NATURE OF PARTNERSHIP

APPLICATION
The Indian Partnership Act of 1932 (Act IX of 1932) applies
to partnerships created by agreement between parties. The Act
is not retrospective; it does not affect any right, title interest,
obligation or liability acquired or incurred betorc the act came
into operation in 1932. (Sec. 74). The Act is not exhaustive. It
does not apply to joint Hindu Family firms.

/}Hf ESSENTIAL ELEMENTS OF A }'ARTNERSHIP"

~efinition and characteristics
Section 4 of the Partnership Act defines a partnership as
follows: "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." A partnership, as defined in the Act,
must have three essential elements :
I. There 'must he an agreement\,entered int~by two or more
persons.
~he agreement must be to share the profits of a business. D
3. The business must be carried on by all or any of them
acting for all.
0 . Voluntary Agreement
The first element~<?wsl the yoluntary contractual rMme of
partnership, ,A partnership can o;>nly arise as a result of an
-agreement: '-express or imp Iied, between two or more persons~
where'ihere is no agreement there is no partnership_ But a
partnership cannot be formed with more than ten persons. in
-banking and twenty persons in other types of business! A
partnership with persons exceeding the above _limits muSt be
registered under _a Compaiiies Act.
- "Person"-See p. 251 -- ---
tartnership is not created by status!: Section 5 states that,
"The relation of partnership arises from contract and not from
status_" In particular the members of-a Hindu undivided family

248
•
 •

NATURE OF PARTNERSIlIP 249

carryirig on a family business, as such, are not partners in such

business.
Example:
The sole proprietor of a business dies leaving a number of heirs.
The heirs inherit the stock in trade of the business including the
goodwill of the business but do not become partners until there in
an agrcemen~, express or impli~d, to cartY on \he business as
partners. '~ifab;b Bux v. Sa~1Ue!. Fi!~ ~u) ~;' j,

2. Sharing of Profits of a Business V"

The second element states the motive undcrlying the infor-
mation of a partnership. \t also lays down that the existence of
a busireg is ~sential to a partnershi . Business includes any
trade. occupation or pro e. . two or more persons join
together to form a music club it is not a partnership because
there is no business in this case. Ilut if two or more persons
join together to give musical performances to the public \\ ith
a view to earning profit. there is a business and a partnership
is formed.
3. Mutual Agency.../'!
The third element is the most important feature of partncr-
ship.( It states that persons carrying on business in partnership
are agents as well as prinCipals. The business of a firm is carried
on by all or by anyone or more of them on behalf of all. Every
partner has the authority to act on behalf of al\ and can, by his
actions, bind all the partners' of the firm, Each partner is the
agent of the others in all matters connected with the business
of the partnership. The law of partnership has therefore becn
called a branch of the law of agency.
The Tests of a True Partnership
~
In a true partnership. all the essential elements mentioned
aboye must be present. Section 6 of the Partnership Act lays
down 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 a\l relevant facts taken together.
If all the relevant facts taken together show that a\l the three
'11925) 23 All. L. 1. 96t
250 THE LAW OF PARTNERSHIP

