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Definition
A Partnership is defined by the Indian Partnership Act, 1932, as the relation between persons who have
agreed to share profits of the business carried on by all or any of them acting for all. This definition gives
three minimum requirements to constitute a partnership, viz. (1) there must be an agreement entered into
orally or in writing by the persons who desire to form a partnership, (2) the object of the agreement must be
to share the profits of business intended to be carried on by the partnership, and (3) the business must be
carried on by all the partners or by any of them acting for all of them. The term person is not defined by the
Partnership Act. Section 2(42) of the General Clauses Act defines a person to include a company or an
association or body of individuals, whether incorporated or not. But the Supreme Court has held that this
definition cannot be imported into the Partnership Act, and the person under the Partnership Act means
either an individual or any other legal entity such as a Limited Company registered under the Companies Act,
or any other Corporation constituted by or under any act of the Legislature as a body corporate. The
Supreme Court has observed that it is now well settled that Hindu Undivided Family cannot as such enter into
a contract of partnership with another person or persons because it is a fleeting body, its composition changes
by births and deaths, marriages and divorces and such a partner- ship is likely to have a precarious existence.
It, therefore, follows that a body of individuals such as an unincorporated society cannot as such become a
partner in a firm. It also follows that a partnership firm cannot as such enter into a partnership with another
individual or legal entity, or with any other partnership firm because a partnership as such is not a .person. But
in the case of H.U.F. the Karta of the family or a member thereof can become partner with another individual
or with other legal entity or even with the partners or partner of a partnership firm because in such a case It is
the Karta or the individual member who is the partner for all purposes and not the joint family whom he
represents and the family does not become a partner of the firm. It has been held that when two Kartas of
two H.U.Fs. enter into a partnership agreement, the partnership though popularly known as one between the
two HUFs, in the eye of law, it is a partnership between two Kartas and the other members of the two
families do not ipso facto become partners. There is nothing to prevent individual members of one H. U. F.
from entering into a partnership with the individual members of another H.U.F. and in such a case it is the
partnership between the individual members and it is wholly inappropriate to describe such a partnership as
one between two HUFs. When the Karta of a H.U.F. enters into a partnership with a stranger the members
of the family do not ipso facto become partners in that firm and they have no right to take part in its
management or to sue for its dissolution.
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enter into a partnership with an individual or another firm merely makes the partners of that firm individual
partners of the larger partnership. A firm as such cannot enter into an agreement as a partner with another
firm or individuals.
Therefore, when one partnership enters into a partnership agreement with another partnership firm, the
partnership is in fact between all the partners of both the firms.
The Supreme Court has observed that a partnership agreement creates and defines the relation of partnership
and, therefore, identifies the firm. if that conclusion is correct, it is only a further step to hold that each
partnership agreement may constitute a distinct and separate partnership and, therefore, a distinct and
separate firm.
That is not to say that a firm is a corporate entity or enjoys a juristic personality in that sense. The firm name is
only a collective name for the individual partners and each partnership is a distinct relationship. The partners
may be different and yet the nature of the business may be the same, the business may be different and yet the
partnership may be the same. And agreement between partners to carry on a business and to share its profits
may be followed by a separate agreement between the same partners to carry on another business and share
the profits therein. The intention may be to constitute two separate partnerships and two distinct firms or to
extend merely the partnership originally constituted to carry on one business or to carrying on another
business. It will depend on the intention of the partners. The intention of the partners will have to be decided
with reference to the terms of the agreement and all the surrounding circum- stances including evidence as to
interlacing or interlocking of management, finance or other incidentals of the respective businesses.
In other words, the same partners can form two different partnerships. The Supreme Court has held that the
word person in section 4 of the Partnership Act contemplates only natural or artificial or legal person and a
firm is not a person and as such not entitled to enter into a partnership with another firm or H. U. F. or
individual. In this view of the matter there can arise no question of registration of a partnership purporting to
be between three parties viz. a firm, a H.U.F. and an individual as a firm.
A partner in his individual capacity can legally be a partner in a firm and the fact that he has secured his capital
from another firm or that he has entered into partnership with other members of that firm in respect of his
share in the first mentioned firm does not show that the other firm is a partner of the first mentioned firm or
that the latter firm is not validly constituted. A divided member or some of the divided members of an
erstwhile joint Hindu family can enter into partnership with a third person, but under some arrangement interse between other members of the divided family but the partnership will have no concern with the obligations
of such divided members to other members of their family in the partnership and their shares in the partnership
have nothing to do with their shares In the Joint familys divided properties.
