PARTNER AND PARTNERSHIP: JUDICIAL INTERPRETATION

FINAL DRAFT SUBMITTED IN PARTIAL FULFILLMENT OF THE COURSE

LAW OF CONTRACT FOR THE COMPLETION OF B.B.A. LL.B (HONS.)
COURSE.

SESSION 2017-21
CHANAKYA NATIONAL LAW UNIVERSITY
NYAYA NAGAR, MITHAPUR
PATNA

SUBMITTED TO SUBMITTED BY
Dr. Vijay Kumar Vimal AMIT DIPANKAR
181609
B.B.A LL.B (Hons.)
 DECELERATION BY STUDENT

I hereby declare that the project entitled “PARTNER AND PARTNERSHIP: JUDICIAL
INTERPRETATION” submitted to Dr. Vijay Kumar Vimal, (lecturer) is my original work and
the project has not formed the basis for the award of any degree, associate ship, fellowship or
any other similar titles. I have not submitted this work elsewhere for any other degree or
diploma. I am fully responsible for the contents of my Project Report.

(Signature of candidate)
AMIT DIPANKAR
Chanakya National Law University
 ACKNOWLEDGEMENT

I am using this opportunity to express my gratitude to everyone who supported me throughout

the course of this Law of Contract project. I am thankful for their aspiring guidance, invaluably
constructive criticism and friendly advice during the project work. I am sincerely grateful to
them for sharing their truthful and illuminating views on a number of issues related to project.

First, I would like to thank my faculty Dr. Vijay Kumar Vimal for his exemplary guidance,
monitoring and constant encouragement throughout the course of this project. I would also like
to express my deep gratitude to him for his valuable suggestions. His lectures on Law of
Contract gave me lot of insight into carrying out research.

The contribution made by my classmates and friends are, definitely, worth mentioning. I would
also like to express my gratitude towards the library staff for their help.

I would like to thank my parents and my brother for their constant support and encouragement
without which this project would not have seen the light of the day.

Last, but far from the least, I would express my gratitude towards the almighty and all those
unseen hands who helped me out at every stage of my project.

AMIT DIPANKAR
 INTRODUCTION

The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October,
19321. The present Act superseded the earlier law relating to Partnership, which was contained in
Chapter XI of the Indian Contract Act, 1872. The Act is not exhaustive. It purports to define and
amend the law relating to Partnership.2

A Partnership arises from a contract, and therefore, such a contract is governed not only by the
provisions of the Partnership Act in that regard, but also by the general law of contract in such
matters, where the Partnership Act does not specifically make any provision. It has been
expressly provided in the Partnership Act that unrepelled provisions of the Indian Contract Act
1872, save in so far as they are inconsistent with the express provisions of this act, shall continue
to apply.3 Thus, the rules relating to offer and acceptance, consideration, free consent, legality of
object, etc, as contained in the Indian Contract Act are applicable to a contract of Partnership
also. On the other hand, regarding the position of minor, since there is specific provision
contained in Section 30 of the Indian Partnership Act, the minor’s position is governed by the
provision of the Partnership Act.

What Is The Nature Of Partnership?

Partnership is a form of business organization, where two or more persons join together for
jointly carrying on some business. It is an improvement over the ‘Sole –trade business ’, where
one single individual with his own resources, skill and effort carries on his own business. Due to
the limitation of resources of only a single person being involved in the sole-trade business, a
larger business requiring more investments and resources than available to a sole-trader, cannot
be thought of in such a form of business organization. In partnership, on the other hand, a
number of persons could pool their resources and efforts and could start a much larger business,
than could be afforded by any of these partners individually. In case of loss the burden gets
divided amongst various partners in a Partnership.

