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IntroductionHistorical backgroundThe Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October, 193. The present Act superseded the earlier law relating to Partnership, which was contained in Chapter XI of the Indian Contract Act,1872. The Act is not exhaustive. It purports to define and amend the law relating to Partnership.

A Partnership arises from a contract, and therefore , such a contract is governed not only by the provisions of the Partnership Act in that regard , but also by the general law of contract in such matters, where the Partnership Act does not specifically make any provision. It has been expressly provided in the Partnership Act that un repealed provisions of the Indian Contract Act , 1872 , save in so far as they are inconsistent with the express provisions of this act , shall continue to apply. Thus, the rules relating to offer and acceptance , consideration , free consent , legality of object ,etc, as contained in the Indian Contract Act are applicable to a contract of Partnership also. On the other hand , regarding the position of minor , since there is specific provision contained in Section 30 of the Indian Partnership Act , the minor’s position is governed by the provision of the Partnership Act.1

Meaning – A partnership is an arrangement in which two or more individuals share the profits and liabilities of a business venture. Various arrangements are possible: all partners might share liabilities and profits equally, or some partners may have limited liability. Not every partner is necessarily involved in the management and day-to-day operations of the venture. In some jurisdictions, partnerships enjoy favorable tax treatment relative to corporations2. Partnership is a form of business organization , where two or more persons join together for jointly carrying on some business. It is an improvement over the ‘Sole –trade business ’, where one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of resources of only a single person being involved in the soletrade business , a larger business requiring more investments and resources than available to a sole-trader, cannot be thought of in such a form of business organisation. In partnership, on the other hand , a number of persons could pool their resources and efforts and could start a much larger business, than could be afforded by any of these partners individually . In case of loss the burden gets divided amongst various partners in a Partnership.

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DefinitionAccording to Pollock partnership is a relationship which subsists between persons who have agreed to share profits of the business carried by all or any of them on behalf of all. According to section 30 Indian partrnership act,1932 a contract of partnership is a special contract where the partnership act is silent on any point, the principles of the contract shall be applied. Section 4 of the Indian Partnership Act ,1932 defines ‘Partnership’ as under[6] : ‘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 ’.3

Elements Of ‘Partnership’: The definition of ‘partnership ‘ contains three elements : 1. There must be an agreement entered into by all the persons concerned. 2. The agreement must be to share the profits of business ; and 3. The business must be carried on by all or any of the persons concerned , acting for all.

Essentials of PartnershipAccording to Section 4, the following essentials are necessary to constitute a ‘Partnership’. 1. There should be an agreement between the persons who wants to be partners. 2. The purpose of creating partnership should be carrying on of business 3. The motive for the creation partnership should be earning and sharing profits. 4. The business of the firm should be carried on by all of them or any of them acting for all, i.e., in mutual agency When all the above elements are present in certain relationship that is known as ‘partnership’. 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’.

Agreement and contractPartnership is the outcome of an agreement between persons. The relation of partnership arises from the formation of a contract and not from status or birth. If a proprietor gives a share in profits to his employee it will not be called a partnership unless there is an agreement of partnership between the two. The agreement may be oral or in writing but it must satisfy all the essentials of a valid contract.4

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Partnership is the result of a contract. It does not arise from status, operation of law or inheritance. Thus at the death of father, who was a partner in a firm, the son can claim share in the partnership property but cannot become a partner unless he enters into a contract for the same with other persons concerned. Similarly, the members of Joint Hindu Family carrying on a family business cannot be called partners for their relation arises not from any contract but from status. To emphasise the element of contract, Sec. 5 expressly provides mat “the relation of partnership arises from contract and not from status.”5 Essential Elements of a Contract6-

Minimum two parties :- Atleast two parties are needed to enter into a contact. One party has to make an offer and other must accept it. The person who makes the 'proposal' or 'offer' is called the 'promisor' or 'offeror'. While, the person to whom the offer is made is called the 'offeree' and the person who accepts the offer is called the 'acceptor'. Offer and acceptance :- There must be an 'offer' and an 'acceptance' to the offer, resulting into an agreement. Both offer and acceptance should be lawful. Legal obligations :- The parties must intend to create a legal obligation.The agreement sought to be enforced should contemplate legal relations between the parties to it. Lawful consideration:- A contract is basically a bargain between two parties, each receiving 'something' of value or benefit to them. This 'something' is described in law as 'consideration'. Consideration is an essential element of a valid contract. It is the price for which the promise of the other is bought. A contract without consideration is void. The consideration may be in the form of money, services rendered, goods exchanged or a sacrifice which is of value to the other party. This consideration may be past, present or future, but it must be lawful. Competent parties:- The parties making the contract must be legally competent in the sense that each must be of the age of majority, of a sound mind, and not expressly disqualified from contracting. An agreement by incompetent parties shall be a legal nullity. Free consent:- The contracting parties must give their consent freely. 'Consent' means that the parties must agree about the subject matter of the agreement in the same sense and at the same time. Consent is said to be free if it is not induced by coercion, undue influence, fraud,misrepresentation or mistake. The absence of free consent would affect the legal enforceability of a contract. Lawful object:- The object of the agreement must be lawful. An agreement is unlawful, if it is:- (i) illegal (ii) immoral (iii) fraudulent (iv) of a nature that, if permitted, it would defeat the provisions of any law (v) causes injury to the person or property of another (vi) opposed to public policy.