essential elements are present, the group of persons doing

business together will be called a partnership.
Of the three elements, the second element, viz., sharing of
profits, is important but not conclusive. ShariQg of profits may
exist under circumstances where there is no question of partner-
ship. As examples the following cases may be cited :
(i) A creditor taking a share of profits in lieu of interest and
part-payment of principal.
(ii) A creditor who supervises the conduct of a debtor's trade
with an agreement that he will be paid out of the profits
of the business. The creditor does not thereby become his
partner. Mollow March & Co. v. Court oj Wards.'
(iii) An employee getting a share of profits as remuneration.
(iv) Share of profits given to workers as bonus.
(v) Share of profits given to the widow or children of deceased
partners as annuity.
In all the above cases the third essential element of
partnership, (viz .. agency) is absent. A creditor .or an employee,
or the widow and children of deceased partners cannot bind the
firm by any act done on behalf of the firm. Only those who have
authority to bind the firm by their actions can be called partners.
Thus, the most important test of partnership is agency and
authority.
The tests of a true partnership were first laid down by the
House of Lords in the case of Cox v. Hickman. 2 In that case,
-a debtor transferred his business to trustees with instructions to
carry on the business and use the profits for paying his creditors.
It was held that the creditors were not partners of the business.
Section 6 of the Partnership Act is a comprehensive restatement
of the rule laid down in this case.
Circumstances which the court must take into consideration
in determining the existence oj partnership : The court must take
into account all the relevant circumstances, e.g., the terms of the
agreement, if any; the conduct of the parties; the mode of doing
business; who controls the property; the mode of keeping
accounts; the manner of distribution of profits etc.
Sharing .oj losses : Sharing of losses is a consequence of
partnership rather than a test of partnership. Losses arc not

1(1872) L.R. 4 P.C. 419 '(1860) 8 H.L.C. 268

 NATURE (,f PARTNERSHIP 251

mentioned in the definition of partnership as given in Section 4.

Bu! in determining whether a partnership exists or not, the court
must take into account how losses are shared. In Raghunandan
v. Hormasjil it was held that partners may agree that one or more
of them shall not be liable for losses. But such an agreement
will be binding only among themselves. All the partners will be
liable to third parties for the debts of the firm.
Who can be a partner?
I. Person: Under the _ _ Partnership Act, a person may
be partner if he has the capacity to enter into a contract
("Capacity of parties" see p. 49)
Who is a 'person'? For the purposes of the Partnership Act,
the. term 'person' does not include a partnership or a limited
company. Thus a Company P cannot form a partnershi with a
Company Q. G. M Refining Co. v. Commr. of /- Tax. 2 .i9Li 9
Similarly. a fir", X cannot orm a partners Ip Wit'· firm Y
But all the partners of firm X and all the partners of firm Y
can .form a single partnership, subject to the rules regarding the
number of partners. (See, Section 11, p. 254 and para 5 below).
2. Minor: A minor cannot be a partner. But in an existing
partnership, a minor can be admitted into a firm if all the partners
of the firm agree. (See p. 271) Such a minor gets all the benefits
of the partnership.
3. Person of unsound mind : A person who is of unsound
mind Cinnot become a partner.
4. ;Voman: A woman can be a partner, married or unmarried.
Of course a woman cannot be a partner if she is a minor or
she is of unsound mind.
'-P. Company : In a Company the capdcity to enter into
contract IS determined -by the Memorandum and Articles of the
Association of the company. The liability of the members of a
firm under the Partnership Act, for the debts of the firm, is
unlimited. But a company cannot incur unlimited liability.
Therefore a company cannot become a partner of a firm.
6. An alien enemy:cannot enter into a contract of partnership
with a citizen of India. (See p. 55)

'(1949) 51 Born. 342 1 AIR (1967), Cal. 429

252 THE LAW OF PARlNERSHlP

PARTNERSHIP AND CERTAIN SIMILAR

ORGANISATIONS
Partnership and Co-ownership
Co-ownership means joint ownership. A and B jointly
purchase a horse. They are co-owners but not necessarily
partners. The distinction between co-ownership and partnership
can be described as follows :
4. In a partnership each partner is the agent of the others
but a co-owner is not the agent of the other owners. The rights
of a co-owner cannot be affected by any act done by the other
owners.
4'2. Partnership always arises out of agreement. Co-ownership
may arise by agreement or by operation of law. A and B inherit
a house from their father. They become co-owners by operation
of the law of inheritance. Habib Bux v. Samuel Fitz & Co. (See
p. 249)
.'l'3. A ,a-owner can trtlnt(er his interest to a third party
without the consent of the other co-owners. t2 partner can transfer
his interest, under certam circumstances, but the transferee can
n'ever become ~rtner of the business without the consent of
the other partners .
.?t. A partnership ~ays implies a business. Co-ownership
may exist without any business, e.g. joint ownership of a
residential house.
~5. Since co-ownership may exist without a business, the
question of sharing profits or losses is immaterial if! a co-
ownership. In a partnership there must be sharing of profits.
6. A partner has a lien on the partnership assets for moneys
spent by him for the partnership. A co-owner has no lien under
.
simi lar circumstances .
Partnership and a Club
A club is an 'association of persons' formed for social
purposes. It differs from a partnership in the following respects-
it is not a business; there is no motive of earning profits and
sharing them; a member of a club is not the agent of the other
members; a member is not responsible for the debts of the club
unless he participated in the transaction; and, the death or
resignation of a member does not affect the existence of the club.
 NATURE OF PARTNERSHIP 253