1
Sec 1, The act came into force on the 1st day of October,1932 except Section 69, which came into force on the
1st day of October ,1933
2
See Preamble to the Act.
3
See Preamble to the Act.
Indian Partnership Act .1932

Preamble—Scope And Purpose

The preamble is an admissible aid to construction. It throws light on the intent and design of the
legislature and indicates the scope and purpose of the legislation itself.4 But it cannot be used to
control or qualify precise and unambiguous language of the enactment. It is only when there is a
doubt as to the meaning of a provision, that recourse may be had to the preamble to ascertain the
reasons for the enactment and hence, the intention of Parliament.5

Scope:

The scope of a partnership is primarily a question of the intention of the partners. There is no
restriction on the exercise of such powers as it chooses at any time to exercise, except such
prohibitions on illegal, immoral or fraudulent conduct as apply equally to individuals.

1- A partnership may itself be a member of another firm if the partners of the constituent firm
consent thereto.

2- If it appears that all the partners have either authorized or ratified the contract, no further
question as to its validity ordinarily remains. The cases where the question of the validity of
partnership contract arises is where one partner has made the contract without specific authority
from his co-partners. As to their implied scope partnerships may he divided into the classes of
the non-trading and the trading. Some powers can be exercised by partners in partnership of
either type. Thus a partner may retain an attorney protect the interests of the firm.

4
Poppatlal Shah vs. State Of Madras AIR 1953 SC 274
5
Tribhuban Parkash Nayyar Vs. Union Of India (1969) 3 SCC 99.
Definition of Partnership:

Section 4 of the Indian Partnership Act1932 defines ‘Partnership’ as under6 :

‘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 ’

Essentials of Partnership:

According to Section 4, the following essentials are necessary to constitute a ‘Partnership’.

1. There should be an agreement between the persons who wants to be partners.

2. The purpose of creating partnership should be carrying on of business

3. The motive for the creation partnership should be earning and sharing profits.

4. The business of the firm should be carried on by all of them or any of them acting for all, i.e.,
in mutual agency

When all the above elements are present in certain relationship that is known as ‘partnership’.
Persons who have entered into partnership with one another are called individually ‘partners’ and
collectively ‘a firm’ and the name under which their business is carried on is called the ‘ firm
name’.

Elements Of ‘Partnership’:

The definition of ‘partnership ‘contains three elements7 :

6
The present definition replaces Section 239 , Indian Contract Act which defined ‘Partnership’ as under :
‘Partnership is the relation which subsists between persons who have agreed to combine their property, labour or
skill in some business , and to share the profits thereof between them.
The present definition is wider than the one contained in the Indian Contract Act in so far as it includes the
important element of ‘ mutual agency ‘, which was absent in the old definition.
According to Pollock:
‘Partnership is the relation which subsists between persons who have agreed to share the profits of a business
carried on by all or any way of them on behalf of all of them.’
7
Dulichand Laxminarayan Vs. CIT AIR 1956 SC 354 ,Para 11 ; see also Pratibha rani Vs. Surajkumar AIR 1985 SC 628 ,
(1985 ) 2 SCC 370 and Sanjay Kanubhai Patel Vs. Chief Controlling Revenue Authority AIR 2005 Bom 57,para8
1. There must be an agreement entered into by all the persons concerned8.

2. The agreement must be to share the profits of business; and

3. The business must be carried on by all or any of the persons concerned, acting for all.

Illustrations:

a) A and B buy 100 bales of cotton, which they agree to sell for their joint account. A and B are
partners in respect of such cotton9

b) A and B buy 100 bales of cotton, agreeing to share it between them. A and B are not partners.

c) A agrees with B, a goldsmith, to buy and furnish gold to B , to be worked on by him and sold ,
and that they shall share in the resulting profit or loss. A and B are partners.

