Partnership Act- Introduction, Definition and Essential Elements of Partnership

Introduction

People individually carry out business. But certain business involved more risk, more money and more burden. In such case we typically involve other people whom we trust and together we do a business. This togetherness is helpful in scaling business, expanding business and sharing risk.

Partnership is one such form of business. There is one other form known as "Company". Find the difference between them here. Both of them have their advantages and disadvantages.

Law related to partnership earlier was in Indian Contract Act,1872. Later, general principles of Contract were kept in Contract Act and other special contracts such as sales of goods, partnership were carved out in separate act.

Indian Partnership Act, 1932 came into force in 1932 (Of course!). This act is not exhaustive per se, meaning containing everything and anything about partnership, but it purports to define and amend the law relating to Partnership.

Definition of Partnership

We all know partnership. When there is some sort of relations between individuals related to sharing something, having duties on each partners as well as some rights.

Despite we all know, Indian Partnership Act still provides a definition for us which is as below.

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.

Looks simple, but this definition is in fact quite lengthy. There are tons of essentials from definition (Figuratively!). Apart from below essentials, we all know it's special form of contract. So other essentials of contract like lawful objects, parties to contract free consent etc..etc are all needed.

Each of below essentials will be discussed in details.

Association between two or more person

Partnership is association between two or more persons. Each person would then be a partner.

As per Company Act 2013, maximum number is 100 persons.

"Person" here means natural person like Salman Khan, or legal person like Being Human :). Also "Person" refers to a person who is capable of entering into contract. We will see provision related to minor separately! relax

Question: Can Hindu Undivided Family be a partner ? I mean What kind of persons are allowed ?

Answer: Can Hindu Undivided Family is legal person ? Yes for tax purpose. But as far as partnership is concerned court in Rashik Lal & Co Vs I.T Comissioner  explained that HUF directly or indirectly cannot become a partner of a firm because the firm is an association of individual. Same arguments goes for Partnership Firms as well, which also cannot become a partner.

Agreement

Agreement is sine qua non of partnership. This is very clear from section 5. Section 5 of the contract act states that Partnership does not arise from status. It even status that if Hindu Undivided Family carries on business, this sort of arrangement is arise out of status and not of agreement. Hence agreement is must.

An  agreement  from  which  relationship  of  Partnership  arises  may  be  express.  It  may  also  be  implied  from the act done by partners and from a consistent course of conduct being followed, showing mutual understanding between them. It may be oral or in writing.

Carrying on of a business

The object of every partnership must be carrying on a business and sharing it's profits. What does carrying on in this context mean.

Take for example, Mr Mallya and Mr Modi together buy a flat for 20 Lakh Rs, and sale it for 30 Lakh Rs. Will this be partnership ? Did they carried out anything except briefcase full of money ?

Answer is NO. They haven't carried out business. It was one shot transaction which would not entail partnership. Partnership needed some form of business to be carried on. "Business" is equally important term.

Another example. 1 BHK is offered at 30 Lakh Rs. Builder offers that if their is group booking there will be discount. Say if you book 2 flats, it will be offered 25 Lakhs each. Now if Mr Mallya and Mr Modi book two flats for sharing profit arising out of group booking, would that be partnership ?

Again, answer is no. It's principle laid in case of Eyre & Co.

In short carrying on business mean some activity should be done further. For example two people can buy Law books in bulk and resale it in retain. This involves further selling as an activity. So such type of activity is essential.

 Sharing of Profit

Definition of partnership contains phrase "to share profits". Hence profit sharing is another important aspect of partnership.

However, if you share profit with someone doesn't necessarily mean that person is automatically become a partnership.

To understand this by example, let's say Mr Salman is good actor (?) and producer of film agrees to share a profit of the film so that Mr. Salman really acts good and work hard. In this case, though profit is shared, still it doesn't make Mr Salman partner.

Section 6 of the act deals in details to provide more clarity on this aspect. It illustrate 4 conditions under which profit sharing doesn't give rise to partnership unless there is real partnership relation between them.

Below are cases where payment of profits does not make receiver a partener.

• Lender of money to business who receives profits
• Servant or Agent sharing a profit as remuneration
• Widow of child of a deceased partner sharing profits
• Seller of goodwill sharing the profits

Mutual Agency

This is perhaps a "testing ingredient" in definition of partnership. It simply means act of any of the partner binds the other partners.

Agency is discussed in details in Contract act from section 182 to 238. Agent is person who acts on behalf of principal or master. In Partnership, every member is agent of other partner.

For example, there is partnership between Salman and Govinda. Then acts of Salman with respect to their business will bind the Govinda and vice versa.

We can see that every partner occupy dual position in case of Partnership. 

Case in point is illustrated in Cox Vs Hickman. In this case Smith and Son were businessmen. They took a loan from creditors. These creditors used to manage business as trustee because they had given a loan. Profit used to be shared first by Trustees (Creditors) and rest was to be given to Smith and Son. One of the trustee took goods from Hickman in exchange of bill of exchange and didn't give money. Hickman sued the other folks (Smith and Son) as partners. It was held that although creditors were sharing profits, but there was no mutual agency between them and hence they are not partner!

Conclusion

Partnership Acts defines "partnership" of which essentials ingredients are discussed above.