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Not expressly declared void:- An agreement expressly declared to be void under the Contract Act or under any other law, is not enforceable and is, thus, not a contract. The Contract Act declares void certain types of agreements such as those in restraint of marriage, or trade, or legal proceedings as well as wagering agreements. Certainity and possibility of performance:- The terms of a contract must not be vague or uncertain. If an agreement is vague and its meaning cannot be ascertained, it cannot be enforced. Also,the terms of a contract must be such as are capable of performance. An agreement to do an impossible act is void and is not enforceable by law. Legal formalities:- Generally, a contract may be oral or in writing. However, certain contracts are required to be in writing and may even require registration. Therefore, where law requires an agreement to be put in writing or be registered, the same must be complied with. For instance, the Indian Trusts Act requires the creation of a trust to be reduced to writing.7

BusinessThe third essential element of a partnership is that the parties must have agreed to carry on a business. The term ‘business’ is used in its widest sense and includes every trade, occupation or profession [Sec. 2(b)]. If the purpose is to carry on some charitable work, it will not be a partnership. Similarly, if a number of persons agree to share the income of a certain property or to divide the goods purchased in bulk amongst them, there is no partnership and such persons cannot be called partners because in neither case they are carrying on a business. Thus, where A and B jointly purchased a tea shop and incurred additional expenses for purchasing pottery and utensils for the job, contributing necessary money half and half and then leased out the shop on rent which was shared equally by them, it was held that they are only co-owners and not partners as they never carried on any business (Govind Nair vs Maga). Further, in order to be a partnership, the business must be ‘carried on’ which suggests continuity or repetition of acts. Merely a single isolated transaction of purchase and sale by a number of persons does not mean carrying on of the business. But if a number of articles are purchased at one time and the sales are to go on, profits are to be realised and are to be divided amongst a number of persons, there is a carrying on of business.

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Section 8, however, provides that there can be ‘particular partnership’ between partners whereby they engage in a particular adventure or undertaking, which if successful, would result in profit. Thus, there can be a partnership business as to the working out of a coal mine, or the sowing, cropping, harvesting and sale of a particular crop, or the production of a film because although in each of these cases there is a single adventure but the same requires a series of transactions and continuing relationship (Ram Dass vs Mukut Dharfi).

Sharing of profits8This essential element provides that the agreement to carry on business must be with the object of sharing profits amongst all the partners. Impliedly the partnership must aim to make profits because then only profits may be divided amongst the partners. Thus, there would be no partnership where the business is carried on with a philanthropic motive and not for making a profit or where only one of the partners is entitled to the whole of the profits of the business. The partners may, however, agree to share profits in any ratio they like. Sharing of losses not necessary: To constitute a partnership it is not essential that the partners should agree to share the losses (Raghunandan vs. Harmasjee1). It is open to one or more partners to agree to bear all the losses of the business. The Act, therefore, does not seek to make agreement to share losses a test of the existence of partnership. Section 13(6), however, provides that the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm, unless otherwise agreed. Thus sharing of losses may be regarded as consequential upon the sharing of profits and where nothing is said as to the sharing of losses, an agreement to share profits implies an agreement to share losses as well. It must be noted that even though a partner may not share in the losses of the business, yet his liability vis-a-vis outsiders shall be unlimited because there cannot be ‘limited partnerships’ in our country under the Partnership Act. Sharing of profits not conclusive test:

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Although sharing of profits is an evidence of partnership but this is not the conclusive test of partnership. There may be persons sharing the profits of a business but who do not by that reason become partners. In this respect Explanation II to Section 6 clearly states: “The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment: (a) By a lender of money to persons engaged or about to engage in any business, (b) By a servant or agent as remuneration, (c) By a widow or child of a deceased partner as annuity, or (d) By a previous owner or part-owner of the business as consideration for the sale of the goodwill or share thereof, does not itself make the receiver a partner, with the persons carrying on the business.” The question whether a person sharing profits of a business is a partner or not depends upon the real relation between the parties, as shown by all relevant facts taken together (Sec. 6).