Not only that but it has been held that the Karta of a H.U.F can enter into partnership with an individual
member of that very family provided the member has contributed his own self acquired capital by way of
money or other property to the capital of the firm. And the members personal skill and labour is held to be his
property which can be a contribution to the capital of such a firm. Similarly if a benamidar, who has the
character of a trustee of the real owner, enters into partnership with another in his own name the share
allotted to him in the partnership must be held to specify his individual share therein. Shortly, therefore, the
position is that partnership can be only between individuals and/or any other legal entity, and those who are
actually parties to a partnership agreement will be considered as partners irrespective of their personal
relationship with others inter-se and with which the partnerships will not be concerned, such as the
beneficiaries if their trustee is a partner or the real owner If his benamidar is a partner or members of a HUF if
their Karta is a partner or the partners of a firm if one of them is a partner of the other firm and so on.
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Agreement of partnership
As stated above a partnership is constituted by an agreement between the partners. The agreement may be in
writing or oral. But from the practical point of view and particularly in view of the provisions of other Acts
such as the Income Tax Act as well as Partnership Act an oral partnership is not practicable, and
therefore, a partnership agreement is necessarily required to be in writing.
Therefore, the mere fact that two persons as joint owners either as heirs or legatees are carrying on a
business it does not necessarily mean that they are partners and if they want to carry on the business in
partnership, then a Partnership agreement in writing becomes necessary. For example, if a person dies leaving
a running business and his heirs continue to carry on such business, it will not be a business carried on in
partnership and if they want to do so they will have to enter into a regular agreement of partnership.
Being an agreement and an agreement enforceable at law, such an agreement must fulfill the basic
requirements of a valid contract, as required by the Contract Act. Therefore, a minor or a mentally
handicapped person cannot enter into a partnership agreement though by virtue of the provisions of the
Partnership Act a minor can be admitted only to the benefits of the partnership. But that only means that a
minor can have a share in the profits of the business, but he cannot become a partner, and cannot execute any
agreement of partnership.
Similarly if a partnership deed provides that on the death of a partner his heirs or any one or more of them
should be admitted as partners or partner in place of the deceased partner even in such a case on the death of
a partner his heirs or any of them do not become partners automatically on such death. But a fresh agreement
of partnership will have to be executed between the existing partners and the heirs or heir of the deceased
partner and if the heir is a minor the new partnership will stand postponed till the minor attains majority or if
the surviving partners are more than one, the minor can only be admitted to the benefits of partnership.
Test of partnership
As stated before, a partnership agreement can be oral or in writing. It is not the general practice to enter into
a preliminary agreement to enter into a regular partnership agreement. But if such a preliminary agreement is
entered into and the partners start business in anticipation of executing a formal deed of partnership, the
partnership shall be deemed to have commenced from the commencement of the business, unless the
preliminary agreement is conditional upon the happening or not happening of some event in which case the
partnership cannot be said to have come into existence unless the event has happened or not happened.
Another test of partnership as mentioned above is that of sharing profits, and which is an essential requirement
of a partnership. Profits may be shared in such proportions as the parties may agree, but sharing of profits is
most essential. As against that, sharing of losses only suffered in business is not a test to constitute a
partnership.
Therefore, the partnership agreement may provide that a particular partner or partners will not be liable to
bear any losses of the firm. As regards sharing in profits the agreement may provide that a partner shall
receive only a fixed share in the profits or a fixed periodical amount and It is not necessary that profits should
be shared in certain proportions.
Section 6 of the Partnership Act provides that In determining whether a group of persons is or is not a firm
or whether a person is or is not a partner in a firm regard shall be had to the real relation between the parties
as shown by all the relevant facts taken together.
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It further provides that sharing of profits or gross returns arising from property by persons holding joint or
common interest in that property does not of itself make such persons partners, that is, as stated above, mere
joint ownership of business does not constitute a partnership.
Similarly, receipt by a person of a share of the profits of a business or a payment contingent upon earning of
profits or carrying with the profits earned by a business, does not of itself make him a partner with the person
carrying on the business. For example, the receipt of a share or payment by a lender of money to persons
engaged or about to engage in a business does not make such lender a partner.
Similarly, a share given in profits to a servant or agent as remuneration does not make him a partner, or if a
widow or child of a deceased partner is given any annuity in payment of the share of the deceased partner It
does not make the widow or child a partner, or if a business is sold with goodwill and the seller is given a
share in profits towards payment of the sale price it will not make him a partner of the firm. But otherwise
wherever the agreement is for sharing of business carried on by two or more persons the partnership relation
will be inferred.
The partnership business may consist of doing anything which is not illegal or against public policy. Business
may consist of carrying a continuous trade. or profession or any manufacture and any other activity of which
the object is to earn profits. Or it may be limited to a single adventure.
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Partnership an agency
The third essential of a partnership is that a partnership business actually may be carried on by all the partners
together or by any one or more partners for all and on behalf of the others, in which case each partner is an
implied agent of the other partners. It is not. therefore, necessary that all the partners take part in the business
of the partnership firm. Some partners can be active partners and others can be sleeping partners. But it must
be clear that there is an implied or express agency constituted in favour of one partner by the other partners.
