Indian Partnership Act 1932

The Indian Partnership Act 1932 defines a partnership as a relation between two or more
persons who agree to share the profits of a business run by them all or by one or more
persons acting for them all. As we go through the Act we will come across five essential
elements that every partnership must contain.

True Test of a Partnership

The true test of a partnership is a way for us to determine whether a group or association
of persons is a partnership firm or not. It also helps us recognize the partners of the firm
and separate them from the third parties.

The idea behind such a true test is to examine the relevant facts and determine the real
relations between parties and conclude about the presence of a partnership.

Let us take a look at the three important aspects of a true test of a partnership, namely
agreement, profit sharing and mutual agency.

1. Agreement/Contract between Parties

For there to be a partnership between two or more persons there has to be an agreement of
partnership between them. The partnership cannot arise family status or any operation of
law. There has to be a specific agreement between the partners.

So if family members of a HUF are running a business together this is not a partnership.
Because there is no agreement of partnership between them. The members of HUF are
born into the HUF, so they cannot be partners.

2. Profit Sharing

Sharing of profits is an aspect of the true test of a partnership. However, profit sharing is
only a prima facie evidence of a partnership. The Act does not consider profit sharing as
conclusive evidence of a partnership. This is because there are cases of profit sharing that
are still contradictory to a partnership. Let us see some such cases

 Sharing of profits/ gross receipts from a property that two or more persons own
together or have a joint interest in is not a partnership
 A share of profits given to an agent or servant does not make him a partner
 If a share of the profit is given to a widow or child of a deceased partner does not
make them partners
 Part of the profits shared with the previous owner as a part of goodwill or as a form
of consideration will not make him a partner.

Now ascertaining this motive becomes difficult if there is no express agreement between
the concerned parties. In such a case we will consider the cumulative effect of all relevant
facts. This will help us to determine the true relationship between the parties.

3. Mutual Agency

This is the truest test of a partnership, it I the cardinal principle of a partnership. So if a

partner is both the principle as well as an agent of the firm we can say that mutual agency
exists. This means that the actions of any partner/s will bind all the other partners as well.

So whenever there is a confusion about the existence of a partnership between people we

check for the presence of a mutual agency. If such an agency exists between the parties
who run a business together and share profits it will be deemed that a partnership exists.

Types of Partners

Here we will look at six types of partners we come across on a regular basis. This list is
not exhaustive, the Partnership Act does not restrict any unique kind of partnership that
the partners want to define for themselves. Let us take a look at some of the important
types of partners.
 1. Active Partner/Managing Partner

An active partner is also known as Ostensible Partner. As the name suggests he takes active
participation in the firm and the running of the business. He carries on the daily business
on behalf of all the partners. This means he acts as an agent of all the other partners on a
day to day basis and with regards to all ordinary business of the firm.

Hence when an active partner wishes to retire from the firm he must give a public notice
about the same. This will absolve him of the acts done by other partners after his
retirement. Unless he gives a public notice he will be liable for all acts even after his
retirement.

2. Dormant/Sleeping Partner

This is a partner that does not participate in the daily functioning of the partnership firm,
i.e. he does not take an active part in the daily activities of the firm. He is however bound
by the action of all the other partners.

He will continue to share the profits and losses of the firm and even bring in his share of
capital like any other partner. If such a dormant partner retires he need not give a public
notice of the same.

3. Nominal Partner

This is a partner that does not have any real or significant interest in the partnership. So,
in essence, he is only lending his name to the partnership. He will not make any capital
contributions to the firm, and so he will not have a share in the profits either. But the
nominal partner will be liable to outsiders and third parties for acts done by any other
partners.

4. Partner by Estoppel

If a person holds out to another that he is a partner of the firm, either by his words, actions
or conduct then such a partner cannot deny that he is not a partner. This basically means
that even though such a person is not a partner he has represented himself as such, and so
he becomes partner by estoppel or partner by holding out.

5. Partner in Profits Only

This partner will only share the profits of the firm, he will not be liable for any liabilities.
Even when dealing with third parties he will be liable for all acts of profit only, he will
share none of the liabilities.

6. Minor Partner

A minor cannot be a partner of a firm according to the Contract Act. However, a partner
can be admitted to the benefits of a partnership if all partner gives their consent for the
same. He will share profits of the firm but his liability for the losses will be limited to his
share in the firm.

Such a minor partner on attaining majority (becoming 18 years of age) has six months to
decide if he wishes to become a partner of the firm. He must then declare his decision via
a public notice. So whether he continues as a partner or decides to retire, in both cases he
will have to issue a public notice.

Elements of a Partnership

The Indian Partnership Act 1932 defines a partnership as a relation between two or more
persons who agree to share the profits of a business run by them all or by one or more
persons acting for them all. As we go through the Act we will come across five essential
elements that every partnership must contain. Let us take a look at them.

1. Contract for Partnership

A partnership is contractual in nature. As the definition states a partnership is an

association of two or more persons. So a partnership results from a contract or an
agreement between two or more persons. A partnership does not arise from the operation
of law. Neither can it be inherited. It has to be a voluntary agreement between partners.
A partnership agreement can be written or oral. Sometimes such an agreement is even
implied by the continued actions and mutual understanding of the partners.

2. Association of Two or More Persons

A partnership is an association between two or more persons. And persons by law only
includes individuals, not other firms. The law also prohibits minors from being partners.
But minors can be admitted to the benefits of a partnership.

The Act is actually silent on the maximum number of partners. But this has been covered
under the Companies Act 2013. So a partnership can only have a maximum of 10 partners
in a banking firm and 20 partners in all other kinds of firms.

3. Carrying on of Business

There are two aspects of this element. Firstly the firm must be carrying on some business.
Here the business will include any trade, profession or occupation. Only that some
business must exist and the partners must participate in the running of such business.

Also, the business must be run on a profit motive. The ultimate aim of the business should
be to make gains, which are then distributed among the partners. So a firm carrying on
charitable work will not be a partnership. If there is no intention to earn profits, there is no
partnership.

4. Profit Sharing

The sharing of profits is one of the essential elements of a partnership. The profit sharing
ratio or the manner of sharing profits is not important. But one partner cannot be entitled
to the entire profits of the firm.

