Indian Partnership Act
Application and Extent of the Partnership Act, and the Law Before 1932
The Act applies to the whole of India and to every partnership formed by agreement. It does not apply to relations that arise by status, such as a Hindu undivided family business, nor to entities with their own statutes, such as companies, limited liability partnerships, societies and co-operatives. Knowing what falls outside is as useful as knowing what falls inside, because many disputes turn on whether an arrangement is a partnership at all. This note sets out the extent and application of the Act, and the law that governed partnership before 1932.
Where the Act applies and where it does not, and the position before 1932
1. Extent and Commencement: Section 1
Provision | The position |
|---|---|
Short title | The Indian Partnership Act, 1932 |
Extent | It extends to the whole of India |
Commencement | 1 October 1932, except Section 69 |
Section 69 | Came into force on 1 October 1933, giving firms a year to register before the disabilities applied |
2. What the Act Applies To
§ Within the Act • Firms formed by agreement to share the profits of a business carried on by all or any of them acting for all: Section 4. • Partnership at will, Section 7, where no provision is made for duration or determination, and particular partnerships, Section 8, for a single venture or undertaking. • Professional firms, since 'business' in Section 2(b) includes every trade, occupation and profession, where the professional body's rules permit partnership. • Registered and unregistered firms alike. Registration affects remedies under Section 69, not the existence of the partnership. • Sub-partnerships, where a partner agrees to share his own share of profits with an outsider; the sub-partner is not a partner in the main firm. |
- Numerical limit. Section 464 of the Companies Act, 2013, with the rules made under it, caps a partnership at fifty partners; an association exceeding the limit is illegal.
3. What the Act Does Not Apply To
Arrangement | Why it is outside |
|---|---|
Hindu undivided family business | Section 5: the relation arises from status, not agreement; a coparcener becomes a member by birth |
Burmese Buddhist husband and wife carrying on business | Expressly excluded by Section 5 |
Companies | Governed by the Companies Act, 2013; a company is a separate legal person with limited liability |
Limited liability partnerships | Governed by the LLP Act, 2008; the 1932 Act does not apply to an LLP |
Societies, trusts and co-operatives | Governed by their own statutes; they are not formed to share the profits of a business among members in the partnership sense |
Co-ownership | Joint owners sharing income are not partners: there is no business carried on and no mutual agency |
Clubs and associations | Not carrying on a business for profit |
§ Not a partner merely because paid out of profits Section 6 and its Explanation make clear that the receipt of a share of profits, or a payment varying with profits, does not by itself make a person a partner. This covers a lender, a servant or agent remunerated by a share of profits, a widow or child of a deceased partner receiving an annuity, and a seller of goodwill paid out of profits. Cox v Hickman (1860) and Mollwo, March & Co. v Court of Wards (1872) are the classic illustrations: creditors and financiers who took profits, and even some control, were held not to be partners because the business was not carried on on their behalf. |
4. How Existence Is Determined: Section 6
i. The real relation. Regard must be had to the real relation between the parties, as shown by all relevant facts taken together, not to the label the parties use.
ii. Not conclusive. A written deed calling the arrangement a partnership, or the sharing of profits, is evidence but not conclusive.
iii. The decisive question. Is the business carried on by all or any of them acting for all? In K. D. Kamath & Co. v Commissioner of Income Tax, (1971) 2 SCC 873, the Supreme Court held that the essential conditions are an agreement to share profits and the business being carried on by all or any acting for all; control and management may be entrusted to one partner without destroying the partnership.
5. The Law Before the 1932 Act
§ Chapter XI of the Indian Contract Act, 1872 • Sections 239 to 266 contained the first statutory law of partnership in India, as part of the law of contract. • Its content. Definition, the authority of partners, liability for the acts of the firm, and dissolution, in brief terms. • Its gaps. No registration, little on the property of a firm, nothing adequate on minors, and thin protection for third parties. • Alongside it. Mercantile custom and English common law and equity principles applied by the courts. • Repealed. The 1932 Act repealed Chapter XI, while Section 3 kept the rest of the Contract Act applicable to firms. |
6. Frequently Asked Questions
Does the Indian Partnership Act apply to a Hindu undivided family business?
No. Section 5 makes clear that the relation of partnership arises from contract and not from status, and a joint family business is a matter of status.
What is the maximum number of partners in a firm?
Fifty, under Section 464 of the Companies Act, 2013 read with the rules made under it.
Are co-owners who share income partners?
No. Co-ownership without a business carried on by or on behalf of all, and without mutual agency, is not partnership.
Which law governed partnership before 1932?
Chapter XI of the Indian Contract Act, 1872, sections 239 to 266, with mercantile custom and English principles.