PARTNERSHIP FIRM IN INDIA

Definition

A Partnership is defined by the Indian Partnership Act, 1932, as ‘the relation between

persons who have agreed to share profits of the business carried on by all or any of

them acting for all’. This definition gives three minimum requirements to constitute a

partnership, viz. (1) there must be an agreement entered into orally or in writing by

the persons who desire to form a partnership,  (2) the object of the agreement must be

to share the profits of business intended to be carried on by the partnership, and  (3)

the business must be carried on by all the partners or by any of them acting for all of

them. 

Types of partnership

A partnership can be formed between

one or more Individuals or

between an Individual and a person representing a H.U.F. or

between an Individual and other partner representing his firm, or

between two partnership firms or

between a Limited Company or a Corporation and an Individual or partnership

firm  or

between a partnership and a H.U.F.

between members of HUF in their individual and independent capacity

between a HUF and a member of that HUF independently.

What constitutes a partnership

A firm is strictly not a person; It is an association of persons and the agreement by

which a firm purports to enter into a partnership with an individual or another firm

merely makes the partners of that firm individual partners of the larger partnership. A

firm as such cannot enter into an agreement as a partner with another firm or

individuals.

Therefore, when one partnership enters into a partnership agreement with another

partnership firm, the partnership is in fact between all the partners of both the firms.

Partnership under Companies Act

Section 4 of the Companies Act, 1956, provides that the number of partners in a firm

shall not exceed 20, and a partnership having more than 20 persons will be illegal.

When there is partnership between two firms all the partners of each firm will he taken

into account for the purpose of this provision but if a partnership is between the Karta

or any member of HUF on the one hand and another individual or Individuals on the

other, the members of the joint family will not be taken into account. A Hindu

Undivided family carrying on business as such, not being a partnership, S 11 of the

Companies Act will not apply even if the members of that family are more than 20. But

where two or more Hindu Undivided families are carrying on business in partnership

the number of the members of those families except minors will be taken into account

for the purpose of S. 11 of the Companies Act.

Partnership under Income Tax Act

A partnership to be recognised for the purpose of income Tax liability of the partners

and their firm is required to comply with certain provisions of the Income Tax Act.

While therefore drafting a deed of partnership the provisions of the Act are required to

be taken in to account.

Partnership and other bodies of Individuals

A partnership is distinguishable from several other associations or bodies of

individuals. A partnership is different from co-owners in several respects. It is different

from a club which is an association of persons formed for the purpose other than

carrying on business and therefore there is no object to earn profit. Partnership is

different from a company or any other corporate body which is a legal entity.

Partnership is also different from Hindu Joint family firm, the latter being a creation of

law while the former is a creation of contract. It is not necessary to discuss the subject

in more detail as each of these bodies are dealt with separately elsewhere.

Agreement of partnership

The agreement may be in writing or oral. But from the practical point of view and

particularly in view of the provisions of other Acts such as the Income Tax Act as well

as Partnership Act an oral partnership is not practicable, and therefore, a

partnership agreement is necessarily required to be in writing.

Therefore, the mere fact that two persons as joint owners either as heirs or legatees

are carrying on a business it does not necessarily mean that they are partners and if

they want to carry on the business in partnership, then a Partnership agreement in

writing becomes necessary. For example, if a person dies leaving a running business

and his heirs continue to carry on such business, it will not be a business carried on in

partnership and if they want to do so they will have to enter into a regular agreement

of partnership.

Being an agreement and an agreement enforceable at law, such an agreement must

fulfill the basic requirements of a valid contract, as required by the Contract Act.

Therefore, a minor or a mentally handicapped person cannot enter into a partnership

agreement though by virtue of the provisions of the Partnership Act. A minor can be

admitted only to the benefits of the partnership. But that only means that a minor can

have a share in the profits of the business, but he cannot become a partner, and cannot

execute any agreement of partnership.