However, the sharing of losses is not of any essence. It is up to the partners whether the
losses will be shared by all the partners. If nothing is said then the losses are also split in
the profit sharing ratio.
Say for example two individuals are operating out of the same warehouse. So they agree
to divide the rent amongst themselves. This is not a partnership since there is no profit
sharing between the two.

5. Mutual Agency

The definition states that the business must be carried out by the partners, or any partner/s
acting for all of them. This is a contract of mutual agency another one of the five elements
of a partnership.

This means that every partner is both a principle as well as an agent for all the other
partners of the firm. An act done by any of the partners is binding on all the other partners
and the firm as well. And so every partner is bound by the acts of all the other partners.
This is one of the most important aspects of a partnership. It is, in fact, the truest test of a
partnership.

Kinds of Partnership

The distinction between partnerships can be done on the basis of two criteria. They are as
follows

 With Regard to the Duration of the partnership – either Partnership at Will or

Partnership for Fixed Duration
 With regards to the extent of the business carried by the partnership – either
General Partnership or Particular Partnership

So let us take a look at these kinds of partnership in some detail.

1. Partnership at Will

When forming a partnership if there is no clause about the expiration of such a partnership,
we call it a partnership at will. According to Section 7 of the Indian Partnership Act 1932,
there are 2 conditions to be fulfilled for a partnership to be a partnership at will. These are

 There is no agreement about a fixed period for the existence of a partnership.

 No provision with regards to the determination of a partnership

So if there is an agreement between the partners about the duration or the determination
of the firm, this will not be a partnership at will. But if a partnership was entered into a
fixed term and continues to operate beyond this term it will become a partnership at will
from the expiration of this term.

2. Partnership for a Fixed Term

Now during the creation of a partnership, the partners may agree on the duration of this
arrangement. This would mean the partnership was created for a fixed duration of time.

Hence such a partnership will not be a partnership at will, it will be a partnership for a
fixed term. After the expiration of such a duration, the partnership shall also end.

However, there may be cases when the partners continue their business even after the
expiration of the duration. They continue to share profits and there is an element of mutual
agency. Then in such a case, the partnership will now be a partnership at will.

3. Particular Partnership

A partnership can be formed for carrying on continuous business, or it can be formed for
one particular venture or undertaking. If the partnership is formed only to carry out one
business venture or to complete one undertaking such a partnership is known as a
particular partnership. After the completion of the said venture or activity, the partnership
will be dissolved. However, the partners can come to an agreement to continue the said
partnership. But in the absence of this, the partnership ends when the task is complete.

4. General Partnership

When the purpose for the formation of the partnership is to carry out the business, in
general, it is said to be a general partnership. Unlike a particular partnership in a general
partnership the scope of the business to be carried out is not defined. So all the partners
will be liable for all the actions of the partnership.
 Business Ownership

Some of the popular types of business organization one can setup in India are as follows:

1. Individual Entrepreneur:

The common form of business organisation in India is one-man business. In agriculture

and retail business, this form is the general rule. In this type of enterprise, the individual
entrepreneur supplies the entire capital (even if he has to borrow); he organizes and
supervises the business; and he alone is responsible for the results, i.e., gets profit or
suffers losses. If necessary, he can employ some persons to assist him.

Merits of Individual Enterprise:

This form of enterprise has certain advantages. The business is generally on a small
scale and all the economies of small-scale production are available.

The chief advantages may be thus summarized:

 Incentive for Hard Work:

Since the risk is entirely his own, the entrepreneur has a great incentive for hard
work. He works long and late. Such a hard work is bound to produce good results.
 Superior Output at Low Cost:
On account of very close supervision over details, quality of the goods is taken
care of and the cost per unit is low. Nobody can waste materials or time or spoil
machinery.
 Customers Satisfaction:
The customers are sent away fully satisfied. This is due to the keen personal
interest that the entrepreneur takes in the business. Even a small complaint can
be promptly attended to.
 Sympathetic Treatment of the Employees:
 The employees can be kept happy and contented. This is due to the intimate
personal relations that exist between the entrepreneur and his employees. He is
in a position to treat them sympathetically.
 Low Overhead Charges:
The staff maintained by the individual entrepreneur is small. Most of the work is
done by the word of mouth and personally. Hence overhead charges are kept
low.
 Independence:
The entrepreneur is his own ‘boss’. He is not to serve another’s will. Such a type
of business suits capable businessmen of small means, who prefer to be
independent.
 Easy Dissolution:
Finally, it is easy to form such a business and simple to dissolve it. This is so
because the proprietor is the only person concerned. One need not be tied to a
business all his life. In case of unsatisfactory result, it can be easily wound up.

Demerits:

But the individual entrepreneur has to face many serious difficulties. The following are
the chief shortcomings of this type of business organisation:

 Limited Resources:
The entrepreneur cannot expand his business to take advantage of increased
demand. He is unable to avail of the opportunities of making profits due to lack
of funds. His business will generally remain on a small scale.
 No division of labour:
The entrepreneur has to look into every aspect of business single-handed, and he
may not be able to do it efficiently. The advantages of division of labour are lost.
 Small Income:
In spite of all efforts, such a business can yield only a small profit. Since the
resources are limited, many profitable ventures are ruled. Business is on a small
scale and income is small.
  Weak Competitive Capacity:
The one-man business cannot compete with a big business. Its life is, therefore,
precarious. Any time cutthroat competition by powerful rivals may kill the
business.
 Backward Country:
A country with small businesses is bound to remain economically backward. It
can never hope to attain industrial or commercial leadership with such a small
and primitive organisation. Not to speak of industrial leadership, it cannot even
occupy a respectable place among the economically advanced countries of the
world.

Conclusion:

In spite of these handicaps, the individual enterprise is not likely to disappear.

Entrepreneurs of ability do not like to enter into partnership or to take up a job in a
public company. They prefer to run their business independently and be content with
whatever profits they make. Agriculture and retail stores must generally remain the
sphere of the individual entrepreneur.