Partnership Agreement – Oral, Written or By Conduct

The Supreme Court has, construing the provisions of section 4, observed that a partnership
agreement is the source of a partnership, and it also gives expression to the other ingredients
defining the partnership, specifying the business agreed to be carried on,the persons who will
actually carry on the business , the shares in which the profits will be divided , and several other
considerations which constitute such an organic relationship . A partnership agreement therefore,
identifies the firm and each partnership agreement may constitute a distinct and separate
partnership. That is not to say that a firm is corporate entity or enjoys a juristic personality in that
sense. However, each partnership is a distinct relationship. The partners may be different and yet
the nature of the business may be the same, the business may be different and yet the partners
may be the same. The intention may be to constitute two separate partnerships and therefore, two
distinct firms, or to extend merely a partnership, originally constituted to carry on one business ,
to the carrying on of another business. The intention of the partners will have to be decided with
reference to the terms of the agreement and all the surrounding circumstances, including

8
Rampratap v Durgaprasad AIR 1925 Pc 293; Hemchandra Dev vs. Dhirendra Chandra Das AIR 1960 Cal 691
9
Birdichand v Harakchand 190 IC 613 , AIR 1940 Nag 211
evidence as to the interlacing or interlocking of management, finance and, other incidents of the
respective business.10

Agreement of partnership need not to be express, but can be inferred from the course of conduct
of the parties to the agreement. The firm rule is that once the parties entering into the partnership
are clearly described in the instrument, there is no scope for further inquiry to find out by some
process or casuistry, if any of the parties has got obligation to others for the purpose of inducting
those others to whom any of the parties may be accountable in law, into the arena of partnership
and for treating them as partners under the law 11. If , the parties to an agreement have not agreed
on the date of commencement of the partnership , it cannot be said that they have become
partners.

The Supreme Cour, in Tarsem Singh v Sukhminder Singh 12, has held that it is not necessary
under the; law that every contract must be in writing. There can be an equally binding contract
between the parties on the basis of oral agreement, unless there is a law which requires the
agreement to be in writing.

The relations inter se, among the promoters of a company, are not the same as the relations
between partners. Persons entering into contract are not, on the authority of Keth Spicer Ltd v
Mansell, necessarily to be viewed as partners. However, if they perform a large number of acts
as part of the promotion , the court might come to a different conclusion.

10
Deputy Commr Of Sales Tax (Law) Board Of Revenue (Taxes) vs. K Kelukutty AIR 1985 SC 1143 , from (1978) 2 ILR
Ker 82
11
CIT v Kedarmal Keshardeo AIR 1968 A&N 68 ; Aruna Group Of Estates , Bodinayakanur v State Of Madras (1962)
2 Mad LJ 294
12
(1998) 3 SCC 471 ,Para 13
Construction of Partnership Agreements:

It is settled canon of construction that a contract of partnership must be read as a whole and the
intention f the parties must be gathered from the language used in the contract by adopting
harmonious construction of all the clauses contained therein. The cardinal principle is to
ascertain the intention of the parties to the contract through the words they have used, which are
key to open the mind of the makers. It is seldom that any technical are pedantic rule of
construction can be brought to bear on their construction. The guiding rule really is to ascertain
the natural ad ordinary sensible meaning to the language through which the parties have
expressed themselves, unless the meaning leads to absurdity. A partnership deed must be
constructed reasonably.

Determining the Existence Of Partnership:

In Ross v. Parkyns13 Jessel, M.R., stated the law as follows: “ It is said (and that there is no
doubt ) that the mere participation in profit inters se affords cogent evidence of partnership. But
it is now settled by the case of Cox v. Hickman, Buller v. Sharp that although a right to
participate in profits is a strong test of partnership, and there may be cases where upon a single
presumption, not of law, but of fact, that there is a partnership, yet whether the relation of
partnership does or does not exists must depend upon the whole contract between the parties, and
that circumstances is not conclusive. ”. The law as stated above has been restated in this section.
The section also indicates the manner in which the general principle to be applied to a particular
circumstances. The question whether the relation of partnership does or does not exist, “must
depend on the real intention and contract of the parties.

