My topic deals with the concept of Partnership and the legal tests which the authorities and

courts have applied for determination of the existence of Partnership in terms of the provisions
of the Indian Partnership Act, 1932.
However, in order to make the laws on contract uniform throughout the country in
India, the British originally brought an Act called Indian Contract Act in 1872.
However, when the British Government felt that the chapter containing the Indian
Contracts Act were not adequate and satisfactory, they brought a separate and
independent enactment in India, called The Indian Partnership Act, 1932 and the
provisions relating to Partnership in the Contract Act were repealed.

Thus, from 1872, the laws relating to Partnership in India were governed by the
Indian Contract, 1872. After 1932 and from the date of notification of the said Act
for various areas, the laws relating to Partnership are governed by the Indian
Partnership Act, 1932,
THE DEFINITION OF PARTNERSHIP
What is Partnership, Partner, Firm and Firm Name are all defined
under Section 4 of the Indian Partnership Act, 1932.

As per the said definition, the relationship between persons who have agreed
to share the profits of a business carried on by all or any of them acting for all, is
called Partnership.

The persons, who have entered into a contract of Partnership with one
another are individually called asPartners and collectively as a Firm.
The

name under which their business is carried on is called as Firm Name.

In order to satisfy the definition of Partnership as per Section 4 of the Indian Partnership Act,
1932, there are certain basic features, essential elements, which are required and which should be
there, to create a Partnership
Five elements
1. CONTRACT FOR PARTNERSHIP:
Partnership will not arise and come into existence, based on status, operation of law or
inheritance and it can be created and it will come into existence only by entering into a contract
of Partnership.

2.

BETWEEN TWO OR MORE PERSONS:

one single person cannot enter into a contract with himself or on his own. Therefore, for entering
into a contract and to create a Partnership, two or more persons shall enter into a contract.
Partnership, the Act, 1932, the Act does not restrict or fix any maximum number for entering into
a contract to create a Partnership.

But the Indian Companies Act has put an embargo by fixing maximum numbers for creation of
Partnership. As per the said provision, the maximum number of persons should not exceed 10 in
case the business for which the Partnership is created is a banking business and in respect of all
other business, the maximum number is fixed as 20.

3.

THE PERSON SHOULD BE ELIGIBLE TO ENTER INTO A CONTRACT

As provided in the Indian Contract Act, a person who is competent to enter into a Contract as per
law, alone is eligible and entitled to enter into a contract of Partnership and is eligible to become
a Partner. Such a person may be either a natural person or an artificial person like a company.

4. OBJECT OF SHARING PROFITS

if the purpose and object of the Firm is not to carry on any business, then it will not amount to a
Partnership. Similarly, if the purpose and object of the Firm is not to make and share profits,
then also it will not amount to a Partnership. Therefore, twin conditions have to be satisfied to
create a Partnership. if any of the two conditions are not satisfied, it will not create Partnership in
the eye of law and in accordance with the provisions of Section 4 of the Indian Partnership Act,
1932. If it is not specifically stated who shall bear all the losses of business in the Contract of
Partnership , then the Partners have to share the profits and losses equally among themselves as
provided under Section 13(b) of the Partnership Act. The liability of Partners in a Partnership
which is created under the Indian Partnership Act is unlimited.

Though there may be an

agreement between the Partners allowing one or more among them not to share the losses, even
in such cases, though such Partners need not share the losses, they are bound to share and bear
the liability equally like other partners. Since the liability of Partners of the Partnership Firm
under the original Indian Partnership Act, 1932 is unlimited, many entrepreneurs, particularly the
Foreign Investors and also the big local investors in India did not come forward to start a
business under the old and original Partnership Act, 1932 fearing and to avoid such unlimited
liability. Therefore, in order to overcome the same and to facilitate starting of business with
limited liability, the Government of India has brought a new Legislation / Act called The
Limited Liability Partnership Act, 2008.

Therefore, the Partners of a Partnership Firm, which is created under the above new Act
will not have such unlimited liability.