If there is no element of agency, even if there is any agreement to share profits, there will be no partnership.
So a partner has a double capacity, he is the principal so far as he is concerned and the agent so far as other
partners are concerned.
Period of partnership
A partnership can be for a fixed period of time or it may be limited to a particular adventure as provided in
Section 8 or it may be for a duration at the will of the partners. Where the period of the partnership is not
fixed and the partnership is not for a particular adventure then under section 7 of the Act the partnership shall
be deemed to be a partnership at will.
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These rights and duties will be implied in the partnership unless the partnership agreement provides to the
contrary i.e. makes any variation in the said rights and duties.
Similarly, subject to a contract to the contrary, if a partner derives any profit for himself from any transaction
of the firm or from the use of the property or business connection with the firm or the firm name he is liable to
account for the profit and pay it to the firm, and if the partner carries a business of the same nature as and
competing with that of the firm, he shall account for and pay to the firm all profits made by him in that
business.
Property of partnership
The property of a partnership firm will consist of all the assets, moveable and immoveable brought in by any
or all the partners into the firm and also include the goodwill.
As to what is goodwill see Introductory Note to Ch. 3 Part III. It may be stated that relying upon the specific
provision of s. 22 of the English Partnership Act, 1890, the Supreme Court has held that all property of a
partnership firm, whether moveable or immoveable is moveable property. and therefore, on retirement of any
partner or dissolution of partnership the division of even immoveable property among the partners does not
amount to transfer of property and the deed of retirement or dissolution does not require registration.
The Supreme Court has not considered the law of vesting and divesting of interest in an immoveable
property. A property acquired by A by purchase or otherwise is vested in him and even if A brings that
property into partnership and it is used for the partnership business, the property is not automatically divested
from A and vested in A and his other partners.
Vesting and divesting can take effect only by act of parties or by operation of law, and, therefore, the
property brought in by A cannot become vested in the other partners unless there is a regular transfer of the
property by A to himself and other partners. And similarly if property vested in the partners is divided, among
them, it amounts to transfer of one partners interest to the other, and such transfer is necessary to vest and
divest the title from one to the other.
Even in English law, in spite of the provisions of Partnership Act above referred to, the convincing practice is
to effect the transfer of property brought in or taken out of the partnership by a Deed of Conveyance.
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Retirement of a partner
Under the Partnership Act no person can be admitted into partnership without
the consent of the other partner or partners unless there is any contract to the
contrary (S. 31).
Any partner may. with the consent of all the other partners or in terms of the
deed of partnership where the partnership is at will, by giving notice in writing to
all other partners, to that effect, dissolve the partnership or retire from
partnership.
A retiring partner, however, continues to be liable to third parties even If the
liability Is taken over by the remaining partners (S.32). Therefore in a deed of
retirement it is necessary to provide that In the event of the retiring partner being
held liable by a third party, the remaining partners shall indemnify him to that
extent, when the liabilities are taken over by the remaining partners.
Insolvency of a partner also causes compulsory retirement of an insolvent
partner (S. 35). It is, therefore, generally provided in a deed of partnership
when there are more than two partners that the insolvency of any partner will
not dissolve the partnership. If a partner retires, unless there is contract. to the
contrary, the retiring partner cannot use the firm name, represent himself as
carrying on the business of the firm or solicit the customers of the Firm. (S.36).
Therefore, in a deed of retirement It is generally not necessary to make explicit
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that the retiring partner shall not do any of these things. But if he is to be
restrained from carrying on similar business for a specified period or in a
specified area, such condition can be provided in the deed of retirement and it is
legal (S.36(2)).
Dissolution
The Act also provides that a partnership firm may be dissolved under the following circumstances namely,
as a result of any agreement between all the partners
by adjudication of all the partners or all partners but one as insolvent, or
by the happening of an event which makes it unlawful for the business of the firm to be carried on in
partnership or
subject to agreement between the parties,
efflux of time,
completion of the adventure,
death of a partner, and
insolvency of a partner.
In these last four cases the partnership agreement may provide whether the firm will be dissolved or not on
the happening of any of the four events. Even if the deed provides that the partnership will not be dissolved on
the death or insolvency of a partner, it does not mean that on the death or insolvency of a partner he ceases
to have interest in the partnership property. In such case his interest in the partnership property will survive to
his heirs in case of his death and to his assignees in case of insolvency. In the absence of a term in the deed of
partnership to that effect, it cannot be that, the partnership shall continue, and notwithstanding the death of a
partner it will operate to extinguish his proprietary rights in the assets of the Firm.