2. Partnership:

Sometimes the one-man business reaches such a stage of development that it becomes
too unwieldy for one man to be able to carry on. The original entrepreneur may become
too old for work. It would seem essential then to take a younger person into partnership
to prevent the firm from decaying. Individual ownership thus naturally develops into a
partnership.

Partnership may also be formed to start a new business altogether. Two or more persons
combine together to do business. Their mutual relations, their rights, and duties, the
capital each is to put in, the proportion in which profits and losses are to be shared are
laid down in the partnership deed. The agreement also lays down the aims of the
partnership as well as the manner in which it can be dissolved. The agreement may be
verbal or in writing.
  Unlimited Liability:
From the legal point of view, each partner is a fully authorised agent of the
partnership, and every partner has the power to bind the other partners to any
contract that he may enter into. Each partner is responsible for the debts of the
firm, not only to the extent of his share in the business, but to the full extent of
even his private resources. In other words, the liability is unlimited.
 Limited Partnership:
There is also a type of partnership in which one or more partners can get their
liability for the partnership debts limited to their share capital or to a fixed
proportion of it. This is called a limited partnership. But the liability of all
partners cannot be so limited. It is essential that there are some partners whose
liability is unlimited. The partners with limited liability cannot take active part
in business. They are called dormant or sleeping partners.

Merits of Partnership:

A partnership has some obvious advantages over individual proprietorship. The

partnership business is small but not too small. It enjoys all the advantages of small-
scale business as well as some economies of large-scale business too. They are:

 More Capital:
It commands large capital resources. As the liability of each partner is unlimited
and all partners are jointly and severally responsible for the payment of debts,
the creditors feel more secure about the money they may have advanced. Hence,
it is easier for a partnership to raise funds. They are thus able to do business on
a large scale reaping the economies of scale.
 Diverse Talent:
 Partnership brings about a pooling of skills and ability. Diverse talents are at the
service of a partnership, and a certain degree of specialization is possible among
the partners. Specialization makes for higher efficiency. A looks after the store,
B is in-charge of the office and C runs the factory. This division of labour proves
advantageous and fruitful.
  Correct Decisions:
In a partnership, there is less possibility of error of judgment. A problem is
examined from more than one angle and the decision arrived at is likely to be
sounder than in a one-man business.
 Vigour and Zeal:
The partners work with great enthusiasm and vigour. Every partner is supposed
to be deeply interested in the business and is expected to give it his best.
 Prompt Decisions:
The partners are in continuous and intimate touch with one another and prompt
decisions can be taken. In business, time factor is very important. A partnership
can take full advantage of each business current, and it can decide on a suitable
course of action before it is too late.
 Personal Relationship:
Partnership can maintain personal relationship with the employees and the
customers. This is highly conducive for a good business.

Demerits:

A partnership suffers from the following drawbacks:

 Unlimited Liability:
Since the liability of a partner is unlimited, he can be held liable for the whole
debt of the firm, not necessarily his own share. This frightens away the moneyed
people. They are reluctant to join those who may have ability but no capital.
 Timid and Unenterprising:
Owing to unlimited liability, a partnership follows a timid policy. Each partner
is anxious that the partnership should not run big risks and incur heavy liability,
for any one of them can be called upon to pay the entire debt of the firm. Hence
they become unduly cautions.
 Less Work and More Waste:
It is generally seen that a partner shirks work. Every partner tries to shift some
work on to the other. But he wants to get the utmost out of the business. The
 partnership fund, being a common fund, is spent by every partner recklessly.
Each partner tries to enrich himself at the expense of the firm. Hence it is
wasteful.
 Mutual Dissensions
Misunderstandings generally arise and the work suffers. Quarrels among the
partners are quite common. No partner then pays any serious attention to the
business
 No Permanence:
The partnership has to be dissolved in case of retirement, death, insolvency or
insanity of a partner. There is thus no continuity of life in a partnership.
 Money locked up:
A partner is wedded to the partnership for ever. No partner can transfer his
interest in the firm to anybody else without the unanimous consent of the other
partners.
 Insufficient Funds:
A partnership has generally insufficient resources for undertaking any
manufacturing or business activity on a large scale. It thus suffers from the
disadvantages of small-scale production and is unable to enjoy the economies of
large-scale.
3. Joint-Stock Company:

The most important type of business organization today is the joint stock company. In
fact, only in this manner can a business be organised on a respectable scale.

 Organisation and Finance:

A limited company is organised in this way: An entrepreneur conceives a scheme
of business; he secures the co-operation of at least six more persons, for the
minimum number of persons to form a company is seven. They take steps for the
formation of the company.
They draft the Memorandum of Association, which contains the name of the company,
the location of the head office, its aims and objects, the amount of share capital, the kind
and value of shares, and a declaration that the liability is limited.

Articles of Association, containing the rules and regulations of the company, are also
drafted. These two documents are submitted to the Registrar of Joint-Stock Companies.
If the Registrar is satisfied that the requirements of the law have been fulfilled, he issues
a certificate of incorporation. The company then comes into existence.

The promoters of the company then canvass for the sale of shares. The shares are of
several kinds—Preference, Ordinary and Deferred. The preference shareholders have
the right to be paid first out of the profits, before anything is paid to the other
shareholders. The preference shares may be cumulative preference shares, in which case
the holders are entitled to receive a fixed dividend even for the years when there is no
profit.

Their dividend goes on accumulating. Or, they may be non-cumulative preference

shares, in which case the shareholders will get dividend only for the years when the
company has made enough profit to pay them.

After the preference shareholders are paid dividend at the fixed rate comes the turn of
the ordinary shareholders for getting the dividend. Last of all rank the deferred shares.
These shares are generally held by the promoters themselves. They are a few in
numbers. Whatever is left of the total profit, after other types of shareholders have been
paid, is distributed among the deferred shareholders, and it may happen to be quite
substantial. This device is, therefore, adopted by the promoters of the company to keep
to themselves the lion’s share of the profits.

Besides raising capital by selling shares, the company may also raise funds by sale of
debentures or bonds. The debenture is document showing the loan taken by the
company. Unlike the shareholders, the debenture-holders do not take any risk. Profit or
no profit, they must get their interest. They are the creditors of the company.
The shareholders then elect directors to manage the business on their behalf. The
directors have to justify their policies before the shareholders in the annual meeting. If
the shareholders are not satisfied, other directors may be elected in their place.