Similarly if a partnership deed provides that on the death of a partner his heirs or any

one or more of them should be admitted as partners or partner in place of the

deceased partner even in such a case on the death of a partner his heirs or any of them

do not become partners automatically on such death. But a fresh agreement of

partnership will have to be executed between the existing partners and the heirs or

heir of the deceased partner and if the heir is a minor the new partnership will stand

postponed till the minor attains majority or if the surviving partners are more than

one, the minor can only be admitted to the benefits of partnership.

Test of partnership

As stated before, a partnership agreement can be oral or in writing. It is not the

general practice to enter into a preliminary agreement to enter into a regular

partnership agreement. But if such a preliminary agreement is entered into and the

partners start business in anticipation of executing a formal deed of partnership, the

partnership shall be deemed to have commenced from the commencement of the

business, unless the preliminary agreement is conditional upon the happening or not

happening of some event in which case the partnership cannot be said to have come

into existence unless the event has happened or not happened. Another test of

partnership as mentioned above is that of sharing profits, and which is an essential

requirement of a partnership. Profits may be shared in such proportions as the parties

may agree, but sharing of profits is most essential. As against that, sharing of losses

only suffered in business is not a test to constitute a partnership.

Therefore, the partnership agreement may provide that a particular partner or

partners will not be liable to bear any losses of the firm. As regards sharing in profits

the agreement may provide that a partner shall receive only a fixed share in the profits

or a fixed periodical amount and It is not necessary that profits should be shared in

certain proportions.

Section 6 of the Partnership Act provides that in determining whether a group of

persons is or is not a firm or whether a person is or is not a partner in a firm regard

shall be had to the real relation between the parties as shown by all the relevant facts

taken together.

It further provides that sharing of profits or gross returns arising from property by

persons holding joint or common interest in that property does not of itself make such

persons partners, that is, as stated above, mere joint ownership of business does not

constitute a partnership.

Similarly, receipt by a person of a share of the profits of a business or a payment

contingent upon earning of profits or carrying with the profits earned by a business,

does not of itself make him a partner with the person carrying on the business. For

example, the receipt of a share or payment by a lender of money to persons engaged or

about to engage in a business does not make such lender a partner.

Similarly, a share given in profits to a servant or agent as remuneration does not make

him a partner, or if a widow or child of a deceased partner is given any annuity in

payment of the share of the deceased partner It does not make the widow or child a

partner, or if a business is sold with goodwill and the seller is given a share in profits

towards payment of the sale price it will not make him a partner of the firm. But

otherwise wherever the agreement is for sharing of business carried on by two or more

persons the partnership relation will be inferred.

The partnership business may consist of doing anything which is not illegal or against

public policy. Business may consist of carrying a continuous trade. or profession or any

manufacture and any other activity of which the object is to earn profits. Or it may be

limited to a single adventure.

Partnership for an adventure

Section 8 of the Partnership Act provides that a person may become a partner with

another partner In particular adventure or undertaking.

The common law does not recognise the relationship of co-adventurers but with the

passage of time, the judicial decisions have recognised what is known, as joint

ventures of two or more persons undertaking to combine their property or labour in

context of a particular line of trade or general business for joint profits. The courts do

not treat a joint adventure as identical with the partnership though it is so similar in

nature, and in the contractual relations created between such adventurers the rights

as between them are governed particularly by the same rules that govern the

partnership.

This relationship has been defined to be a special combination of persons undertaking

jointly some specific adventure for profit without any actual partnership.

It is also described as a commercial or maritime enterprise undertaken by several

persons jointly, a limited partnership, not limited in the statutory sense as to the

liabilities of the partners, but as to its scope or duration. Generally speaking the

distinction between joint venture and partnership is that former relates to a single

transaction though It may comprehend business to be continued over several years

while the latter relates to a joint business of a particular trade. In order to constitute a

joint venture there must be a community of interest and right tojoint control.

