Q 3. What is Partnership?

Briefly state special features of a partnership on the basis of which its existence can be determined under the Indian Partnership Act?
A Partnership is defined by the Indian Partnership Act, 1932, as the relations between persons who have agreed to share profits of the business carried on by all are any of them acting for all. This Definition gives three minimum requirements to constitute a Partnership, viz:

There must be an agreement entered into orally or in writing by the persons who desire to form a Partnership, The object of the agreement must be to share the profits of business intended to be carried on by the Partnership, and The business must be carried on by all the partners or any of them acting for all of them.

Agreement of Partnership A Partnership is constructed by an agreement between the partners. 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 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 does not necessarily mean that they are partners and it they want to carry on the business in Partnership, then a Partnership agreement in writing becomes necessary. 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 Section 9 and 10 of the Act lay down the basic duties of every partner and the said duties are not subject to any contract on 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 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 the partner may be decided by contract between the partner either express or implied. Subject to any contrary to the contrary such duties and rights of each partner or provided in Sections 12 and 13 of the Partnership Act. They are:

Every partner has a right to take part in the contact of the business, Every partner is bound to attend diligently to his duties in the contact of business, Any difference arising as to ordinary matters connected with the business may be decided by a majority of partner and no change in the nature of the business shall be made without the consent of all the partners, Every partner has as a right to have assess to and to inspect and copy any books of the firm, A partner is not entitled to receive remuneration for taking part in the conduct of the business,

The partners are entitled to share equally the profits earned and shall contribute equally to the losses sustained by the firm, Where the partners is entitled to interest on the capital subscribed by them, such interest shall be payable only out of the profits, A partner making, for the purpose of the business, any payment or advance being the amount of capital he has agreed to subscribed, is entitled to interest thereon at the rate of 6% P.A, The firm shall indemnify a partner in respect of payment made and liabilities incurred by them, o in the ordinary and proper course of conduct of the business and o in doing such act in an emergency, for the purpose of protecting the firm from any loss, as would be done by a person of ordinary prudence, under similar circumstances o The partners shall indemnify the firm from any loss caused due to his willful neglect in the conduct of the business of the firm. This rights and duties will be implied in the Partnership, unless the Partnership agreement provides to the contrary i.e., makes any variation in the said rights and duties. Similarly, subject to a contract to the contrary, if any partners derives any profit for himself from any transaction of the firm or from the use of the property or business connection with the firm or the firm name is liable to contact for the benefit and pay it to the firm, and if the partner carries a business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

Property of Partnership The property of a Partnership firm will consist of all the assets, movable and immovable brought in by any or all the partners into the firm and also include the goodwill. It may be stated that relaying upon the specific provision of Section 22 of the English Partnership Act, 1890, the Supreme Court has held that all the property of a Partnership firm, whether, movable or immovable is movable property, and therefore, on retirement of any partner or dissolution Partnership the division of even immovable property among the partners does not amount to transfer of property and the deed of retirement or dissolution does not require registration. The Supreme Court has not considered the law of vesting and divesting of interest in an immovable property. A property required by A by purchase or otherwise his 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 vests 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. Similarly if possible vested in the partners is divided, among them, it amounts to transfer of one partners interest to the other, and such transfer is necessary to vest and divest the title from one to the other. Even in English law, in spite of the provisions of the Partnership act above referred to, to the countenancing practice is to affect the transfer of property brought in or taken out of the Partnership by a deed of conveyance. Capital of a firm A Partnership firm may or may not have any capital in the form of money or any other property. It is also not necessary that each partner must contribute to the capital of the firm if any. It is a matter of agreement between the parties by which they can regulate their relations and rights towards the capital. Capital of a firm is however different from the assets of a firm. Capital is the initial amount in cash or kind brought in by one or more or all partners to start the business. It is also distinct from the loan advanced by any partner. The propionate share of each partner in the capital may not also be the same or equal to their shares in the profits and losses of the firm. On dissolution the capital contributed by a partner is refundable to him subject to payment of all debts and liabilities [section 48 (b) (iii) of the