The board of directors only lays down the general policy and discusses major issues.
The day-to-day business is carried on either by the salaried secretary, manager,
managing director or the managing agents. Since April 1970, managing agency system
has been abolished in India.

Public Limited Company. The joint-stock company may take the form of a public
limited company. Such a company has to submit certain statements and the balance-
sheet to the Registrar of Joint-stock Companies yearly. It can invite the public to buy
shares by issuing a prospectus. There is no maximum limit to the number of
shareholders; the minimum limit is seven. Business cannot be started unless the
minimum capital laid down has been subscribed.

Private Limited Company. This type of company is free from the necessity of
submitting certain returns to the Registrar. But there are certain restrictions. If cannot
issue a prospectus. The maximum number of shareholders is limited to 50.

Joint-stock Company and Partnership Compared:

From the above description of a joint stock company, we can easily notice some
essential features which distinguish it from a partnership. The number of shareholders
in a company is very much larger than in a partnership. It may run into thousands, and
they are scattered through the length and breadth of the country, sometimes the world.
The number of partners, however, is generally very small and the contact between them
is close and continuous.

The financial resources of a joint-stock company are much larger:

No partnership can raise so much capital. Since the partnership cannot sell shares, it has
to depend on its own resources. The liability is limited in a joint-stock company,
whereas it is unlimited in the case of partnership. A partner can be called upon to pay
the entire debt of the business; even his private property can be attached. But the liability
of a shareholder in a company is limited to his share capital only.

The company is a legal person and, as such, it can sue and be sued upon. In the
partnership, the partner can sue and be sued up in personally, and right in the name-of
the firm. Being a legal person a company can own property and enter into business
contracts.

The existence of a limited company has a legal sanction:

It is brought into existence according to an Act of the State and works under the
supervision of law. The partnership comes into the grip of law only when the law is
invoked against it. The partnership can change in any lawful business? But a company
cannot go beyond what has been laid down in the Memorandum of Association.

A company has a perpetual existence:

The retirement or death of a shareholder or a director cannot bring about the dissolution
of a company. But a partnership comes to an end when a partner retires, dies, or if he
becomes instance or bankrupt. Hence, a company is a permanent body and can go on
forever.

Personal relationship is of no importance in a company, whereas it is vital in a

partnership. This is shown by the fact that a shareholder may sell his shares without the
consent of the company. But no partner can transfer his interest in the firm to another
person without the consent of all other partners.

In a partnership, the owners themselves manage the business. In fact, every partner has
a right to take part in business management. But in a company the shareholders, who
are the owners of the company, entrust the work of management to a board of directors.
Ownership is thus separated from control.

Merits of Joint-Stock Organisation:

Let us now enumerate the merits of the joint-stock type of organisation:

 Economies of Large Scale:

The large financial resources of the company enable it to undertake business on
a scale large enough to realise internal and external economies of scale. These
economies are: use of modern machinery, division of labour, economies in
buying and selling, lower overhead charges relating to distribution, publicity and
administration, research and experiments, etc.
 Limited Liability:
It is a great advantage to have the liability limited. The shares are of different
kinds and the value of each share is quite low. This attracts all sorts of people,
rich and poor, rash and prudent, to invest their capital. Large funds can thus
easily be raised which would not have been possible if the liability were
unlimited.
 Shares Transferable:
A shareholder can sell his shares whenever he likes. He is not tied for life to the
fortunes of a company. When he needs money he can get it by selling his shares.
Thus the investment is quite convenient.
 Economical Administration:
The directors have not to be paid salaries but just a fee tor attending the Board
meeting. Thus the company can get the advice of people of mature wisdom and
ripe experience at a small cost. The administration is, therefore, economical.
 Democratic:
The directors can be removed by the shareholders, if they are not found
satisfactory. The company is therefore a democratic organisation. It is the will of
the general body of the shareholders that is supreme.
 Permanent Existence:
The company has a perpetual existence. Any number of shareholders may leave
it, but the company continues. It can thus afford to launch enterprises which may
reach the stage of profit-taking after a long time.
 Thrift Encouraged:
 By affording opportunities of investment even to men of small means, the
company organisation encourages thrift and saving in the country. This type of
organisation is a great aid in capital formation.
 Legal Control:
The Government exercises control over the working of the company. It has to
conform to certain legal requirements. The object is to prevent fraud and to
protect the interests of the share-holders and the public at large
 Risks spread out:
This type of organisation enables the individual investor to spread out his risks.
Instead of starting a business of his own, he can buy the shares of a number of
joint-stock companies. He need not put all his eggs in one basket. These are some
of the advantages associated with joint-stock from of business organisation.

Demerits:

As against the advantages mentioned above, there are certain draw-backs too in the
company form of organisation

 Rash Enterprises:
The limited liability may encourage rash enterprises to be launched. It is the
shareholders’ money that is involved and the decisions are taken by the directors.
One is tempted to play ducks and drakes with other people’s money.
 Shareholders Indifferent:
The transferability of shares kills the interest of the shareholders in the company.
On account of the indifference of shareholders, the directors are all in all. They
often promote their own interests at the expense of the company.
 Democratic only in Theory:
The directors, self-elected at first, manage to get themselves re-elected every
time by securing proxies. The shareholders who should have ultimate authority
feel helpless.
 Fraud and Exploitation:
 The shareholders are exploited by dishonest directors. Frauds are common. This
frightens away the prospective investor and capital becomes shy.
 Lacking Adaptability:
A company lacks the adaptability and vigour of a partnership. It is a slow-moving
machine. Quick decisions are not possible. This form of business organisation is
thus more suited to business that can be reduced to a routine. When quick
decisions are necessary, it is not suitable.
 Lack of Personal Touch:
The owners of the company, i.e., the shareholders, have no personal touch with
the employees. This impersonal and unsympathetic role results in employees
being often exploited in the name of the shareholders. There are often labour
troubles.

Conclusion:

Weighing advantages and disadvantages, we can say that, on the whole, a joint-stock
company is very desirable and beneficial. This form of business has come to stay and
no country can do without it. First class business can be run only in this form of
organisation.