Mutual agency-9 The fifth element in the definition of a partnership provides that the business must be carried on by all the partners or any (one or more) of them acting for all, that is, there must be mutual agency. Thus every partner is both an agent and principal for himself and other partners, i.e. he can bind by his acts the other partners and can be bound by the acts of other partners in the ordinary course of business. To test whether a person is a partner or not, it should be seen, among other things, whether or not the element of agency exists, i’. e., whether the business is conducted on his behalf. It is on the basis of this test that a widow of a deceased partner or a manager having a share in the profits is not a partner, because business is not carried on her or his behalf. If she or he does something the firm is not legally bound by that.

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The importance of the element of mutual agency lies in the fact that it enables every partner to carry on the business on behalf of others. Partners may agree among themselves that some one of them shall not enter into any contracts on behalf of the firm, but by virtue of the principle of mutual agency, such partner can bind the firm vis-a-vis third parties without notice in contracts made according to the ordinary usage of trade. Of course he can be made liable by other partner’s inter-se for exceeding his authority. In fact, the law of partnership governing relations of the partner’s inter-se and with the outside world is an extension of the law of agency. In Cox vs. Hickman it was rightly observed: “The law as to partnership is undoubtedly a branch of the law of the principal and agent…. The liability of one partner for the acts of his co-partner is in truth the liability of a principal for the acts of his agent. Where two or more persons are engaged as partners in an ordinary trade, each of them has an implied authority from the others to bind all by contracts entered into according to usual course of business in that trade. Every partner in trade is, for the ordinary purposes of the trade, the agent of his co-partners; all are therefore liable for the ordinary trade contract of the other. The public have a right to assume that every partner has authority from his co-partners to bind the whole firm in contracts made according to the ordinary usage of trade.”10

Some related landmark casesChandrakant Manilal Shah And Anr vs Commissioner Of Income TaxChandrakant Manilal Shah was the Karta of a Hindu undi- vided family (HUF) and the family was carrying on business of cloth. Naresh Chandrakant, one of the sons of Chandrakant Manilal Shah, joined the business on a monthly salary of Rs. 100/- since about April 1959. It was asserted that with effect from 1st November 1959 the business had been convert- ed into a partnership between Chandrakant Manilal Shah as Karta of HUF and Naresh Chandrakant. The deed of partnership executed in this behalf on 12th November, 1959 indicated that Naresh Chandrakant had been admitted as a working partner with effect from 1st November, 1959 having 35 per cent share in the profits and losses of the firm and the remaining 65 per cent share was held by Chandrakant Manilal as the Kartas of the HUF. An application was made for regis- tration of the firm which was dismissed by the Incometax officer on the ground that there was no valid partnership. The view taken by the Income10

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tax officer was upheld in appeal by the Appellate Assistant Commissioner. On further appeal, the Income-tax Appellate Tribunal also came to the same conclusion that there was no valid partnership and the business consequently must be taken to continue in the hands of the joint family. However, at the instance of the asses- see the following question was referred by the Tribunal to the High Court for its opinion:Whether on the facts and in the circumstances of the case, there was a valid partnership under Annexure 'A' between Shri Chandrakant, as the Karta of the HUF and Shri Naresh, a member of the family? Reverting to the facts of the instant case it is noteworthy that it is not the case of the Revenue that the partnership between Chandrakant Manilal Shah as karta of HUF and Naresh Chandrakant was fictitious or invalid on any other ground. Consequently, the judgment of the High Court cannot be sustained. In view of the foregoing discussion, this appeal suc- ceeds and is allowed. The judgment of the High Court is set aside and the question referred to the High Court is answered in the affirmative, in favour of the assessee and against the Revenue. In the circumstances of the case, however, there shall be no order as to costs.11

