brothers living together inherited certain properties on the
death of their father. They did not divide the properties. Further
they sold a garden of theirs for Rs. 5000 and invested the sum in a
separate timber business. There was no formal partnership
agreement, but it appeared that they intended to share profits.
The business, however, failed before any profits could be made
and the question of payment of liabilities arose.
• It was held that they must bear the liabilities as partners. The
court upheld, “if two or more persons put together certain
amounts of money in certain share for the purpose of purchasing
properties and selling them for profit for common benefit”.
• Regional Director ESIC v. Ramanuja Match
Industries, , it was held by the Apex Court that
while the partnership deed in writing is not
necessary and even writing is not prescribed
in the Act itself. But writing known as
“Instrument of partnership” is necessary
under the Income-tax Act, 1961, if the
partners desire their firm to be assessed for
Income-tax as such firm.
 Business
• The word ‘Business’ does not necessarily mean
some undertaking of an industrial or commercial
nature. Business connotes organised course of
activity or conduct with set purposes for earning
profits or to exploit property purchased in order so
that one should get the highest amount.
• A very wide definition of word ‘Business’ has been
given in section 2(b) of Indian Partnership Act.
“Business” includes every trade, occupation and
profession.
• Birdichand v. Harakchand, [1940]
• If number of persons agree to purchase cotton
jointly on joint account and thereafter resell
the same and then share the profits or losses
as may arise from the same, this amounts to
carrying on of business and partnership is
created between such persons.
 Sharing of Profits
• Sharing of profits is an aspect of the true test of a partnership.
However, profit sharing is only a prima facie evidence of a partnership.
The Act does not consider profit sharing as a conclusive evidence of a
partnership. This is because there are cases of profit sharing that are
still contradictory to a partnership, as the following:
• Sharing of profits/ gross receipts from a property that two or more
persons own together or have a joint interest in is not a partnership
• A share of profits given to an agent or servant does not make him a
partner
• If a share of the profit is given to a widow or child of a deceased
partner does not make them partners
• Part of the profits shared with the previous owner as a part of
goodwill or as a form of consideration will not make him a partner.
 Mutual Agency
• Existence of mutual agency is also essential to
constitute partnership. According to section 4 of
the Partnership Act, 1932 the partnership business
must be carried on by all or any of them acting for
all. It enables any partner to carry on the business
on behalf of others. Every partner, therefore, can
bind other partners by his act alone on behalf of
the firms. Every partner can be the agent of any
other partner and the relationship is that of
mutual agency.
• This is the truest test of a partnership, it is the
cardinal principle of a partnership. So if a
partner is both the principle as well as
an agent of the firm we can say that mutual
agency exists. This means that the actions of
any partner/s will bind all the other partners
as well.
• If the person carrying on the business acts not only for himself but for
others also so that they stand in the position of principals and agents, they
are partners. This is the principle of Cox v. Hickman, (1860) 8 HLC 268.
• “S and S were iron merchants in partnership. They faced financial distress
and, therefore, made a compromise with their creditors. Under the
compromise the property of the firm was assigned to a few creditors
selected as trustees. They were empowered to carry on the business to
divide the net income among the creditors in a rateable proportion and
after the debts had been discharged, the business was to be returned to S
and S. Cox was one among the trustee although he never acted. The other
trustee continued the business. They purchased a quantity of coke from the
plaintiff Hickman and gave him a bill of exchange for the price. The bill
remaining unpaid. Hickman brought an action against the trustee, including
Cox, for the price.
• It was held that they were not partners and, therefore, Cox was not liable.
The creditors instead of taking legal proceedings came to an agreement
about the way in which their claims should be satisfied. That did not make
them partners
 Partnership Deed –

• 1) Written document which contains the mutual rights

and obligations of partners is known as partnership deed.
• 2) Partnership Deed is not mandatory.
• 3) However, it is advisable to have partnership deed in
writing.
• 4) If there is partnership deed then each partner should
have 1 copy.
• 5) If the firm is to be registered then a copy of the deed
should be filed with the Registrar of Firms.
 Contents of partnership deed
• Partnership deed should contain the following
details –
• - Firm name;
• - Names and addresses of partners;
• - Details of business of partnership;
• - Address of business place;
• - Profit sharing ratio
• - Date of commencement of partnership firm;
• - Duration of partnership firm;
• - Amount of capital contribution;
• - Salaries, commission and remuneration to
partners;
• - Rights of the partners;
• - Liabilities of the partners;
• - Details of retirement of partners;
• - Provision for expulsion of a partner;
• - Arbitration clause for the settlement of
disputes.