A partnership can also be dissolved by the Court under the circumstances mentioned in Section 44 of the
Act. Where the partnership is at will the partnership can be dissolved by any partner or partners giving
notice of his/their intention to dissolve the firm.
Types of partnership
The result of this summary of the Act is that a partnership is generally created by agreement between the
partners. A partnership can be formed between
one or more Individuals or
between an Individual and a person representing a H.U.F. or
between an Individual and other partner representing his firm, or
between two partnership firms or
between a Limited Company or a Corporation and an Individual or partnership firm or
between a partnership and a H.U.F.
between members of HUF in their individual and independent capacity
between a HUF and a member of that HUF independently.
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Registration
A partnership firm is required to he registered under sections 58 and 59 of the Partnership Act, though it is
not compulsory.
Every change in the constitution of a partnership is also required to be registered. But if it is not registered,
then there are certain handicaps stated in S.69 of the Act.
The main handicap being that a partnership firm or its partner cannot file a suit against a third party. In
Maharashtra, the Section is made more stringent making registration almost compulsory. For the purpose of
income tax benefits It is necessary to register a partnership with the Department under S. 184 and S.185 of
the Income Tax Act, 1961. For the Influence of the Income Tax Act on partnership, see Ch. III in Part
Viii.
Limited partnership
The concept of limited partnership is not recognised by Indian Law. It is prevalent in England and America
and other countries. In England, the limited partnership is governed by the Partnership Act of 1907. It
consists of general partners who are the main partners with exclusive right of management and their liability is
unlimited. But they can take any linilted partner who contributes some capital to the Firm and whose liability is
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limited to that amount provided he does not participate in the management or withdraw any part of the capital
contributed by him during the term of partnership. However a limited partnership is not a separate legal entity
like a limited company. Generally a limited partner joins a firm to participate in a particular scheme or
adventure of the firm.
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41
Tw eet
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maddy says:
May 15, 2013 at 9:29 pm
I have a doubt regarding this article it is not mentioned here that who all can be a part of partnership
firm, say a salaried person of a private ltd can be a partner,a sleeping or active???
2.
3.
4.
5.
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7.
Deepak says:
November 6, 2013 at 1:17 pm
in case of an unregistered partnership firm Do we need apply for the NAME of the partnership firm?
If yes How do we apply?
8.
9.
10.
rttdrytdtyt says:
April 1, 2014 at 3:27 pm
rtgrthrtyhdrt
11.
12.
kuruvill says:
August 4, 2014 at 2:44 pm
A partnership firm ( four members)carrying on the business of real estate and apartment developing
purchased land for building flats represented and signed the deed by two partners only. After one year
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one partner of the above signatory left. A deed of retirement and resolution prepared on rs.100 stamp
paper duly signed by all four partners including the said retiring parter. Later the apartment flats sold to
customers duly registered and signed the deed of sale agreement by one partner (who signed the
purchase deed alongwith the retiring partner) only. Is it correct the signature of one partner out of three
is sufficient for selling the flats though his name and signature was recorded in the purchase deed along
with retiring partner. kindly comment on it.
13.
naveen says:
August 12, 2014 at 9:11 pm
sir 4 parners and 3 portners cast oc, 1 person sc + working partner but 3 partners daminashion in the
firm plz rules sc act or incom tex act plz inform plz save me sir
14.
Bhawna says:
September 12, 2014 at 6:04 pm
Amar and Poonam have a Partnership Deed for a Petrol Pump with 50-50% partnership. The Deed is
not registered but it is on a Rs 50 stamp paper and notarized and attested. Is Poonam legally
authorised to claim the ownership of the pump after Amars death and can she now get the deed
registered?
15.
16.
17.
Rose says:
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Rose says:
December 24, 2014 at 5:35 pm
I have registered my partnership deed with 3 partners(individual persons) on 1st October 2014. No
business has been started till today as on 23rd December 2014.We all 3 partners want to end the
partnership thru mutual consent.
What is the procedure?
What is the Format of the same.
Do we have to prepare a Deed of Dissolution of the firm and get it registered.
please help. Its very urgent.
19.
20.
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Sir,
It has come to the notice of the Ministry that some Hindu Undivided
Families (HUFs) / Kartas of such families are applying to become partner/
Designated partner (DP) in LLPs and a question has arisen whether a HUF or a
karta can be allowed to do so. The matter has been examined in consultation
with Ministry of Law.
2. As per section 5 of LLP Act, 2008 only an individual or body corporate may
be a partner in a Limited Liability Partnership. A HUF cannot be treated as a body
corporate for the purposes of LLP Act, 2008. Therefore, a HUF or its karta can not
become designated partner in LLP.
3. This issues with the approval of Secretary, MCA
Yours fa
Copy to:
1. All Concerned.
2. PS to CAM.
3. PPS to Secretary, Additional Secretary, Joint Secretaries
21.
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