Partnership and a Company

See Company Law, Book XI.
Partnership and a Joint Hindu Family Firm
A Hindu joint family wMch carries on a trade inherited from
its ancestors is called a Hindu Joint Family Firm. Such firms
are very common in India, particularly among Hindus governed
by the Mitakhsara school. The points of difference between such
a finn and a contractual partnership can be enumerated as
follows :
I. Method of creation : A partnership is created by agree-
ment; a joint family firm is created by operation of law.
Membership of a joint family firm is the result of status, i.e.,
position of the person concerned as member of a joint family
or coparcenary.
2. Authority oj members: In a joint family firm the manager
or Karta has authority to bind the members by all acts coming
within the scope of the joint family business but no other
members has any such authority. In a partnership every partner
has authority to bind the firm by his actions and can participate
in the business of the firm.
3. Liability af members: In a partnership every partner is
liable to an unlimited extent for the debts of the firm. In a joint
family firm only the Karta has unlimited liability; the other
members are liable only to the extent of their share in the joint
family business.
4. Position of minors: The minor members of a joint family
are members of the firm from the date of their birth. In a
partnership a minor cannot be a member, except in onc special
case. (See p. 271) The reason is that a partnership is the result
of an agreement and a minor does not have capacity to enter
into an agreement.
5. Position of women : A woman can be a partner under
the Act, but not in a Joint Hindu Family finn.
6. Number of members : In a contractual partnership, the
number of members must not exceed lOin a banking firm and
20 in other kind of firms. There is no limit on the number of
members in joint family. firms. r
7. Death of memb'ers' : The dcail]"of a member of a joint
family finn has no effe'ct on the firm.Jhe firm continues with
\
254 1lfE LAW OF PARnlERSHlP

the other members. In a partnership, dcath of a partner dissolves

the firm unless otherwise agreed by thc partner's.
-P;gistration : In a partnership registration is optional. A
jomt family firm does not require registration.
9. Dissolution and accounts: A member of a joint family
firm when severing his connection with the firm cannot ask for
accounts of past profits and losses, but a partner of a firm under
similar circumstances can.
10. Law : A partnership is governed by the Partnership Act;
a joint family firm is governed by Hindu law.
II. Partnership: The karta of a joint Hindu family and an
undivided member of that family can join a partnership. But the
Hindu undivided family cannot as such enter into a contract of
partnership with another person or persons. Commissioner of
Income Tax, W B. v. Kalu Babu. I
12. A floating body: A Hindu undivided family is a floating
body. Its composition changes by births, deaths, marriages and
divorce.
13. Ullity of oWllership : In a joint Hindu family business
no member of the family can say that he is the owner of one-
half, one-third or one-fourth. The essence of joint Hindu family
property is unity of ownership and community of interest, and
the shares of the members are not defined. Nanchand Gallguram
Shetji v. Mallappa Mahalingappa Sadalge alld other. 2
14. A precarious existence: A partnership is likely to have
a precarious existence, because a partnership can be ended at
any time. Aggarwal & Co. v. Commissioners of Income Tax. l