act]. Therefore it is necessary to provide specifically about the capital contribution to be made by each partner. 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 contrary to the contract (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 (a) as a result of any agreement between all the partners (b) by adjudication of all the partners or all partners but one as insolvent, or (c) by the happening of an event which makes it unlawful for the business of the firm to be carried on in Partnership or (d) subject to agreement between the parties, on the happening of any of the following events such as (i) efflux of time, (ii) completion of the adventure, (iii) death of a partner, and (iv) insolvency of a partner. In these last four cases the Partnership agreement may provide 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 cases 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 his/their intention to dissolve the firm. Types of Partnership The result of this summary of the Act is that a Partnership is generally created by agreement between the partners. A Partnership can be formed between (i) one or more individuals or (ii) between an individual and a person representing a H.U.F. or (iii) between an individual and other partner representing his firm, or between Limited Company or a Corporation and an Individual or Partnership firm. (iv) between two Partnership firms (v) or between a Limited Company or a Corporation and an individual or Partnership firm (vi) between a Partnership firm and H.U.F. (vii) between members of HUF in their individual and independent capacity (viii) between a HUF and a member of that HUF independently. Partnership under Companies Act

Section 11 of the Companies Act, 1956, provides that the number of partners in a firm shall not exceed 20, and a Partnership firm having more than 20 persons will be illegal. When there is Partnership firm between two firms all the partners of each firm will be taken into account for the purpose of these provisions but if a Partnership is between the Kartha 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. Applicant Hindu undivided family carrying on business as such, not being a Partnership the number of the members of the 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 section 11 of the Companies Act. Partnership under Income Tax Act A Partnership to be recognized 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 into account. Registration of Partnership A Partnership firm is required to be registered under section 58 and 59 of the Partnership Act, though it is not compulsory. Every change in the constitution of a Partnership is also required to be registered. But if it is not registered, then there are certain handicaps stated in section 69 of the Act, the main handicap being that a Partnership firm or its partner cannot file a suit against a third party. For the purpose of Income tax benefits it is necessary to register a Partnership will the Department under S. 184 and 185 of the Income Tax Act, 1961. But once a firm is registered then it is not necessary to register it again if there is any change in the constitution of the firm by adding a partner or omission of a partner by death or resignation. Limited Partnership The concept of limited Partnership is not recognized by Indian Law. It is prevalent in England and America and other countries. In England, the limited Partnership is governed by the Partnership Act of 1907. It consists of general partners who are the main partners with exclusive right of management and their liability is unlimited. But they can take any limited partner who contributes some capital to the firm and whose liability is limited to that amount provided he does not participate in the management or withdraw any part of the capital contributed by him during the term of the Partnership. However a limited Partnership is not a separate legal entity like a limited company. Generally a limited partner joins a firm to participate in a particular scheme or adventure of the firm. Stamp Duty On a Deed of Partnership the stamp duty under the Indian Stamp Act is a fixed one. Article 45 of the Indian Partnership Act, Article 47 in Maharashtra and Article 44 in Gujarat of Bombay Stamp Act speaks about duty payable for registration. The stamp duty is payable on a deed of retirement or a deed of dissolution under the same Articles. But in Maharashtra, and Gujarat if the deed of retirement or deed of dissolution affects any transfer of an immovable property, it will attract stamp duty as on a conveyance on the market value of the property. Registration A Partnership deed is not required to be registered under the Registration Act even if an immoveable property is brought in the firm. Similarly, a deed of retirement or a deed of dissolution is not required to be registered. According to Supreme Court, a division of even immoveable properties on dissolution is not required to be registered as it does not amount to a transfer. The correctness of this view is doubtful

and it is desirable to get such a deed of dissolution or retirement registered for the sake of caution or safety.