DIAN PARTNERSHIP ACT, 19

Kalpeshkumar L Gupta
Assistant Professor of Law
April 9, 2015
1

Outline
1. Nature of Partnership
2. Relation of Partners
3. Dissolution of Firm
4. Taxation in Partnership
Firms

Outline
1. Nature of Partnership
2. Relation of Partners
3. Dissolution of Firm
4. Taxation in Partnership
Firms

Introduction
- Indian Partnership Act, 1932 which came into
force on October 1, 1932
- Prior to this act, it was embodied in Chapter XI of
the Indian Contract Act, 1872

Definition of
Partnership
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 (Sec.
4)
Persons who have entered into partnership with
one another are called individually partners and
collectively a firm.

Essential Characteristics of
Partnership
1. Association of two or more persons.
no should not exceed in banking business and
in other 20
.The term person as used in Sec 4 does not
include a firm
(Duli Chand v/s. Comm. Of IT, AIR, 1956 SC 354)
This is because a firm is not a separate legal
entity.
2. Agreement
3. Business
4. Sharing of Profits
5. Mutual Agency
A partner is both an agent (in the sense that he
can bind by

Formation of Partnership
A partnership is based on an agreement. Some
points should be noted in this connection.
1. Minor partner
A minor may be admitted to the benefits of
partnership with the consent of all the other
persons.
2. Consideration
As no consideration is required to create an
agency, no consideration is required to create
partnership
3. Partnership Deed
May be oral or writing. It is in the interest of the
partners that the agreement must be in writing.
Duly stamped.

Partners, Firm, Firm Name

Persons who have entered into partnership with
one another are called individually partners and
collectively a firm and the name under which the
business is carried on is called the firm name
The law safeguards the trade names and goodwill
of other persons who are already in existence. The
mere fact that a firm already been doing business
under a certain name does not prevent a new firm
from adopting it.
But if the name is used with a fraudulent
intention, the law will intervene. The firm may be
restrained from the adoption of such name by
injunction.
8

Legal Status of firm

A firm is not distinct legal entity apart from the
partners constituting it (Malabar Fisheries Co. v/s.
Comm. Of IT, Kerala, AIR 1980 SC 176). Unlike a
company which is a corporate body, it is not
regarded as a person in the eyes of the law.
Firm is abridged name for the individuals who
compose
it
(Munshi
Ram
v/s.
Chhehrata
Municipality, AIR 1979 SC 1250)

Test of Partnership
In order to determine the existence of partnership
between a group of persons, the in Sec 4 is used as
test i.e. one must look to the agreement between
them. If the agreement is to share the profits of a
business and business is carried by all or any of
them acting for all, there is partnership otherwise
not.
But when there is specific agreement constituting
partnership among the partners or the agreement
is such as does not specifically speak of
partnership, we have to refer Sec. 6 which
embodies the rule laid down.
.Sec 6 In determining whether a group of
persons is or is not a firm, or whether a person is or
not a partner in a firm, regard shall be had to the

10

Test of Partnership
Cases where no partnership relation
1. Joint owners sharing gross returns
.joint owners of property sharing profits or
gross returns arising from the property do not
become partners.
2. Sharing of profits
The sharing of profits is prima facie a strong
evidence of partnership but the fact that there is
sharing of profits between some persons will not
automatically make them partners.
e.g. where a person has sold his business alongwith
its goodwill and receives a portion of the profits in
consideration of the sale.

11

Partnership & Co-ownership

Co-ownership means joint ownership of some
property which does not necessarily result in
partnership. In partnership the partners are
necessarily co-owners of the property of the firm,
but in co-ownership the co-owners are not
necessarily partners.
Points of difference
1.
2.
3.
4.

Mode of creation
Business
Transfer of interest
Number of members etc.

12

Duration of Partnership
1. Partnership for a fixed term
where a firm constituted for a fixed term
continues to carry on business after the expiry of
that term, the
mutual rights and duties of the
partners remain the
same as they were before
the expiry, and so far as they
may be consistent
with the incidents of partnership-atwill; (Section
17(b))
2. Partnership at will (Section 7)
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-atwill".

13

Registration of Firms
The Act does not provide for the compulsory
registration of firms.
Firm to be registered in office of Registrar of Firms
But indirectly, by creating certain disabilities from
which an unregistered firms suffers, it has made
the registration of firms compulsory.
Section 69 deals with such disabilities.
1. Suits between partners and firm
2. Claim of set off
3. Suits between firm and third parties
A plaint filed by an unregistered firm is void
(Abani Kant
Pal, AIR 1986 Cal. 143)
14

Alteration
For following alteration intimation to be sent to
Registrar of Firms.
1. Change in the name of the firm or in location of
the principal place of business of the registered
firm (Sec. 60)
2. Closing and opening of branches (Sec. 61)
3. Change in names and addresses of partners
(Sec. 62)
4. Change in constitution of the firm and its
dissolution or election of a minor partner on
attaining the majority to continue as partner or

15

Outline
1. Nature of Partnership
2. Relation of Partners
3. Dissolution of Firm
4. Taxation in Partnership
Firms

16

Rights of a partner
1. Right to take part in business.
2. Right to be consulted.
3. Right to access to account
4. Right to share to profits
5. Right to interest in capital
6. Right to interest on advances
7. Right to be indemnified
8. Right to use partnership property
9. Right to partner s agent of the firm
10.No new partner to be introduced etc..

17

Duties of a partner
1. To carry on business to the
greatest common advantage
2. To observe faith
3. To indemnify for fraud
4. To attend diligently
5. To hold an use property of the firm
exclusively for the firm
6. To account for personal profits
7. To act within authority
8. To be liable jointly and severally
9. Not to assign his rights
10.To share losses etc.