PARTNERSHIP FORBIDDEN BY LAW

Number of partners : Section II of the Companies Act,
1956 prohibits the formation of the partnership for the purpose
of carrying on the business of banking with more than ten persons
and for any other purpose with more than twenty persons. If it
is desired to carry on business with more than' 10 or more than
20 persons for banking and non-banking business respectively,
a company must be fonned.
2. An agreement to form a partnership, for the purpose of
carrying on an illegal trade ora prohibited trade, is void,
I AIR (1959) Supreme Court 1289 ,2 AIR (1976) Supreme Court 835
3 AIR (1970) Supreme Court 1 3 4 3 " .
 NATURE Of PARTNERS
2S~
Firm, Firm-name, Partner
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."-Sec. 4, para 2.
lie Legal Status or a Firm
il"\A firm is not an artificial person like a company. It is merely
a collective name for the individual who are trading in partner-
ship. Therefore, a firm is not a legal person or a legal entity.
A partnership firm cannot be distinguished from its partners. The
rights, duties and obligation of a firm are actually the rights,
duties and obligations 0 th jlMSOns who own the firm.
~ Classes or P e
Partners can be classified as below :
£ 'Active Partner : An active partner is one who actually
participates in the business of the firm. A person becomes a
partner only by agreement.
.~ Dormant. Sleeping Or Nominal Partner : These partners
join the finn by agreement but do not take any active part in
the business. Their liabilities are same as of Active Partners.
1f' Sub-Partner : The transferee of a share of a partner's
interest in a fimt is called a Sub-Partner. Suppose P. the owner
of ~ of finn, transfers ! of his share to Q. Q will be called
a sub-partner. His rights and liabilities are limited.
Name of a Partnership
The partners may select any finn-name they please, subject
to the following restrictions :
(0) They must not select a name which will fraudulently
imply that their business is the same as some other competing
concern.
(b) They cannot use words like 'President', 'Royal', etc. which
will imply that the finn is enjoying the patronage of the state.
The names of all the partners may be used together as the
firm-name or the name of any particular partner may be so used.
It may happen that the name of a partner is used as the finn-
name but that name is identical ",:ith the firm-name of a ri\'al
 256 THE LAW OF PARTNERSHIP

trade. This is not illegal. A man is·entitle4 'to use his own name
for carrying 011 business even though it i~ identical with, the name
of another person carrying 011 a similar business. But' if there
is any fraudulent intention, he may be stopped from doing so.
Turton v. Turtoll. l .

~Classes of Partnershil!.s
Partnerships can be classified as below :
,.1. Partnership-at-w.: I : A partnership is called a partnership-
at-will (I) when the partr. ership is !fat for a fixed period of time
and (ii) when no provision is made as to when and how the
partnership will come to an end.-Sec. 7.
A partnershlp-at-wIII can be dissolved whenever any partner
chooses to do so.
2 Particular Partllership--Joint Venture : A particular
partnership is one which is formed lor a partic'ular allventure or
a particular undertaking. (Sec. 8). Such a ·partnership is usually
dissolved on the completion of the adventure or undertaking.
3. Limited Partnership : In Great Britain, according to the
provisions of the Partnership Act of 1907, a partnership may be
formed ill which the liability of all partners (except one) is
Iimited. There must be at least one partner with unlimited
liability. In India there is nO such provision. In India the liability
of all the partners must be unlimited.
Partnership Property
The property of the firm includes all property and rights and
interests in property originally brought into the stock of the firm
or acquired by purchase or otherwise, by or for the firm. or for
the purposes and in the course of the business of the firm, and
includes also the goodwill of the business.-Sec.14.
Thus, property of the firm means (i) property originally
brought in by the partners, (ii) property obtained while the firm
wa~ in business and (iii) the goodwill of the firm.
Goodwill of a firm is an asset of the firm. In the absence
of any provision expressly made or clearly implied, the normal
rule is that the share of a decreased partner, including goodwill,
devolves upon his legal representatives. Khurshal Khengar Shah
& Ors. ~.i Khorshedballu Dadiba Boatwalla & Drs. 2

'(1889) 42 Ch. D. 128 2 (1971i S.C.A. 16 (Sup'en:'e <;:oan) .