It is recognised on authority that each of the partners must have equal voice in the

matter of performance and control over the activities used therein though one

authority may entrust the performance to another.

The rights and duties and liabilities of a joint venture are similar or analogous to those

which govern corresponding rights and duties and liabilities of the partners. The only

difference between partnership under section 8 of the Partnership Act and an

ordinary partnership is that ln joint venture, parties undertake no liability beyond the

limit of a particular venture/adventure or business or undertaking and their rights and

obligations are, therefore, less extensive than those of the partners in ordinary

partnership.

Partnership an agency

The third essential of a partnership is that a partnership business actually may be

carried on by all the partners together or by any one or more partners for all and on

behalf of the others, in which case each partner is an implied agent of the other

partners. It is not. therefore, necessary that all the partners take part in the business

of the partnership firm. Some partners can be active partners and others can be

sleeping partners. But it must be clear that there is an implied or express agency

constituted in favour of one partner by the other partners. If there is no element of

agency, even if there is any agreement to share profits, there will be no partnership.

So a partner has a double capacity, he is the principal so far as he is concerned and

the agent so far as other partners are concerned.

Period of partnership

A partnership can be for a fixed period of time or it may be limited to a particular

adventure as provided in Section 8 or it may be for duration at the will of the

partners. Where the period of the partnership is not fixed and the partnership is not

for a particular adventure then under section 7 of the Act the partnership shall be

deemed to be a partnership at will.

Rights and duties of partners

Sections 9 & 10 of the Act lay down the basic duties of every partner and the said

duties are not subject to any contract to the contrary. Therefore, partners are bound to

carry on the business of the firm to the greatest common advantage, to be just and

faithful to each other and to render accounts and full information of all things affecting

the firm to any partner or his legal representative and every partner is bound to

indemnify the firm for any loss caused to it by fraud in the conduct of the business of

the firm.

Subject to this the mutual rights and duties of partners may be decided by contract

between the partners, either express or implied.

Subject to any contract to the contrary such duties and rights of each partner are

provided in Sections12 and 13 of the Partnership Act.

Property of partnership

The property of a partnership firm will consist of all the assets, moveable and

immoveable brought in by any or all the partners into the firm and also include the

goodwill.

It may be stated that relying upon the specific provision of  s. 22 of the English

Partnership Act, 1890, the Supreme Court has held that all property of a partnership

firm, whether moveable or immoveable is moveable property and therefore, on

retirement of any partner or dissolution of partnership the division of even immoveable

property among the partners does not amount to transfer of property and the deed of

retirement or dissolution does not require registration.

A property acquired by A by purchase or otherwise is vested in him and even if A

brings that property into partnership and it is used for the partnership business, the

property is not automatically divested from A and vested in A and his other partners.

Vesting and divesting can take effect only by act of parties or by operation of law, and,

therefore, the property brought in by A cannot become vested in the other partners

unless there is a regular transfer of the property by A to himself and other partners.

And similarly if property vested in the partners is divided, among them, it amounts to

transfer of one partner’s interest to the other, and such transfer is necessary to vest

and divest the title from one to the other.

Limits on Agency of partners

As stated above, every partner is an agent of the other partners and has implied

authority to do all acts and things necessary for the purpose of carrying on business of

the firm. But such an implied authority does not empower a partner to

(a) Submit a dispute relating to the business of the firm to arbitration or

 (b) open a banking account on behalf of the firm in his own name,

 (c) compromise or relinquish any claim or a portion of a claim by the firm,

 (d) withdraw a suit or proceeding on behalf of the firm, (e) admit any liability in a suit or proceeding against the firm, (f) acquire immoveable property on behalf of the firm, (g) transfer any such property, or (h) enter into any partnership on behalf of the firm.

These being the implied authorities they can be modified by express provisions in the

partnership deed.

Retirement of a partner

Under the Partnership Act no person can be admitted into partnership without the

consent of the other partner or partners unless there is any contract to the contrary

(S. 31).