4. Co-Operative Organisation:

Another form of business organisation is co-operative enterprise. Cooperation is

broadly of two types, namely,

(1) Producers’ co-operation, and

(2) Consumers’ co-operation.

Producers’ Co-operation:

In this form of co-operation, the workers are their own masters. The business is owned
by them. They elect managers and foremen. They are their own employees. The profits,
if any, are divided among them all.
The scheme is very attractive. The “accursed” entrepreneur is done away with and the
profits, instead of enriching a few individuals, go to the actual workers. Nothing could
be more attractive and fairer than this. The workers are supposed to put in very hard
work; and there are no strikes or lock-outs. Co-operation is educationally and morally
useful. It encourages thrift among the workers and prevents them from being exploited.
It teaches them how to run a business and to work in a team spirit.

This, however, is all theory. Actually, co-operative enterprise has proved a failure. It
has generally not achieved the results expected of it. The members are not able to raise
sufficient capital and employ good managers. The workers show lack of discipline and
often refuse to obey orders of their managers. Bickering’s are common. The workers
have powers, but lack of the sense of responsibility. They cannot make success of a
business.

Consumers’ Co-operation:

The consumers living in a particular place, or working in an establishment, combine

together. Each contributes a small capital. A store is opened in which articles of
common use are stocked. Such co-operative stores are found in many colleges schools
and other establishments. Usually goods are sold at market price, and points are
distributed among the shareholders.

This form of co-operation has been very successful. The consumers feel deeply
interested in then own store and extend to it their unfailing patronage. Not much capital
is needed. The management is simple and honorary. There is legal control and
inspection which keep these cooperatives straight.

The drawbacks or the consumers’ cooperatives are that they cannot finance, expanding
business. They offer very little selection for the consumers. The honorary office-holder
do not take pains. Besides being inefficient they are sometimes dishonest. Still the co-
operative stores are very common and are fairly successful.

Other Forms of Co-operation:

The principle of co-operation has been given a very extended application. Co-operative
societies have been formed for a number of purposes. Primary co-operative credit
societies exist in our villages. They are meant to help the small villagers with loans for-
useful purposes.

The aim of such societies is not merely to supply the monetary needs of the farmers, but
also to teach them self-help and thrift. These village societies, when they need more
money, are helped with loans from the central co-operative thinks in the district towns,
which, in their turn, are aided with funds by the State Co-operative Bank.

Besides such co-operative credit societies in the villages, there- are co-operative
societies for all sorts of purposes, credit and non-credit, e.g., for running schools and
libraries, for killing mosquitoes, for purchasing seeds and cattle, for sale of milk, ghee,
fruits, sugar-cane, for consolidation of holdings, and what not.

5. Public Enterprise:

We finally come to a form of organisation known as Public enterprise or State

enterprise. Here the Government, or a local body like a municipality or a Zila parishad,
runs a business. This is generally done in the case of public utility services like gas,
electricity, water supply or bus service.

Advantages of State Enterprise:

The following advantages are claimed for the State enterprise:

 Profits for Public Welfare:

Profits go to the Government, and are utilized for the benefit of the society at
large. Nation-building departments like education and public health can be
liberally financed from the increased resources.
 Pure Supply:
Purity of the supply is guaranteed. There is no incentive for adulteration for a
Government official as there is for a private businessman.
  Ample Funds
Government has ample funds and can borrow more, if needed, in the money
market at low rates. This lowers cost of production.
 Best Talent:
The best talent is attracted towards Government service. The Government can,
therefore, engage a superior staff. The business, therefore, is run better.
 Popular Control:
Government enterprise is more amenable to popular control. Things are not,
therefore, allowed to go wrong. Public cannot be exploited for long.
 Where profit is delayed
Government can afford to wait long for an enterprise to yield profit. Private
enterprise will not be attracted towards these lines. Big business ventures, like
iron and steel works, can be launched largely by the state.
 Consumers’ Interests:
Consumers’ interests are properly safeguarded. This is a great gain to the
community at large.

Disadvantages:

 Evils of Bureaucracy:
There is the tyranny of the bureaucracy. The petty official behaves like a big
boss, and a respectable citizen receives no courtesy. The public is at the mercy
of a big bureaucratic machine.
 No Incentive:
The Government servant has not the same incentive to do his best as a man in
private service. In Government service, promotion is by seniority, and not by
merit. Why should a Government servant worry his head?
 Extravagance and Inefficiency:
There is little check on extravagance and inefficiency. The Government has got
a long purse to draw upon. Taxes can be increased to cover losses. There are no
shareholders to question the directors in the annual meeting.
  No Continuity:
Frequent transfers of Government officials are harmful to successful enterprise.
There is no continuity in policy and the business may be suddenly dislocated.
 No Initiative
The Government business is all routine and there is little initiative. Business of
a pioneering type cannot be attempted; economic progress is, therefore, slow.

Public Enterprises in India:

The public enterprises in India are: the Postal and Telegraph, the Railways, the Steel
Plants, the Heavy Electricals, Heavy Engineering, the Machine Tools Factory, Fertilizer
Corporations, the Reserve Bank of India, the State Bank of India and 20 nationalised
banks, Life Insurance Corporation, Industrial Finance Corporation and the Industrial
Development Bank; and in the States: The State Financial Corporations, the State
Transport Undertakings, State Electricity Boards; and in the Municipalities and
Corporations: Water Works, etc.

Some of these State enterprises are run like government departments such as Post and
Telegraph at the Centre and water works in the municipalities. The railways are run by
an autonomous body, the Railway Board, and the Reserve Bank, State Bank and
nationalised banks by their own Boards of Directors. They are run on commercial
principles and make some profit.

The other enterprises like the Life Insurance Corporation, the Hindustan Steel, the
Industrial Finance Corporation are organised like the joint-stock companies except that
they have no share-holders. Their administration is placed under a general manager or
a chairman with a suitable official hierarchy.

