INTRODUCTION TO INDIAN PARTNERSHIP ACT, 1932

Published On : 2018-09-23

Study Online Notes for Introduction to Indian Partnership Act,1932


(1) This Act may be called the Indian Partnership Act, 1932. 
(2) It extends to the whole of India except the State of Jammu and Kashmir. 
(3) It shall come into force on the 1st day of October, 1932, except section 69 which shall come into force on the 1st day of October, 1933.


DEFINITION OF PARTNERSHIP 
Section 4 of the Indian Partnership Act,1932 has defined partnership as Partnership is the relation between two or more persons who have agreed to share the profits o f a business carried on by all or any of them acting for all.


ESSENTIAL ELEMENTS OF PARTNERSHIP
This definition clearly indicates the following characteristics of partnership.


Two or more persons
There should be at least two persons to form a partnership if the number of partners gets reduced to one by any reason, say death or insolvency of partner it would cease to be a partnership. For the maximum number of partners in a firm, the partnership Act is silent.


Agreement between persons
A partnership originates from an agreement between persons. This agreement may be express or implied. It should also be noted that a partnership does not arise out of status as in the caw of Joint Hindu Family or by operation of law as in the case of co-ownership. It is essential that all elements of a valid contract are present.

Business
Partnership can be formed only for the purpose of carrying on some business for profit. As per section 2(b) "business" includes every trade, occupation and profession. An association created primarily for charitable, religious and social purposes are not regarded as partnership. Similarly, when two or more persons agree to share the income of a joint property, it does not amount to partnership.


Sharing of profits
Sharing the profits of business is the essence of partnership. Unless otherwise agreed, sharing of profits of a business implies sharing of its losses as well. However, a person can become a partner on the understanding that he will not share the losses. The ratio in which the profits and losses will be shared is a matter of agreement amongst the partners.


Mutual Agency
The underlying principle which governs partnership is the agency relationship amongst the partners. The business of the firm may be carried on by all the partners or by any of them acting for all. This means that a partner is both an agent and a principal. He, can, by his acts, bind the other partners and is bound by the acts of the other partners. Thus, the partners have relationship of mutual agency between them and the law of partnership is regarded as an extension of the general law of agency.

Extent of liability
The liability of every partner is unlimited. Creditors have to right to recover the amount from the property of all or any partner where assets of the firm are not enough.

LAW OF PARTNERSHIP EXTENSION TO LAW OF AGENCY
PARTNER TO BE AGENT OF THE FIRM
Section 18 of the Indian Partnership Act,1932 provides that Subject to the provisions of this Act, a partner is the agent of the firm for the purposes of the business of the firm.

So a partner assumes twofold character
He is agent of the firm
He is the principal of the other partners

FORMATION OF PARTNERSHIP
MAY BE MADE ORALLY IN WRITTEN OR MAY BE IMPLIED
A partnership is based on an agreement which may be made 
orally or 
in writing or 
may be implied in the course of dealing among partners

ESSENTIALS OF VALID CONTRACT
All the essentials of contract act must be fulfilled like there must be genuine and free consent, for law for business etc. 
However there are two exceptions to this rule
Minor can be admitted into partnership with consent of all other partner but for profits only
No consideration is required to create partnership which is extension of the law of agency

PARTNERSHIP DEED
Partnership may be made orally or in written. In case partnership is made in written the documents that contains this agreement is called partnership deed. It contains provisions like
Name of the firm
Names and addresses of partners
Provision relating to Interest on capital
Provision relating to Interest on drawing 
Salary to a partner 
Etc. 
WHO MAY BECOME A PARTNER
Anyone who is competent to contract as per section 11 of the Indian contract act may become a partner in a partnership firm
With an exception of a minor who can be admitted into partnership with consent of all other partner but for profits only
Following can never be entered into partnership
Alien enemy
Person of unsound mind
However a Corporation can enter into contract of partnership as a single individual but not s a group of individuals comprising it. 

PARTNER, FIRM AND FIRM NAME
PARTNERS AND FIRM
As per section 4 para 2 of the Indian Partnership Act,1932
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".

FIRM NAME
The firm name is only a short way of expressing the names of all the partners. Partners are free to choose any name for their firm subject to following limitation
1. As per section 58(3)A firm shall not have 
             any of the names or emblems specified in the Schedule to the Emblems and Names (Prevention of Improper Use) Act, 1950, or 
         any colourable imitation thereof, unless permitted so to do under that Act, or 
         any name which is likely to be associated by the public with the name of any other firm on account of similarity, or 
         any name which, in the opinion of the Registrar, for reasons to be recorded in writing, is undesirable

2. Name already used by some other business, provided the same name is used with fraudulent intention only then the law with intervene. The firm may be restrained from adopting such name by injunction.

LEGAL STATUS OF THE FIRM
Though in commercial and mercantile usage a firm is deemed to be separate from its partners however in case of Malabar fishres Co Vs CIT it was ruled as not be a distinct entity from the partners constituting it. So as per Indian law firm is not a distinct entity from its partners. 


    

PARTNERSHIP

FIRM

Partnership is an abstract legal relation between the partners

Firm is a collective name for all the partners.

It is an invisible tie bounding the partners

It is the visible body of those partners who are bond together

 

TRUE TEST OF PARTNERSHIP
Real relationship amongst the parties needs to be ascertained to determine whether or not a group of persons constitutes partnership and whether a particular person is or is not a partner in the firm. If the parties have drawn an express contract, their real relation may be known from the terms of partnership contract. But, if they have not drawn an express contract, their real relationship is to be gathered from other relevant factors such as conduct of parties, circumstances under which the contract took place, books of account, statement of employees, etc. Section 6 of the Act clearly states that in determining whether a group of persons is or is not a firm regard shall be had to the real relation between the parties as shown by all relevant facts taken together.


SITUATION WHERE THERE IS NO PARTNERSHIP RELATION
Joint Owner Sharing Gross Return
 Joint owner of property sharing profits or gross return arising form the property do not become partner. In case of Govind Nair Vs. Maga A and B jointly purchased a tea shop. Each of them contributed half of the expense incurred for the purchase of pottery and utensils. They then leased out the shop and shared the rent equally. It was held that they were co owners and not partner. 

Sharing of profits
Though sharing of profits is a strong evidence of partnership however sharing of profits will not automatically make them partners. In following cases there will be no partnership though profits will be shared.

Where a person has lent money to person engaged in business or is about to be engaged and interest on the loan varies with the profit. In case of Mollow March & Co. Vs. The Court of Wards A advanced money to two merchants who agree to carry on business subject to the control of A in several matters. A was to receive commission of 20% on all profits. It was held that there was not partnership among them.

Where a servant or agent is engaged in a business and receives his remuneration as a share of profit. In case of Munshi Abdul Latif Vs. Gopeshwar A appointed a manager who was to receive 75% of profits and was to bear all losses. It was held that manager was an agent and not a partner.

Where a person has sold his business along with goodwill and receives a portion of profit in consideration of sale.


Mutual Agency as true test of partnership
 The true test of partnership lies in the existence of mutual agency relationship i.e., the capacity of a partner to bind other partners by his acts done in firm's name and be bound by the acts of other partners. This relationship of principal and agent distinguishes a partnership from co-ownership and the simple agreements for sharing profit.

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