The registration of Partnership under the old Act is not a must. However, it is a must
under the new Act. Therefore, the new Act also provides for and facilitates the Firm to sue and
be sued in the name of the Firm itself, as it is a legal person under the new Act. However, that is
not the case in the old Act. Therefore, the Firm under the old Act 1932 cannot sue and be sued
on its own and if any case has to be filed, it has to be filed only through its Partners and the Firm
can sue and be sued on its own only if it is registered.

5.

MUTUALITY OF AGENCY BETWEEN THE PARTNERS:

The business must be carried on by all or by any one among them, acting for all. That is, the
concept of agency shall be there among the Partners.
Every Partner in a Partnership Firm is a Principal as well as an Agent for himself and for other
Partners. That is, an act of one Partner is binding on the others. Similarly, he will be bound by
the act of other Partners. Therefore, the object of applying and insisting the principles of agency
is that every Partner shall carry on the business on behalf of others and to make them
accountable to others.
Therefore, in order to make and create a valid and lawful Partnership, all the above five essential
elements shall be present and in existence. In fact, the first four conditions are part of the first
essential conditions prescribed under Section.4 of the Indian Partnership Act, 1932.

II.

TESTS

TO

DETERMINE

AND

FIND

OUT

THE

EXISTENCE

OF

PARTNERSHIP.
1.

The mode of determining the existence of Partnership is provided under Section 6

of the Indian Partnership Act. The said Section is extracted below:

6. Mode of determining existence of partnership.- 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 relevant facts taken
together.
Explanation 1.- The sharing of profits or of gross returns arising from property by
persons holding a joint or common interest in that property does not of itself make such
persons partners.
Explanation 2.- The receipt by a person of a share of the profits of a business, or
of a payment contingent upon the earning of profits or varying with the profits earned by
a business, does not of itself make him a partner with the persons carrying on the
business;
and, in particular, the receipt of such share or payment
(a)

by a lender of money to persons engaged or about to engage in any

business,
(b)

by a servant or agent as remuneration,

(c)

by the widow or child of a deceased partner, as annuity, or

(d)

by a previous owner or part owner of the business, as consideration for the

sale of the goodwill or share thereof, does not of itself make the receiver a partner with
the persons carrying on the business.

2.

Though the provision under the main Section 6 provides for determination of a

Partnership, it is general in nature and no specific provision is made to determine and find out to
the existence of a Partnership, except providing certain illustrations under Explanation-1 and
Explanation-2. Thus, this provision is only an illustrative one and not an exhaustive one.
Therefore, the test to find out the existence of Partnership may vary from case to case, depending
upon the facts and circumstances of each case and depending upon the terms and conditions of
the Contract of Partnership.

3.

Therefore, it has given rise to questioning the existence of Partnership in various

cases under various laws and those disputes have been ultimately resolved by various Forums,

Tribunals, Authorities, High Courts and finally by the Honble Supreme Court, answering as to
whether a Partnership is in existence in the respective cases or not and answering whether one or
the others in the said Firm is/are partner or partners

In Cox V. Hickman (1860) 8 HLC 268: LJCP 125, it has been held that where the creditors, by
agreement, concur and permit their debtor, or trustees for their debtor, to continue his trade and
to apply the profits in discharge of the demands of creditors, the agreement does not create a
partnership between the creditors and the debtor or his trustees.

11.

Smith V. Watson, 2 B & C 401, it has been held that a broker, who receives merely a

share of profits of a business, is not a partner in that business although he may have an option to
become a partner and may do acts which a partner might do.

12.

In Re Fisher & Sons, (1912) 2 KB 491, it has been held that executors who carry on

business under the terms of the Will and do not share the profits are not partners.
CONCLUSION
From the analysis of the legal provisions and Judgments, the concept of Partnership and the tests
to determine the existence of Partnership have to be ascertained and decided based on the
statutes and the case laws and basically it has to be decided based on the terms and conditions of
the contract / deed of partnership either in writing or oral, by looking into agreement. Difficulty
may arrive only when there is no specific agreement or even if there is an agreement if the terms
of agreement are not specific.

Therefore, we have to look at the real intention and real

relationship of the parties based on both oral or written agreement and it has to be seen
collectively, cumulatively and totally in terms of the provisions of law and the Judgments, where
various tests have been applied by the courts.