 NAlURE OF PARTNERSHIP 257

Unless the contrary impression appears, property and rights

and interests in property acquired with money 'belonging to the
firm. are deemed to have been acquired for the firm.
Application of the property of the firm : Subject to contract
between partners the property of the firm shall be held and used
by the partners exclusively for the purpose of the business.-
Sec. 15.
Examples of Partllership Property: A partnership is formed
witlt X. Y and Z as partners. }( contributes to the stock of the
firm a plot of land, Ya motor lorry and, Z t~e sum of Rs. 10,000.
Subsequently the firm purchases, out of its earnings, a house.
All these properties, and the goodwill of the business, are
properties of the firm.
Goodwill
Goodwill is not defined in the Partnership Act. Goodwill may
be described as the advantage which is acquired by a firm (over
and above the value of the stock-in-trade and capital and funds)
from the connections it has built up with its customers and the
reputation it has gained.
"Goodwill, I apprehend, must mean every. advanlage .... that
has been acquired by the old firm in carrying on its business,
whether connected ~ith the premises .in which the business was
previously carried on;' or' with the name afthe late firm, or with
any other matterearrying with it the benefit of the business."
Churton· v. Douglas,' '
"The gOodwill of a business 'is the whole advantage of the
reputation and 'connexion formed with customers together with
the circumstances, whether of habit or otherwise, which tend to
make such connexion permanent. it represents in conn~xion witll
any business or business product the value of the attraction to
customers which the name and reputation possesses."-Halsbury. 2
GO\?dwill is part of the prdperty of the' firm. Section 55 of
the Partnership Act provides that in setting the accounts of a
firm after dissolution, the goodwill shall. subject to contract
between the partners,' be includ~ in the assets and it may be
sold either separately or along with other property of the firm,

'(1859) 28 L.J. Ch, 841, 845 'La... of England. 3,d Edition, p. 360

C omme,cial Law - 17
2S1 THE LAW OF PARTNERSHIP

At the time Qf valuation of goodwill 1\ IS necessary to

consider the type of business and the type of customer which
such a business is inherently likely to attract as well as all the
surrounding circumstances. Mehl'1l Belgam Vola and another v.
G. Bell cf Co. and others. I
The rartttenhip Agree.eat
The agreement to carry on business in partnership may be
oral or in writing. If it is in writing, the 004;ument in which the
terms are incorporated is called the Deed of Partnership or the
Articles of Partnership.
Written documents of partnership usually contain exhaustive
provisions regarding matters concerning the business and the
relationship between the partners. The following matters are
generally included: name and address of the partners; firm-
name; nature of business; place of business and the business
address: duration of the partnership and the mode of dissolution :
the amount of capital to be contributed by each partner; the share
of profits to be taken by each partner; the mode of management ;
the powers of the partners; terms on which a partner can retire ;
expulsion of partners; introduction of new partners etc.

* REGISTRADON 0' fIRMS

The registration of a partnership is DOl compulsory.
an unregistered firm is not an _!lJegaL~iation... But . ~
unregiSl~ff~ XtolllC~rtajn_cliSlibilitics and tbeRfoR
~
rellSbailon is necessary for cmying on
---- ----- -- ---- -~~ - -- --- ----_.-- -----'!!!linn. ._~-

..... , .......tia., ..........