In July 1969, 14 top commercial banks were also nationalised and 6 more in April 1980,
so that commercial banking in India is now largely run as public sector undertakings.
Thus, the public sector in India is steadily expanding 10 occupy commanding heights
in the economy.
 Government Assistance to Small Industries and
Small Business Units and the Future

The contribution of small industries and businesses to the Indian economy is simply
immeasurable. They not only create wealth and employment but are also a big factor in
social development. In fact, so great is their importance that we have a special ministry
dedicated to Micro, Small and Medium Industries. So let us learn how our government
assists and develops these small industries.

Government Assistance

The Indian government has been supporting and developing small unit sectors. India is
focusing on rural industries and cottage industries. According to layman’s language, a
small business is a project or venture that requires a small budget or is run by small group
of people.

Both central and state government have been emphasizing more on self-employment
opportunities in rural sectors by providing help and support in financing in terms of loans,
training in terms of programs, infrastructure, raw materials and technology.

The core purpose of the government is to utilise the local manpower and locally available
resources. Which are further transformed into action by local departments, agencies,
corporations, etc. The support of small industries include:

Institutional Support

1. National Bank for Agriculture and Rural Development

(NABARD)

NABARD established by the government in 1982 to give action and to promote the rural
industries. It has adopted multi-purpose strategies in promoting in rural business in India.
It supports small industries, rural artisans, rural industries, cottage industries along with
agriculture. Also, it sets up training and counselling plus it gives development programmes
for rural entrepreneurs.

2. A Rural Small Business Development Centre (RSBDC)

RSBDC is a government centre sponsored by NABARD for micro, small and medium
businesses which is set up by world organization. The primary purpose of RSBDC is to
work for socially and financially disadvantaged people and groups. RSBDC does many
programmes on skill up gradation, entrepreneurship, awareness, counselling and training.

These programmes motivate various unemployed youth and young women learn different
trades and introduce them to other good benefits from it.

3. National Small Industries Corporation (NSIC)

NSIC was set up in 1995 by the government to popularize and support small businesses
focusing on commercial aspects. The important functions of NSIC are:

 Supply imported goods and machine on hire purchase agreement.

 Procurement of supply imported indigenous raw materials.
 Developing small business by importing their products.
Supervising services.
 Awareness on technical up gradation.

Also, a new scheme called performance and credit rating for small units have been started
by NSIC, this ensures that the more their credit rating, the more their financial assistance
for their investment and capital requirement.

4. Small Industries Development Bank of India (SIDBI)

It is a top government bank to provide direct and indirect financial support under various
schemes to meet credit requirements of various small businesses.

5. The National Commission for Enterprises in the Unorganised

Sector (NCEUS)
NCEUS was formed in the September 2004 by the government with objectives:

 Measures to improve the productivity of small industries in the informal sector.

 Generation of employment in the rural sector.
 Creating links between small sector and finance, infrastructure, raw materials and
technology.
 To create public and private partnerships for engagement in imparting skills for the
informal sector.
 Providing micro-finance for the informal sector.
 Providing social security for the informal sector.
 To introduce competition of small scale in a global environment.

6. Rural and Women Entrepreneurship Development (RWED)

This is a government organisation that focuses to raise the business environment for
women and to support women’s business initiatives. It provides manual for training in
entrepreneurship and renders advisory services.

7. World Association for Small and Medium Enterprises (WASME)

WASME is an international body that is nongovernmental organisation of micro, small

and medium business units in India which establish an international committee and focus
on rural development and apply action plan model for sustained growth of rural industries.

8. Scheme of Funds for Re-generation of Traditional Industries

From 2005, the government established a fund to support these traditional small industries
and to facilitate higher productivity and to enhance their growth and development.

Incentives

The government of India focuses more on the economic and industrial development of
backward, hilly and tribal areas of India. Committees have been established to attest and
support the growth of small-scale industries and business units and to suggest schemes
that are needed.

The programs and schemes vary from state to state. Together they form a package of
benefits and incentives to attract industries in the backward areas. Small industries receive
various benefits from the government of India such as Land, Power, Water, Sales Tax,
Octroi, Raw materials, Finance, Industrial estates and Tax holiday. Even though enough
importance is given to backward areas and small industries, there is still an imbalance in
their economic growth.
 Income Tax Act, 1961
Income Tax Act, 1961 is an act to levy, administrate, collect & recover Income-tax in
India. It came into force from 1st April 1962.

Income Tax including surcharge (if any) & cess is charged for any person at the rate as
prescribed by Central Act for that assessment year. Income-tax Act has provided separate
provisions with respect to levy of tax on income received in advance as well as the income
with respect of which the amount has not yet been received. A person also has to keep
track of his TDS deducted while calculating his final tax liability at the end of the year.

Previous Year:
For Income Tax Act 1961, previous year is defined as the financial year which
immediately precedes the assessment year. In case the source of income is new or the
business set up is new, previous year for that entity will start from the date of setting up of
that business or profession or from the date when the source of income of this new
existence starts and ends in the said financial year.

Exception to Previous Year:

These incomes are taxed as the income of year immediately preceding the assessment year
at the rates applicable to such person.

o Income of a person who is leaving India for a long period or permanently

o Income of a person who is trying to alienate his assets with an intention to
avoid taxes
o Income of a discontinued business
o Income of non-resident shipping companies who don’t have any
representative in India

Scope of Total income:

As per Income Tax Act 1961, the total income of previous year for a person who is resident
of India will include all his income irrespective of source of that income which is either
received or has accrued in India in previous year. However, if person is not an ordinarily
resident in India as per Section 6 of Income Tax Act, 1961, income from the sources which
accrues or arises for him outside India shall not be included in total income. In respect of
non-residents any income which is received or arises in India is taxable in India.

Various Heads for Income under Income Tax Act 1961:

Every income arising to any person will always be classified under one of the following
headers provided by the Act: -

a. Salaries
b. Income from house property
c. Profit and gains of business or profession
d. Capital gains
e. Income from other sources

Type of Taxes:
Income Tax holds its importance for it is the money which tends to support the running of
our government. It is one of the major sources of revenue for the government and thus is
inevitable to not to impose it on the income earned or utilized in the country. It helps meet
the funds required to develop the country and other defense related needs of a nation.

