Module 4

Session 12
Dr. Garima Tiwari
All Copyrights Reserved
An Introduction to The
Indian
Partnership Act, 1932
 Partnership: Nature and Formation
[ Refer Chapter 10] : Ravinder Kumar, Legal Aspects of Business,
Sixth edn. 2023, Cengage. Part III

Indian Partnership Act, 1932.

Part of the Indian Contract Act, 1872 (Chapter IX-Sections 239–
266), but was converted into a separate Act in 1932.
 It contains 74 sections and extends to the whole of India.
Although Partnership Act is a Central Act, it is administered by
state governments.
 Partnership: Definition and Essentials

• Section 4 of the Partnership Act, 1932, defines

partnership:
‘Partnership is the relation between persons who
have agreed to share the profits of a business
carried on by all or any one of them acting for
all. The people who have entered into partnership
with one another are individually called “partners”
and collectively “firm”, and the name under which
their business is carried on is called the “firm name”.’
 Essential Features For Formation Of A
Partnership

1. Association of two or more persons

2. Result of an agreement
3. Agreement to carry out some business
4. Sharing of profits
5. Mutual agency
 1. Association of Two or More Persons

• A partnership cannot survive if the number of partners

gets reduced to one for whatever reasons—death,
insolvency, lunacy, etc.,—it may be. This is so because,
one cannot be one’s own partner.
• Although the Partnership Act is silent over the maximum
number of partners in a firm, the Companies Act, 2013,
puts a ceiling on the number of partners in a partnership
firm as under.
• As per Rule 10 of Companies (Miscellaneous)
Rules, 2014, if a partnership firm consists more than
50 persons, it will be illegal. Thus, the current limit is 50.
• However, Section 464(1) of 2013 Act states, ‘If
registered as a company then 100 could be there.
• Notwithstanding, the above maximum ceiling of 100
partners does not apply to a partnership firm,
formed by professionals who are governed by special
Acts [Section 464(2)].
• Accordingly, a firm of chartered accountants,
for instance, can have maximum 50 partners (i.e., at
par with a business firm), all being chartered
accountants ofcourse, but by amendment of
Companies Rules, the said limit may go even beyond
100.
• In order to enter into a partnership, the persons must be
competent to contract.
• It is, however, immaterial whether the persons so entered into a
partnership contract are natural or artificial.
• A company may, if so authorised by its charter (Memorandum of
Association), become a partner in a firm, as it is a person in legal
terms, though artificial one [MM Pulimoad vs Registrar of Firms
1987, 61 Comp. Cas. 209 (Kerala)]. There could be a partnership
even between two or more companies .
• But a partnership firm not being a person in legal terms
cannot enter into partnership [Dule Chand vs Commissioner of
Income Tax A.I.R. 1958, S.C. 315].
2. Result of an Agreement

• Partnership is formed as a result of an agreement between two

parties.
• It does not arise out of status or inheritance as in the case of
Hindu Undivided Family (HUF).
• It even does not arise by operation of law as in the case of co-
ownership or Joint Stock Company.
• Thus, creation of an agreement [whether express (written or oral)
or implied] between two or more people is the very foundation
of partner-ship. Besides, the contract must contain all essential
elements of a valid contract.
3. Agreement to Carry out Some
Business
• Formed for the purpose of carrying out some (but lawful) business.
• An association or society formed primarily to carry out some
charitable, religious, or social works cannot be regarded as
partnership.
• The term ‘business’ includes every trade, occupation, and profession
[Section 2(b) of the Partnership Act].
• Thus, business is used in its widest sense as it does not refer merely
to trade or industry but also includes occupations and professions
such as chartered accountancy, legal practice, and placement
services.
4. Sharing of Profits

• Sharing the profits of business amongst all the

partners is the core of partnership. There will be no
partnership where only one of the partners is
entitled to the whole of the profits of the business.
• Unless otherwise agreed, sharing of profits implies
sharing of losses as well.
• Section 13(b), however, provides that the partners are
entitled to share equally in the profits earned and shall
contribute equally to the losses sustained by the
firm. Ratio may be decided.
• Sharing of profits not a conclusive test
• Merely sharing profits does not automatically make
someone a partner.
Examples
• A and B, who jointly own a house, let it out on a rent of
Rs. 5000 per month. They share the rental income
equally. Yet A and B cannot be regarded as partners.
They are simply co-owners of the property.
• X and Y buy 100 bales of cotton, which they agree to
sell for their joint account, each party sharing profits
equally. Here, X and Y are partners in respect of such an
account.
 5. Mutual Agency

• Mutual agency is the conclusive test of a partnership.

• Section 18 of the Partnership Act emphasises the element of mutual
agency, thus:
• ‘Subject to the provisions of this Act, a partner is the agent of the firm for
the purpose of the business of the firm.’
• The true test, therefore, to determine whether a person is a partner
or not is to see inter alia, whether the relationship of principal and
agent exists between the parties. In fact, existence of the element of
agency is the foundation of partnership, which is regarded as an extension
of the general law of agency.
• It is, however, not necessary that all partners should actively
participate in business.
Partners, Firm, and Firm’s Name
Persons who have entered into partnership with one another are individually called
‘partners’ and collectively ‘firm’, and the name under which their business is carried on is
called the ‘firm name’ [Section 4].

A firm has no legal existence independent of its partners.

It is neither a legal entity nor an artificial person as a company. In the eyes of the law, it cannot
possess property; it cannot sue or be sued by others. Similarly, it can neither be a debtor nor a
creditor.

It is only for the sake of commercial usage, a firm comprises all those elements.

It is, however, worth noting that from the taxation point of view, a partnership firm is
identifiable from the partners comprising it and, therefore, assessable separately.
 Firm Name
• Partners have a right to carry out business under any name and style, which
they would like to adopt.
• Follow restriction contained in Section 58(3) of the Indian Partnership Act,
which reads as follows:
• ‘A firm name shall not contain any of the following words: “Crown”,
“Emperor”, “Empress”, “Empire”, “Imperial”, “King”, “Queen”, “Royal”, or words
expressing or implying the sanction, approval, or patronage of the
government except when the State Government signifies its consent to the use
of such words as part of the firm name by order in writing’.
• The partners must also not adopt a name calculated to mislead the public or
confuse them with a firm of repute already in existence with a similar name.
• The court has the power to contain the use of such names, which are alike or
similar to the name of an existing firm and used with deceitful intention.
Moreover, a partnership firm cannot use the word ‘Limited’ as a part of its
name.