Any partner may with the consent of all the other partners or in terms of the deed of

partnership where the partnership is at will, by giving notice in writing to all other

partners, to that effect, dissolve the partnership or retire from partnership.

A retiring partner, however, continues to be liable to third parties even If the

liability Is taken over by the remaining partners (S.32). Therefore in a deed of

retirement it is necessary to provide that In the event of the retiring partner being

held liable by a third party, the remaining partners shall indemnify him to that

extent, when the liabilities are taken over by the remaining partners.

Insolvency of a partner also causes compulsory retirement of an insolvent partner

(S. 35). It is, therefore, generally provided in a deed of partnership when there are

more than two partners that the insolvency of any partner will not dissolve the

partnership. If a partner retires, unless there is contract to the contrary, the retiring

partner cannot use the firm name, represent himself as carrying on the business of

the firm or solicit the customers of the Firm. (S.36).

Therefore, in a deed of retirement It is generally not necessary to make explicit that

the retiring partner shall not do any of these things. But if he is to be restrained

from carrying on similar business for a specified period or in a specified area, such

condition can be provided in the deed of retirement and it is legal (S.36(2)).

Dissolution

The Act also provides that a partnership firm may be dissolved under the following

circumstances namely,

as a result of any agreement between all the partners

by adjudication of all the partners or all partners but one as insolvent, or

by the happening of an event which makes it unlawful for the business of the firm

to be carried on in partnership or

subject to agreement between the parties,

efflux of time,

completion of the adventure,

death of a partner, and

insolvency of a partner.

In these last four cases the partnership agreement may provide whether the firm will

be dissolved or not on the happening of any of the four events. Even if the deed

provides that the partnership will not be dissolved on the death or insolvency of a

partner, it does not mean that on the death or insolvency of a partner he ceases to

have interest in the partnership property. In such case his interest in the partnership

property will survive to his heirs in case of his death and to his assignees in case of

insolvency. In the absence of a term in the deed of partnership to that effect, it cannot

be that, the partnership shall continue, and notwithstanding the death of a partner it

will operate to extinguish his proprietary rights in the assets of the Firm.

A partnership can also be dissolved by the Court under the circumstances mentioned

in Section 44 of the Act. Where the partnership is ‘at will’ the partnership can be

dissolved by any partner or partners giving notice of his/their intention to dissolve the

firm.

How to register a Partnership Firm in India:

Partnerships in India are governed by the Indian Partnership Act, 1932. As per the partnership Act, Registration of Partnership Firms is optional and is entirely at the discretion of the partners. The Partners may or may not register their Partnership agreement.

However, in case the partnership deed is not registered, they may not be able to enjoy the benefits which a registered partnership firm enjoys.

Registration of Partnership Firm may be done before starting the business or anytime during the continuance of partnership. However, where the firm intends to file a case in the court to enforce rights arising from the contract, the registration should be done before filing the case.

The procedure for Registration of Partnership Firms in India is fairly simple. An

application and the prescribed fees are required to be submitted to the Registrar of

Firms of the State in which the firm is situated. The following documents are also

required to be submitted along with the application:-

1. Application for Registration of Partnership in Form No. 1 (Attached copy)

2. Duly filled specimen of Affidavit

3. Certified True Copy of the Partnership Deed

4. Ownership proof of the principal place of business or rental/lease

agreement thereof.

The application or statement must be signed by all the partners, or by

their agents especially authorised in this behalf. When the registrar is

satisfied with the points stated in the partnership deed, he shall record

an entry of the statement in a register called the Register of Firms and

issue a Certificate of Registration

It should however be noted that registration with the Registrar of Firms

is different from Registration with the Income Tax Deptt. It is mandatory

for all firms to apply for Registration with the Income Tax Department

and have a PAN Card.

After obtaining a PAN Card, the Partnership Firm would be required to

open a Current Account in the name of the Partnership Firm and operate

all its operations through this Bank Account.