There are basically two kinds of taxes - Direct Tax and Indirect Tax. Direct Tax is tax that
is paid by an individual or any other person on the basis of his Income. It is a form of tax
that is directly paid by the person to the government, i.e., the liability to pay the tax and
the burden of tax falls on the same person. Indirect taxes are the types of taxes where the
person depositing the tax with government and the person actually having been burdened
by the tax are different. Generally these taxes are included in the prices of the goods or
services which are provided to the people and then such taxes are deposited by the person
collecting the same from their customers. GST is one of the most popular type of indirect
tax.

Some Important Definition under Income-Tax Act 1961:

 Income Tax:
It is the tax that is collected by Central Government for each financial year levied on total
taxable income of an assessee during the previous year.
  Assessee:
As per Income Tax Act 1961 section 2(7), an assessee is a person who is liable to pay the
taxes under any provision of Income Tax Act 1961. Assessee can also be a person with
respect of whom any proceedings have been initiated or whose income has been
assessed under the Income Tax Act 1961 Assessee is any person who is deemed assessee
under any of the provisions of this act or an assessee in default under any provisions of
this Act.

 Assessment:
Assessment is primarily a process of determining the correctness of income declared by
the assessee and calculating the amount of tax payable by him and further procedure of
imposing that tax liability on that person.

 Assessment Year:
Assessment year is the 12 months’ period commencing on 1st of April till 31st March of
next year. It is the year in which the income of previous year is assessed.

 Person:
As per section 2(31) of Income-Tax Act 1961, a Person would be any one who is-

o An Individual
o A HUF (Hindu Undivided Family)
o A Company
o A Firm
o An association of person or body of individuals
o A local Authority
o Every artificial and juridical person who is not included in any of the above
mentioned category.

 Income:
The definition of Income as per section 2 (24) is inclusive but not exhaustive of below
mentioned items:
o Any illegal income arising to the assessee
o Any income that is received at irregular intervals
o Any Taxable income that have been received from asource outside India
o Any benefit that can be measured in money
o Any subsidy or relief or reimbursement
o Gift the value of which exceed INR 50,000 without any consideration by an
individual or HUF.
o Any prize
o Causal incomes like winning from lotteries or horse race gambling etc.
 CONTRACT OF SALE OF GOODS
According to Section 4 of the Sale of Goods Act a contract of the sale of goods is a
ontract whereby the sellertransfers, or agrees to transfer, the property in (i.e., ownership
of)
goods to the buyer for a price.A contract of salemay be (i) absolute or (ii) conditional, i.
e., according to the wishes of
the parties to the contract.The term “contractof sale” is a generic term. It includes an ‘act
ual sale’ as well as an ‘agreement to sell’. Where under a contract ofsale the property in t
he goods (i.e., the ownership has passed from the seller to the buyer, the contract is calle
d asale. Where the transfer of
ownership is to take place at a future date, or subject to some condition to be fulfilledlate
r,
the contract is called an agreement to sell. An agreement to sell becomes a sale when the
time
elapses or thecondition is fulfilled subject to which the ownership of the goods is to be
transferred.
A has a book. He transfers hisright or ownership to B for Rs.15. There is a sale. Where
A agrees to transfer the ownership of the book to B aftertwo months for Rs.15, this is
an agreement to sell, when the two months expire, it becomes a sale.The maindistinction
between a sale and an agreement to sell is that in a sale the buyer
owns the goods, while in an agreementto sell, the ownership does not pass from the selle
r to the buyer at the time of the contract. The seller continuesto be the owner until the
agreement to sell becomes an actual sale by the expiry of the stipulated time or onthe
fulfilment of some condition.
Essentials of a Contract of Sale

A valid contract of sale must consist of the following essentials

:

(1) Two parties: There must be two parties viz., buyer and seller to constitute the c
ontract.
 So where a personbuys his own goods through some agent, there is no contract. Howev
er, a part-owner can sell his share to otherpart-owners.
(2) Goods: Subject matter of contract of sale must be the goods of any kind except
immovable goods.
(3) Transfer of property: Passing of property is necessary and not the physical deliv
ery of goods.
(4) Price: Consideration for a contract of sale must be money. If some goods are su
pplied
as remuneration for workdone or in exchange for some goods, it does not amount to co
ntract of sale.
(5) Lastly, it must contain all the essentials of a valid contract.

Contract of sale how made. No particular from is necessary to constitute a contract of

sale. It is, like anyother contract, made by the ordinary method of offer by one party and
its
acceptance by the other party. Itmay be made in writing or by word of mouth, or partly i
n
writing and partly by word of mouth. It may alsobe implied from the conduct of parties,
or from the course of dealings between the parties.

Difference between Sale and Agreement to Sell

1. Nature of contract: Sale is an executed contract while an agreement to sell is an
executory contract. Inan agreernent to sell something remains to be done. It shall become
sale only when the conditions ofcontract are fulfilled.
2. Transfer of property: In a sale the transfer of property takes place immediately but in
an agreement tosell, it does not pass to the buyer immediately. As the buyer, in a sale
immediately becomes the owner ofgoods, so the risk also passes to him. But in an agree
ment
to sell seller still remains the owner so the riskdoes not pass to the buyer and if the goods
are destroyed, the loss will fall on the seller even though theyare in the possession of th
e buyer.
3. Creation of right: An agreement to sell creates a ‘Jus in personam’, i.e., a personal
right only againstthe buyer while a sale creates ‘fus in rem’, i.e, right in the goods against
the whole world.
4. Remedies in case of breach: In an agreement to sell, the seller can sue only for
damages for non-
performance of contract by the buyer. But in a sale, the seller can sue for
the price of the goods. Inaddition to that he has the right of lien, stoppage in transit and
re-
sale.In case of breach of contract of saleby the seller, the buyer can sue for the delivery o
f
goods or for damages but in an agreement to sell the buyer has onlya personal remedy ag
ainst the seller.
5. Consequences of Insolvency: In a sale if the buyer is adjudged insolvent; the seller
must deliver thegoods to the official receiver and can claim rateable dividend like other
unsecured creditors for the priceunpaid on his goods. In an agreement to sell the seller ca
n refuse to deliver the goods unless paid for thegoods.
In a sale, if the seller is adjudged insolvent, the buyer is entitled to receive the goods fro
m
the official receiver. But inan agreement to sell, if the buyer has made the payment in ad
vance to the seller, he can only ask for rateable dividendand not the delivery of goods.

