Indian Partnership Act
The Nature of Partnership: Sections 4 to 8
Chapter II is short, five sections, but it decides the most litigated question in this branch of law: is this arrangement a partnership at all? Section 4 defines it. Section 5 says it comes from contract, not status. Section 6 explains how its existence is determined. Sections 7 and 8 describe two kinds of partnership: at will, and for a particular adventure or undertaking. This note covers the whole chapter, and serves as the map for the detailed notes that follow.
Sections 4 to 8 as a single map, with the true test and the arrangements that are not partnerships
1. Section 4: The Definition
§ The text and its elements '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. Agreement between two or more persons competent to contract. Business, which under Section 2(b) includes every trade, occupation and profession. Sharing of profits as agreed between them. Mutual agency: carried on by all or any of them acting for all. Partner, firm and firm name are defined in the same section. |
2. Section 5: Contract, Not Status
i. The rule. The relation of partnership arises from contract and not from status.
ii. Hindu undivided family. Members of an HUF carrying on a family business as such are not partners in that business.
iii. Burmese Buddhist husband and wife carrying on business as such are likewise not partners.
iv. Consequence. No one becomes a partner by birth, marriage or inheritance; the heir of a deceased partner does not automatically step into his place.
3. Section 6: How Existence Is Determined
§ The test and the safe harbours • The test. Regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. • Gross returns. The sharing of gross returns does not of itself create a partnership, whether or not the persons sharing them have a joint interest in the property from which the returns arise. • Profits are evidence only. The receipt of a share of profits, or of a payment contingent on profits, is evidence but not conclusive. • Five protected receipts. 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 previous owner or part owner of the business receiving the price of goodwill by instalments out of profits, are not partners by that fact alone. |
4. Section 7: Partnership at Will
Aspect | The position |
|---|---|
Definition | Where no provision is made by contract between the partners for the DURATION of their partnership, or for the DETERMINATION of their partnership, the partnership is 'partnership at will' |
Both conditions | Both must be absent; a provision for either duration or determination takes the firm out of Section 7 |
Dissolution | Under Section 43, a partnership at will may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm |
Effect of the notice | The firm is dissolved from the date mentioned in the notice, or, if no date is mentioned, from the date of communication of the notice |
A firm for a fixed term that continues | Where a firm constituted for a fixed term continues after the term expires, the rights and duties remain as before so far as consistent with a partnership at will: Section 17(b) |
5. Section 8: Particular Partnership
i. The provision. A person may become a partner with another person in particular adventures or undertakings.
ii. Examples. A joint venture to construct one building, to import a single consignment, or to produce one film.
iii. Duration. Subject to contract, the firm is dissolved on the completion of the adventure or undertaking: Section 42(b).
iv. Contrast with a general partnership, which carries on a continuing business not confined to one venture.
6. Putting the Chapter Together
Question | Section | Answer |
|---|---|---|
What is a partnership? | s. 4 | Agreement, business, sharing of profits, mutual agency |
Can it arise without agreement? | s. 5 | No; status does not create it |
How is it proved? | s. 6 | By the real relation on all the facts; profit sharing is only evidence |
What if no duration is fixed? | s. 7 | It is a partnership at will, dissoluble by notice under s. 43 |
Can it be for one venture? | s. 8 | Yes; it ends with the venture under s. 42(b) |
7. Frequently Asked Questions
What is the true test of partnership?
Mutual agency: whether the business is carried on by all or any of the partners acting for all. Sharing of profits is only evidence, under Section 6.
What is a partnership at will?
One where the contract makes no provision for the duration of the partnership or for its determination, under Section 7; it may be dissolved by notice under Section 43.
What is a particular partnership?
A partnership for a particular adventure or undertaking under Section 8, which ends on its completion, subject to contract.
Does sharing gross returns create a partnership?
No. Section 6 says the sharing of gross returns does not by itself create a partnership.