Explanation I - The mere fact that a person is entitled to a share in the profits does not make him
a partner, because the real relationship may be one of debtor and creditor.

DISSOLUTION

The partnership may be voluntarily dissolved at any time with the mutual consent of the partners.
In such an eventuality, the withdrawing partner should move reasonably swiftly to facilitate the

13
(1875) L.R. 20 Eq.331,335
liquidation. In case a partner was to die, the remaining partners will have the option to either
liquidate the partnership or to buy out the share of the deceased partner.

However, dissolution of partnership firm is triggered when some predefined conditions as per the
Partnership Act of 1932 are met such as:

  Dissolution by Agreement

  Dissolution by Notice

  Dissolution by the Court

  Compulsory Dissolution

  Conditional Dissolution

Dissolution by Agreement14

We find this form of dissolution in section 40 of the Partnership Act of 1932. A partnership can
be dissolved at any point of time with the consent of the existing partners irrespective of the fact
of whether the partnership was formed at will or for a fixed period of time in accordance with the
terms and conditions of the partnership deed or of a separate agreement. As we know that
partnership is formed by mutual consent and volition of individuals who are called partners. This
type of partition takes into account of the above fact and honors the decision of the partners. It
also provides for a disjunctive clause that partnership can be dissolved by complying with the
contract that was made between the partners. The second part speaks of a situation that if there
was a written contract which provided for the manner and mode of dissolution then by following
or adopting the same it can be dissolved. For example if the contract provides that consent of one
partner has to be made in writing only then it must be adhered.

Compulsory Dissolution15

This is a form which does not leave any room for the partners to decide or resolve. It is like auto
dissolution. Section 41 of the act speaks of two situations numbered as 41(A) and 41(B) where
this form is applicable. The first situation is when all partners or even one partner is adjudged as
insolvent. The second situation is section 41(B) wherein it speaks that in event of the business of
14
Sec 40, The Partnership Act, 1932
15
Sec 41, The Partnership Act, 1932
the firm becoming unlawful or it would be unlawful for the partners to carry on the business. For
example in case of the business of prize chit funds.

However, an exception has been carved out which says that if out of many projects or ventures if
one becomes illegal and the other business can be carried out then the firm will not stand
automatically dissolved.

Dissolution Due to Certain Contingencies16

It says that if on the happening of four contingencies numbered as a, b, c and d and qualified by
the term of the contract the firm shall stand dissolved. They are as follows:

On the expiry of the term.

For example if a partnership was formed to sell a particular item for one year. On the completion
of the one year the firm would be dissolved.

On completion of the undertakings.

For example a firm was formed to provide service to VAT registration. Since the law has been
amended and VAT no longer exists therefore the firm shall stand dissolved.

On the death of a partner.

Adjudication of partner as insolvent.

In the case the partner is adjudged as insolvent the firm would be dissolved even though the term
has not been expired for the particular venture has not been finished.

Dissolution by Notice17

Section 43 of the act provides an opportunity to avail this section to dissolve the firm provided it
is formed at will. The law also says that such option to be exercised only in writing and such
notice to be given to all other partners or partner. Therefore to come within this provision of law
the partnership must be formed at will. But if there is no mention of a fixed duration or

16
Sec 42, The Partnership Act, 1932
17
Sec 17, The Partnership Act, 1932
determination the partnership constituted is considered to be formed at will18. Thus in such cases
a partner by notice in writing intimating the other partners or partner can dissolve the firm.

Dissolution by Court19

This provision states seven grounds on which the court can dissolve a firm. Section 44 applies
only when one of the partners approaches a court of competent jurisdiction praying for
dissolution. The seven grounds are as follows:

Any partner becoming of unsound mind.

A partner becoming incapable of discharging or performing duties as a partner but not as a

person.

The nature of the business being such that the conduct of a partner prejudicially affects the
carrying on the business in which case the partner suing must not be the person whose conduct is
complained.