( (~tions 56-71). The rqiS1nllioil of a flflll ~ be cft'ccted
at any time by sending by post or dcliveriDg to the .......
of Finns of the locality. a ~ in the pmc:ribed f _ IIId
accompanied by the prescribed fcc, stating the following
particulars; (q) the f~ (6) the place or principal place
of business of the fina, (c) tile a.ncs of any othc.- plac:cs where
the flflll carries on business, (d) Jbe date when each partner joined
the firm. (e) the names in full and permanent addresses of the
partners and if) the duration of the firm.
I AIR (1913) Mad 3$1
 NATURE Of PARTNERSHIP 259

t The statement shall be signed and verified by all the partners,

or their agents specially authorised on this behalf. On receipt
of the statement and the fees, the, Registrar records an entry of
the statement in the Register of Finn and the firm is thereupon
considered to be registered.
AIterations in any of the above particulars have to be
recorded.
The Register of Firms can be inspected and copies of entries
taken by any person on payment of the necessary fees.
Under Section 56 of the Act, the Government of any State
may, by notification, declare that the provisions relating to the
registration of firms shall not apply to the State or any part
thereof. .....,/'
TI..e ror Registration
A firm may be registered at anytime. Bul an un.registered
firm cannot file certain suits. (See below). A fIrm must be
registered before it can file suits or claim set-off. A firm can
be registered even after the partners have agreed \0 dissolve the
firm.
CODsequeDCH or Non-registration (Sec. 69)
An unregistered lirm and the partners thereof suffer from
certain disabilities :
I. A partner of an unregisteredlirm cannot file a suit (against
the firm or any partner thereof) for the purpose of enforcing a
right arising from contract or a right conferred by the Partnership
Act.
2. No suit can be filed on behalf of an unregistered firm
against any third party for the purpose of enforcing a right arising
from a contract.
3. An unregistered firm cannot claim a set-off in a suit. [' Set-
off" means a claim by the defendant which would reduce the
amount of money payable by him to the plaintiff].
The effect of Section 69 is (I) to bar all suits by an
unregistered lirm against third parties for the enforcement of
rights arising from contracts, and (ii) to bar ;III suits between
partners inter se for the enforcement of partnership rights. ~
section does not bar suits in respect of torts, i.e., civil suits for
damages for the VIOlation of a right. r -
 260 THE LAW OF PARTNERSHIP
·,
Exceptions: There are certain exceptions to the rules stated
abo"e.
L A' partner of an unregisteretl finn can file a suit for the
dissolUiion of the finn and f~r' accounts.
, 2.'Surts can'be filed for the realisation of the properties of
a dissolved firm even though .it was unregistered.
3. The Official Assignee or Receiver can realise the prop-
erties of an insolvent partner of an unregistered finn.
4. There is no bar to suits by unregistered firms and by the
partners thereof in areas where the provisions relating to the
registration' of firms do not apply by 'notification of a State
Government under Section 56.
5. An unregistered finn can file a suit (or claim a set off)
It)r a sum not exceeding Rs. 100 in value, provided. the suit is
of such a nature that it has to be filed in the Small Causes Court.
Proceedings incidental to such suits, e.g, execution of decrees,
are also allowed.
6. An unregistered firm suffers from certain disabilities but
it is not an illegal association. TIlerefore registration of a firm
is optional.

EXERClSES
L What are the essentials of a partnership? (Pages 248·249)
2. What is the test of determining whether a partnership between A
and B does not exist? (Pages 249-250)
J. "Sharing of profits is only prima facie evidence of partnership."
Discuss, (Pages 248-249)
4. What is partnership property? For what purposes can it be used?
• (Page 256)
5. How far can a partner of a firm be considered as an agent of the
other panners? (Pages 249, 264)
6. Explain the following terms: Firm: P"rtner; Donnant; Sleeping
or Nominal Partner; Partnership at will; Partnership property;
Partnership agreement; Goodwill. (Pages 254-258)
7. Must a finn be registered? What arc the effects of non-reg,istration
of a finn? (Pages 258-260)
8. Although regIstration of firms is not compulsory, finns arc usually
registered. \\-'hat arc the disad'vantages qf non-regiST! ~tion of il finn
under tile law of partnership?' . (Pages 2~8-266)
9. Distinguish between the folloWirig :
(a) Part[lershipfinn and'. Hindu' joint'f?mily finn. (Page 253)