Gherulal Parakh vs Mahadeodas Maiya And OthersThe facts lie in a small compass. They, omitting those not germane to the controversy before us, are as follows: The appellant, Gherulal Parakh, and the first respondent, Mahadeodas Maiya, managers of two joint families entered into a partnership to carry on wagering contracts with two firms of Hapur, namely, Messrs. Mulchand Gulzarimull and Baldeosahay Surajmull. It was agreed between the partners that the said contracts would be made in the name of the respondents on behalf of the firm and that the profit and loss resulting from the transactions would be borne by them in equal shares. In implementation of the said agreement, the first respondent entered into 32 contracts with Mulchand and 49 contracts with Baldeosahay and the nett result of all these transactions was a loss, with the result that the first respondent had to pay to the Hapur merchants the entire amount due to them. As the appellant denied his liability to bear his share of the loss, 'the first respondent along 'With his sons filed O. S. No. 18 of 1937 in the Court of the Subordinate Judge, Darjeeling, for the recovery of half of the loss incurred in the transactions with Mulchand. In the plaint he reserved his right to claim any further amount in respect of transactions with Mulchand that might be found due to him after the accounts were finally settled with him. That suit was referred to arbitration and on the basis of the award, the Subordinate Judge made a decree in favour of the first respondent and his sons for a sum of Rs. 3,375. After the final accounts were settled between the first respondent and the two merchants of Hapur and after the amounts due to them were paid, the first respondent instituted a suit, out of which the present appeal arises, in the Court of the Subordinate Judge, Darjeeling, for the recovery of a sum of Rs. 5,300 with interest thereon. Subsequently the plaint was amended and by the amended plaint the respondents asked for the same relief on the basis that the firm had been dissolved. The appellant and his sons, inter alia, pleaded in defence that the agreement between the parties to enter into wagering contracts was unlawful under s. 23 of the Contract Act, that as the partnership was not registered, the suit was barred under s. 69(1) of the Partnership Act and that in any event the suit was barred under S. 2, Rule 2 of the Code of Civil Procedure. The learned Subordinate Judge found that the agreement between the parties was to enter into 11

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wagering contracts depending upon the rise and fall of the market and that the said agreement was void as the said object was forbidden by law and opposed to public policy. He also found that the claim in respect of the transactions with Mulchand so far as it was not included in the earlier suit was not barred under s. 2, Rule 2, Code of Civil Procedure, as the cause of action in respect of that part of the claim did not arise at the time the said suit was filed. He further found that the partnership was between the two joint families of the appellant and the first respondent respectively, that there could not be in law such a partnership and that therefore s. 69 of the Partnership Act was not applicable. In the result, he dismissed the suit with costs. It is held that the suit partnership was not unlawful within the meaning of s. 23 of the Indian Contract Act.12

COX V. HICKMANBenjamin Smith and Josiah Timmis Smith carried on business as iron workers and corn merchants under the name of B Smith & Son. They owed a lot of money to the creditors and a meeting took place, amongst whom were Cox and Wheatcroft. A deed of arrangement was executed by more than six-sevenths in number and value of the creditors. The trusts were enumerated and the lease was fixed at 21 years. They were to carry on business under the name of “The Stanton Iron Company”. The deed also contained a clause which prevented them from suing the Smiths for existing debts. Cox never acted as trustee, and Wheatcroft resigned after six weeks after which no trustee was appointed. The goods for the business were provided by Hickman who drew 3 bills of exchange, which the business accepted but did not honour. The suit was first tried in front of Lord Jervis who ruled in favour of the defendants. The action was then taken to the Exchequer Chamber wherein three judges wanted to uphold the judgement and the other three were for reversing it. The deed in this case is merely an arrangement between the creditors and the Smiths, to repay the creditors out of existing and future profits. This relationship between the creditors and debtors is not enough to constitute a relationship between a principal and agent. Trustees are liable as they are the agent by the contract but the creditors are not the principals of the trustees. The decision of the Court of Common Pleas was reversed and the defendant’s were not held liable.13

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CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW & GOVERNANCE

SYNOPSIS Partnership : Defination, and essentials Under the Supervision of – Dr. P.K. Das Sir

Submitted by:Dakshyesh Darshan Naik B.A L.LB(Hons)- 3rd Semester Enrollment- CUSB1513125017

Bibliography: Texts in the above project have referred and copied from the following-

Websites referred:

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https://indiankanoon.org https://indiancaselaws.wordpress.com

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http://www.shareyouressays.com/ http://www.archive.india.gov.in http://www.legalservicesindia.com http://www.investopedia.com/

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http://www.preservearticles.com/

Referred books: 

Contract 2 ‘R.K.Bangia’

Content

S. N.

Topic

Page no.

1.

Introduction

1

2.

Definition of partnership

2

3.

Essentials of partnership

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4.

Some related cases

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5.

bibliography

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ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my professor Dr. P.K. Das sir who gave me the golden opportunity to do this wonderful project on the topic partnership and its essentials, which also helped me in doing a lot of Research and I came to know about so many new things. I am really thankful to them. I would also like to thank my friends who helped me a lot in finalizing this project within the limited time frame.