DEFINITION OF PARTNERSHIP
The present definition replaces Section 239, Indian Contract Act. The present Act adopts Pollock's definition with slight modification.
Section 4 of the Indian Partnership Act, 1932 defines 'Partnership' as under:
4. DEFINITION OF 'PARTNERSHIP', 'PARTNER', 'FIRM' AND 'FIRM NAME'
'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.
ESSENTIALS OF PARTNERSHIP:
According to Section 4, the following essentials are necessary to constitute a 'partnership'.
1. There should be an agreement (either express or implied) between the persons who want to be partners.
If the basis of the relationship between certain persons is not an agreement, the association would not be a partnership, as in case of HUF, which arise from status.
To make the things further clear, Section 5 expressly provides that 'the relation of partnership arises from contract and not from status.’
COMPETENT TO CONTRACT
Persons entering into relationship of partnership must be competent to contract.
A person, incompetent to contract may not become partner but he (minor) can be admitted to benefits of partnership (Section 30).
HUF
An H.U.F. cannot become a partner of a Partnership Firm because its not an individual but association. It can only be individuals and not a body of persons, who can be a partner.
PARTNERSHIP FIRM
A Partnership Firm is not a legal person and, therefore, a firm as such is not capable of entering into partnership with another firm or individuals.
COMPANY
A partnership could be formed between a number of companies as the Company is a legal person.
INSOLVENT PERSON
The Partnership Act does not directly mention that only a solvent person can become a partner but Section 34, however, states that when a partner is adjudicated insolvent, he ceases to be a partner. In view of this provision, only such person who is not insolvent can become a partner.
2. The purpose of creating partnership should be carrying on of business.
It may be any business which is not unlawful. The Act defines business as including 'every trade, occupation or profession. The definition is not exhaustive and is capable of including any kind of commercial activity aimed at earning profits.
Purchasing goods for self-consumption does not amount to business.
COOPE V. EYRE
In Coope v. Eyre, there was an agreement between Eyre and Co. and three other persons that Eyre & Co. would purchase some oil and distribute the same between itself and the other three persons and others would then pay for the oil to Eyre and Co. at the purchase price.
The purchase was made only in the name of Eyre & Co. without any notification to the plaintiffs that any other persons
had any concern in it. Eyre & Co. became bankrupt and the seller of oil sued the other three persons, who had shared the oil to recover the price of oil.
It was held that the oil in this case was not meant for re-sale and, therefore, there was no business being carried on by Eyre & Co. and others and hence there was no partnership between them.
Since Eyre & Co. had purchased the oil on its own account and not as agent or partner of the other three persons, the other persons could not be made liable for the same.
Business should be lawful and not opposed to public policy.
Business should be 'carried on' by all the partners or any of them acting for all of them. Carrying on of a business involves a series of transactions. Merely a single isolated transaction of purchases and sale by a number of persons does not mean carrying on of the business.
3. THE MOTIVE FOR THE CREATION OF PARTNERSHIP SHOULD BE EARNING AND SHARING PROFITS.
Therefore, clubs or societies which do not aim at making profits are not partnerships.
Although sharing of profits is one of the essential elements of every partnership but every person who shares the profits need not always be a partner.
For example, I may pay a share of profits to the manager of my business instead of paying him fixed salary so that he takes more interest in the progress of the business, such person sharing the profits is simply my servant or agent but not my partner.
At one time it was thought that a person who shared the profits must incur the liability also as he was deemed to be a partner. This rule was laid down in GRACE V. SMITH, in 1775 and it, was stated by Grey C.J. that 'every man who has the share of the profits of a trade ought also to bear his share of the loss.'
This principle was confirmed in 1793 in WAUGH V. CARVER.
In 1860 this question came for consideration before the House of Lords in COX V. HICKMAN. In that case it was laid down that the persons sharing the profits of a business do not always incur the liability of partners unless the real relation between them is that of partners.
The principle laid down in Cox v. Hickman forms the basis of the provisions of S. 6 of the Indian Partnership Act, which gives a caution that the presence of only some of the essentials of partnership does not necessarily result in partnership.
The provision contained in Section 6 is as follows:
6. MODE OF DETERMINING EXISTENCE OF PARTNERSHIP
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 relevant facts taken together.
EXPLANATION. 1
The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.
EXPLANATION. 2
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 the 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 of itself make the receiver a partner with the persons carrying on the business.
SALARIED PARTNERS
Sometimes, there is a possibility that a partner may not get the payment contingent on the profits. He may be paid salary or a fixed sum periodically, say every month or every year, in lieu of profits.
R.N. KOTHARE V. HORMASJEE
In R.N. Kothare v. Hormasjee, there was an agreement between two partners that one of them was to get a salary of Rs. 500/- p.m. in lieu of profits, and moreover, he was not responsible for any loss or liability of the firm. It was held that there, was a valid partnership in which one of the partners was a 'salaried partner.' If the real relationship is that of partners, merely because one of them does not share the profits does not negative that relationship.
VALIDITY OF PARTNERSHIP DOES NOT DEPEND UPON CONTRIBUTION OF CAPITAL BY A PARTNER
Contribution of a capital by a partner is not the sine qua non for the validity of partnership.
As per Section 18 of the Indian Partnership Act, 1932, every partner is the agent of the firm, therefore, the act of a partner would be treated as 'act of a firm' which is defined in Section 2(a) of the Partnership Act.
As per Section 185 of the Indian Contract Act, 1872, consideration is not necessary for creation of agency, hence even without making any contribution towards capital a person can validly become a partner of a firm.
4. MUTUAL AGENCY
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 a 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'.
PARTNERSHIP FIRM—NOT A SEPARATE LEGAL ENTITY
FIRM'S PERSONALITY FOR TAX PURPOSES
It has been noted above that a firm has no existence of its own. It is a compendium of partners. It cannot be recognised as entity.
The law, however, recognises partnership firm as a distinct personality only for the purpose of income-tax by
varieties of specific provision under the Income-tax Act distinct from the members composing it.
For the purposes of tax laws, a firm is a taxable unit or a person, different from the partners, and in that sense it has personality of its own. To the extent a partnership firm is recognised as a person under different tax laws, the provisions of the Partnership Act do not apply to such situations.