The partner commits breach of agreement relating to the management and affairs of the firm or
the conduct relating to the business is such that the other partners for reasonably for all other
practical purpose cannot carry on the business of the firm.

The guilty partner transferred in interest of the firm to a third party or share charged under civil
procedure code or allowed his share to be sold for the recovery of land revenue.

The firm business carried on if results in the loss of the business.

Any other ground which appears to the court as just and equitable.

18
Sec 7, The Partnership Act, 1932
19
Sec 44, The Partnership Act, 1932
RIGHTS OF A MINOR IN A PARTNERSHIP

A minor is a person who hasn’t yet attained the age of majority according to the Indian Majority
Act of 1875.20 Section 3 of the Indian Majority Act states that a person who is domiciled in India
will attain majority at the age of eighteen.

Section 30 of the Indian Partnership Act governs the admittance of a minor into a partnership.
This section deals with the rights and liabilities of a minor who is admitted into a partnership and
is entitled to the benefits of a partnership. A deeper reading of the provision, specifically sub-
section (1) Of the provision makes it very clear that a minor can’t be a full-fledged partner in a
partnership. But with the consent of all the partners, a minor can be admitted to the benefits of a
partnership.

Minors – Admitted only to benefits

The general principle which has been laid down in Section 11 of the Indian Contract Act, 1872,
states that a person has to attain the age of majority and should be of sound mind and not
disqualified to enter into a contract to be a competent party. The Indian Partnership Act, 1932
was drafted by a Special Committee. Before the enactment of this statute, the provisions relating
to partnerships was enshrined in the Indian Contract Act itself. While drafting the Act, the
Special Committee felt that no major changes were required in the Partnership Act, and they
believed that there was no reason to deviate from the principle of incapability of a minor to enter
into a contract as provided by Section 11 of the Contract Act. Following this, the Committee did
not allow minors to become a partner in a partnership, although they allowed a minor to be
admitted to the benefits of a partnership.21 In the judicial pronouncement of S.C. Mandal v.
Krishnadhan,22 It was observed that under Section 4 of the Indian Partnership Act, a firm means
a group of person who has entered into a contract of partnership among themselves and reading it

20
http://admis.hp.nic.in/himpol/Citizen/LawLib/C0141.htm
21
http://www.legalindia.com/minority-and-partnership
22
(1922) 49 Cal 560,570
with Section 11 of the Indian Contract Act, it can be interpreted that a minor cannot be a part of
the contract of partnership. A minor can only be admitted to the benefits of a partnership, and
that partnership has to exist independently. Also, there cannot be a contract between two minors. 
In simple words, there should be a partnership between two major partners before a minor can be
admitted to its benefits.

In the case of H.R.G Ram v. Commissioner of Income Tax, 23 It was held by the High Court of
Allahabad that any partnership deed which divides the obligations and rights between the major
and minor partners equally will be invalid as it will be in contravention of Section 30 of the
Partnership Act because in such a case not only the benefits are given to the minor, but liabilities
are also being imposed upon the minor. There was some confusion regarding this proposition of
law as in some cases, different high Courts of the country opined that even if a minor is made a
full-fledged partner in a partnership firm, the partnership deed is to be interpreted in a liberal
manner, and the obligations of the minor will be limited to the extent provided in Section 30 of
the Partnership Act.