Subject matter of Contract of Sale

The subject matter of contract of sale is essentially the goods. Section 2 (7) says that
“goods”. means every kind ofmovable property other than money or actionable claims, i
t
includes stock and shares, growing crops, and thingsattached to the earth which are to be
removed because of the contract of sate. According to this definition moneyand actionab
le
claims are not goods and cannot be bought and sold. Money here means legal tender mo
ney.
It does notinclude old coins which are sold like goods, e.g., silver rupee coins in our cou
ntry.An actionable claim means a debt ora claim for money which a person may have ag
ainst another and which he can recover by suit.
Goods may be classified into three types :
(1) Existing goods (2) Future Goods, and (3) Contingent Goods.
(1) Existing Goods are goods which are already in existence and which are physically
present in someperson’s possession and ownership. Existing goods may be either (i) Spe
cific and Ascertained or (ii) Genericand Unascertained.
(i) Specific goods are those goods which are identified and agreed upon at the time of
the contract ofsale; i.e., a particular painting by a painter, a horse pointed out and recogni
sed
as separate from otherhorses in a stable. The term Ascertained goods is used in the same
sense as Specific Goods.

(ii) Generic or Unascertained Goods are those goods which are not specifically identified
but are indicatedby description. If A agrees to supply one bag of wheat from his godown
to
B, it is a contract relating tounascertained goods because it is not known which bag will
be
delivered. As soon as a particular bag isseparated from the lot and making or identified f
or delivery it becomes specific goods.
(2) Future Goods are goods which the seller does not own or possess at the time of the
contract, butwhich he will manufacture or produce or acquire after the making of the con
tract.
For example, A agree to sellto B all the oranges which will be produced in his garden ne
xt year. This is an agreement for the sale offuture goods.
(3) Contingent goods are those goods which the seller will acquire on the happening of
a contingency. Anagreement to sell contingent goods can also be made. For example, A’
s
father has a rare copy of bookwhich is out of print. A hopes to get it on his father’s death
.
A agrees to sell it to B for Rs.10,000 evenbefore his father’s death. This is an agreement
for the sale of contingent goods.
Perishing of Goods: If in a contract for the sale of specific goods, the goods have,
without the seller’sknowledge, perished at the time when the contract was made, the cont
ract
is void. Where A sold 700 bagsto B, but only 591 bags were in existence at the date of
contract, the remaining having been stolen. Inthis case B cannot be compelled to accept t
he591 bags.

The Price: Price, which means money consideration for a sale of goods, constitutes the
essence of a contract of sale. It may be money actually paid or promised to be paid
accordingly
as the agreement is forcash sale or credit sale. If consideration other than money is given,
it is not a sale.In an agreement to sellwhen the seller becomes insolvent the only remedy
available to
buyer is to claim for rateable dividend if the buyerhas paid the price. But in a sale if selle
r
becomes insolvent, the buyer can recover the goods from the liquidatorbecause the owne
rship
in goods has passed to him.The price may be fixed by the contract or may be determined
bythe course of dealing between the parties. In the absence of either of these provisions t
he buyer must pay areasonable price, the amount of which is determined by the facts of
each particular case.

Sale and contract for work and materials. A contract of sale must be distinguished
from a contract forwork and materials. The Sale of Goods Act applies to the former and
not
to the latter. A contract of salecontemplates the delivery of goods whereas a contract for
work
and materials involves exercise of skill and labour by one party in respect of mat
erials supplied for another, the delivery of goods being onlysubsidiary or incidental.
Earnest or Deposit Money
An earnest money is some amount which the buyer pays to the seller at the time of the
contract as a token of goodfaith, and as a guarantee that he will fulfill his contract. If he f
ails
to fulfil the contract, the earnest money is forfeitedby the seller, but if he fulfills the contr
act the earnest or deposit will be treated as part-
payment of the price, onlythe balance being
required to be paid to make up the full price.
Sale and Hire-Purchase Agreement
A hire purchase agreement is one under which a person takes delivery of goods promisin
g
to pay the price by a certainnumber of installments and, until full payment is made, to pa
y
hire charges for using the goods. It is in fact bailmentfor hire with an option to the hirer t
o
buy the goods in his possession on making the full payment. Until the fullpayment is ma
de
the agreement remains a contract of hire and the hirer can return the goods to the owner a
nd theowner can get them back, as the ownership of the goods remains with him.
When the hirer
pays full price he buys thegoods. The essence of hire purchase agreement is that there is
no
purchase or agreement to purchase, but only anoption is given to the hirer to buy so that
when
he has paid the full price it becomes a sale and he becomes the owner.In a sale, on the ot
her hand, the property passes to the buyer immediately on making the contract even if the
payment ofthe price is to be made by instalments.The transaction of hire-
purchase protects the owner against the insolvency ofthe buyer,
for if the buyer becomes insolvent or fails to pay the instalments, the seller has the right t
o take the goodsas owner and treat all the money already received as hire-
charges. Again, until
the full price is paid and theagreement remains that of hire, no title will pass even to an
innocent and bonafide parties.
Sale and Bailment
Bailment is the delivery of goods from one person to another upon a condition that he
shall return the goods to thebailor when his purpose is accomplished. Bailment may be w
ith
or without consideration. Sale is delivery of goods inreturn of monetary payment and the
re
is no provision of return of those goods. In a sale, the buyer becomes theabsolute owner
of goods but in bailment, the question of transfer of ownership does not arise at all.

Agreement to sell at valuation. According to section 10 the parties may agree to sell and
buy goods on theterms that price is to be fixed by the valuation of a third party. If such th
ird
party cannot or does not makesuch valuation, the agreement becomes void. But if the go
ods
or any part thereof have been delivered toand appropriated by the buyer, he shall pay a
reasonable price therefore. If the third party is preventedfrom making the valuation by th
e
fault of the seller or buyer, the party not in fault may maintain a suit fordamages against t
he party in fault.