Indian Partnership Act
Essential Ingredients of Partnership: Sections 4 and 5
Every partnership question begins with four gates. Is there an agreement? Is a business carried on? Is there an agreement to share profits? And above all, is the business carried on by all or any of them acting for all? If any gate fails, the arrangement is something else: a joint family business, co-ownership, a loan, or an employment. This note takes each ingredient in turn, explains why mutual agency is the true test, answers the questions about losses and status, and compares partnership with a joint family business and with co-ownership.
The four gates, what lies behind each failed gate, and partnership compared with a joint family business and with co-ownership
1. Agreement between Two or More Persons
§ What the agreement requires • Two or more persons, each competent to contract; the maximum is fifty under the Companies Act, 2013 and its rules. • A valid contract. Free consent, lawful object and consideration, and capacity; an unlawful business makes the firm void. • Form. Express or implied, oral or written; a deed is not essential to the relation, but is needed for registration and for tax. • Who may be a partner. An individual, and also a company, which is a person competent to contract. A firm cannot be a partner in another firm, though its partners can: Dulichand Laxminarayan v CIT, AIR 1956 SC 354. • A minor cannot be a partner but may be admitted to the benefits of the firm under Section 30. |
2. The Business Requirement
i. Wide meaning. 'Business' under Section 2(b) includes every trade, occupation and profession.
ii. A single venture counts. Section 8 permits a partnership for a particular adventure or undertaking.
iii. What is not a business. Holding property to enjoy its income, or joining together for a charitable or social purpose, is not a business; there must be an activity carried on with a view to profit.
iv. Lawful business. A partnership for an unlawful object, such as smuggling, is void and unenforceable.
3. Agreement to Share Profits
§ Three questions answered In what proportion? Any proportion the partners agree; in the absence of agreement, profits are shared equally under Section 13(b), irrespective of unequal capital. Must losses be shared? No. Section 4 speaks only of sharing profits. Partners may agree that one of them bears no losses, or is indemnified against them. As between the partners, that agreement holds; as against third parties, every partner remains liable under Section 25. Is profit sharing conclusive? No. Section 6 makes it evidence only, and the Explanation lists receipts of profit that do not make a partner. This was settled in Cox v Hickman (1860). |
4. Business Carried on by All or Any Acting for All: Mutual Agency
§ The true test • The words. 'Carried on by all or any of them acting for all' mean that each partner acts as an agent of the others and as a principal bound by their acts. • Where it appears in the Act. Section 18 makes every partner an agent of the firm; Section 19 defines implied authority; Section 25 imposes joint and several liability. All of this flows from agency. • Not everyone need work. A sleeping partner is still a partner; what matters is the authority to bind, not the exercise of it. Equally, management may be entrusted to one partner alone: K. D. Kamath & Co. v CIT, (1971) 2 SCC 873. • Why it is decisive. Profit sharing tells you how the fruits are divided; agency tells you whose business it is. If the person cannot bind the others and is not bound by them, he is not a partner. |
📖 Cox v Hickman, (1860) 8 HL Cas 268 Creditors who took over the management of a business under a deed of arrangement, and were paid out of its profits, were held not to be partners. The test is not participation in profits but whether the trade is carried on by persons acting on behalf of one another. This rejected the older rule that profit sharing was conclusive, and is the source of Section 6. |
5. Section 5: Contract, Not Status
Basis | Partnership | Joint Hindu family business |
|---|---|---|
How it arises | By agreement | By status: membership comes by birth |
Members | Only those who agree, and who are competent to contract | All coparceners, including minors |
Management | Every partner may take part, s. 12 | The karta manages; others do not bind the family |
Agency | Every partner binds the firm | Only the karta binds the family |
Liability | Unlimited, joint and several | A coparcener's liability is limited to his share; the karta may be personally liable |
Accounts | A partner may demand accounts, s. 12(d) | A coparcener generally cannot, except on partition |
Death | Affects the firm, subject to contract | The business continues; the share passes by survivorship or succession |
Governing law | Indian Partnership Act, 1932 | Hindu law |
6. Co-ownership and Joint Ownership
Basis | Partnership | Co-ownership |
|---|---|---|
Source | Agreement | May arise without agreement, by inheritance or purchase |
Business | Essential | Not necessary |
Agency | Exists between the parties | None: one co-owner cannot bind another |
Sharing | Profits of a business | Income or produce of the property |
Transfer of interest | Only with the consent of all, s. 31 | A co-owner may transfer his share freely |
Remedy | Suit for dissolution and accounts | Suit for partition |
Illustration | Two persons run a shop together | Two heirs own a house and share the rent |
- Husband and wife. A husband and wife may certainly be partners if they agree to carry on a business and share its profits. What Section 5 excludes is a Burmese Buddhist husband and wife carrying on business as such, that is, by their status.
7. Frequently Asked Questions
What are the essential ingredients of a partnership?
An agreement between two or more competent persons, a business, an agreement to share its profits, and the business being carried on by all or any of them acting for all.
Is sharing of losses essential to a partnership?
No. Section 4 requires only an agreement to share profits; partners may agree that one of them does not bear losses, without affecting their liability to third parties.
Why is mutual agency called the true test?
Because it identifies whose business is being carried on. Profit sharing may exist in a loan or an employment, but only partners act for one another and bind each other.
Can members of a Hindu undivided family be partners in the family business?
Not as such. Section 5 provides that partnership arises from contract and not from status. They may, however, enter into a separate partnership by agreement.