18

Property of the Firm

(Section
It is open to14)
partners to determine

by agreement
amongst them as to what shall be the property of
the firm, if there is no express agreement, the
source from which the property was obtained, the
purpose for which it was acquired and the mode in
which it had been dealt with are important in
determining as to whether the property is or is not
the property of the firm.
..Sec. 14 further provides that, unless the
contrary intention appears, property an rights and
interest in property acquired with money belonging
to the firm deemed to have been acquired for the
form.
e.g. A & B are partners in a business. A buys some
land in his own name out of the profits of the

19

Agreement between partners in

restraint
Section 27 of
of trade
Indian Contract Act agreement
restraint of trade or business is voidbut partners
of the firm may agree that a partner shall not carry
on any business other than that of firm while he is
a partner (Sec. 11(2))
Exception to the general rule that an agreement in
restraint of trade is void under the Partnership Act.
1. A partner shall not carry on business other than
that of the firm while he is a partner.
2. An outgoing partner may agree with his partners
not to carry on a business similar to that of the
firm within a specified period or within specified
local limits.etc.

20

Types of Partners
1.
2.
3.
4.

Actual or ostensible partner

Sleeping partner
Nominal Partner
Partner by estoppel or holding out

Sometimes a person who is not a partner in a firm

may, under certain circumstances, be liable for its
debts as if he were a partner. Such partner is
called a partner by estoppel or holding out.
e.g. A retired businessman of some repute
assumed the honorary presidentship of the
business of certain persons who requested him for
the same. Held he was liable for the debt of the
firm to those who gave credit to the firm in the
bonafide that he was a partner (Lake v/s. Duke of
Argyll. 1844)

21

Minor Partner
With the consent of all the partners for the time
being, a minor may be admitted to the benefits of
partnership (Sec. 30(1)).
This provision is based on the rule that a minor
cannot be a promisor, but he can be a promisee or
a beneficiary.
There cannot be partnership of minors among
themselves as they are incapable of entering into a
contract (Shriram v/s. Gourishankar, AIR 1961 Bom
136)

22

Minor Partner
Position of minor partner
1. Before attaining majority.
Rights
Share of property and of profit
Access to and inspect and copy of accounts
Can sue when profit is not given. When he wants
to sever from firm.
Liabilities
Confined only to the extent of his share in profits
and property of the firm
Cannot be declared insolvent
Cont

23

Cont

Minor Partner
Position of minor partner
2. Position on attaining majority
On attaining the majority the minor partner has to
decide within 6 months whether he shall continue
in the firm or lave it.
If he fails to give a public notice, he is deemed to
have become a partner in the firm on the expiry of
the said six months.

24

Reconstitution of Firm
1. Introduction of a partner (Sec. 31)
2. Retirement of a partner (Sec. 32)
3. Expulsion of a partner (Sec. 33)
4. Insolvency of a partner (Sec. 34)
5. Death of a partner (Sec. 35 & 42 (c))
6. Transfer of a partners interest (Sec. 29)

25

Outline
1. Nature of Partnership
2. Relation of Partners
3. Dissolution of Firm
4. Taxation in Partnership
Firms

26

Dissolution of Firm
Dissolution of Firm means complete breakdown
or extinction of the relationship of partnership
between all the partners of the firm.
If this breakdown or severance of partnership
relation is between a few and not all the partners
(and business is carried on), this amounts to
Dissolution of Partnership and not of the firm
e.g. If there is a partnership between A, B and C, C
retires. The partnership between A, B and C comes
to end and partnership between A and B comes
into being.

Cont

27

Cont

Dissolution of Firm

Cont

28

Cont

Dissolution without order of court

(Sec.
40 toby43)
1. Dissolution
agreement (Sec. 40)
2. Compulsory dissolution (Sec. 41)
e.g. insolvency
3. Contingencies (Sec. 42)
e.g. expiry of term, death of partner etc.
4. Notice of Partnership a will (Sec. 43)
Notice by any partner giving notice to all
partners.

Cont

29

Cont

Dissolution by court (Sec.

44)
1. Insanity of partner
2. Permanent incapacity
3. Misconduct
Fraud, persistent refusal or neglect by a partner
to attend business etc.

Cont

30

Cont

Liability of a partner on
dissolution
(Sec.
45)of the
In order to absolve
partners

liability for any

act done after the dissolution of the firm, a public

notice must be given of the dissolution. If it is not
done, the partners continue to be liable as such to
third parties for any act done by any of them after
dissolution.
Further in such case the act of a partner done after
the dissolution is deemed to be an act done before
the dissolution.
31

Outline
1. Nature of Partnership
2. Relation of Partners
3. Dissolution of Firm
4. Taxation in Partnership
Firms

32

Taxation in firms &

LLPs
Flat rate of 30% on the total

income
after deduction of interest and
remuneration
to
partners/Designated Partners at the
specified rates + Surcharge of 10%
if Total Income exceeds 1 Crore and
will
be
further
increased
by
education cess secondary and
higher education cess @ 3% on
Income-tax.

Interest to partner not exceeding

12%.

Cont

33

Cont

Taxation in firms
From A.Y. 2010-11, deduction for payment of
remuneration to working partners for both Business
as well as professional firms has changed as under:
Book Profit/Loss% of amount of deduction
Book Profit/Loss

% of amount of deduction

(i) loss or profit upto Rs. 3,00,000 ---- Rs. 1,50,000/or 90% of
Book Profit
whichever is more
(ii) on the balance 60% of book profit ---- 60% of
book profit

34

Thank you

35