But in the landmark case of Commissioner of Income Tax v. D Khetan and Co. 24 The Apex
Court made the legal stand clear on this issue by stating that where a minor is made a full-
fledged partner in the firm, the firm could not be registered by the Income Tax Department. In
case the Income Tax Department do register such a partnership firm, a new contract is to be
made where the minor is admitted only to the benefits of the firm, and the original contract will
be rendered invalid by registration of the new contract. Therefore, the proposition of the law is
very clear. The partnership deed has to make it specifically clear that the minor is admitted only
to the benefits of the firm and is not personally liable for the losses. In the judicial pronounce of
Banka Mal Lajja Ram & Co. v. Commissioner of Income Tax, Delhi, 25 It was held by the Court
that even if the other partners consent, a minor still can’t become a full-fledged partner in a firm
through his or her guardian. In the case of CIT v. Kedarmall v Keshardeo, 26 it was held by the
Court that a contract deed is valid when a guardian enters into a partnership on behalf of the
minor, provided the minor is not made liable for the losses of the partnership, and the Guardian

23
(1950) 18 ITR 106 (All)
24
AIR 1961 SC 680
25
AIR 1953 Punj 270 (DB).
26
AIR 1968 Assam 68
still had the right of being the guardian of the minor when the contract was entered into. Also,
the income of a minor from a partnership will not be considered for the purpose of income tax.

Rights and liabilities of a minor

Sub-section (2) of section 30 of the Partnership Act states that a minor is entitled to share of
profits and the property of the firm which may have decided at the time the minor was admitted
to the benefits of the partnership.  Under this provision, a minor also has the right to access and
inspects the accounts of the firm. But this right is limited to the access and inspection only of the
accounts of the firm and not any other document of the firm. Under sub-section (3) of the
provision, it is stated that the minor is liable to the extent of his share in the partnership and
cannot be made personally liable for the losses of the firm. In the case of S.C Mandal v. Asutosh
Ghose,27 It was held by the Court that the creditors of the firm can only recover the amount from
a minor to the extent of his share in the firm, but they can’t sue the minor personally. The full-
fledged partners do not enjoy this benefit as they can be made personally liable. In the case of
S.R Patil v. C.N. Sedalge,28 It was opined by the Court that a minor who has been admitted to the
benefits of a partnership can’t be declared insolvent even if the other partners are declared as
insolvent.

Sub-section (4) of the provision states that the minor can sue other partners to get the benefits of
the partnership, but this right to sue is limited by the provision. The minor gets the right to sue
other partners to recover the benefits only if the minor sever all ties with partnership firm. This
provision further states that in the case the minor sever all ties with the firm, valuation of his
share is to be done by section 48 of the Act, as far as possible.

Position of minor on attaining majority

Under sub-section (5) of the provision, the minor has two options on attaining majority. Either he
can sever the connection with the firm or become a full-fledged member. The minor has to make
the decision within six months of attaining majority. If he chooses to become a full-fledged
partner of the firm or sever the ties with the firm, he will have to give a public notice specified

27
AIR 1915 Cal 482
28
AIR 1965 SC 212
under section 72 of the Act. In the case that no public notice is given by the partner, he will be
considered as a member of the partnership. The minor also continues to enjoy the rights which he
enjoyed as a minor till he reaches a decision. Sub-section (6) of the provision states that burden
of proving that the minor had no knowledge about the fact that he was entitled to enjoy the
benefits of the firm lies on the party who alleges such facts. Clause (a) of sub-section (7) states
that when a minor becomes a full-fledged partner, such minor will now be held liable not only
for the future liabilities of the firm, but will be liable for those obligations also which were
incurred by the firm from the date the minor was admitted to the benefits of the partnership.
Clause (b) states that the share of the minor after he attains majority will be the same which was
given to him when he was a minor. This is because, when the minor chooses to become a full-
fledged member of the partnership, there is no break in the partnership and it continues as it is.

Sub-section (8) of the provision states that when the minor decides that he’ll not become a full-
fledged member of the partnership, he will be liable for the obligations and liabilities of the firm
until the time he gave a public notice stating that he wouldn’t continue as a partner in the
partnership. After severing the ties with the firm, the minor may file a suit to recover the benefits
he was entitled to. Sub-section (9) of the provision states that nothing is given in sub-section (7)
and (8) will affect Section 28 of the Act which states that if a party has misrepresented some fact,
he’ll be liable for holding out. Therefore, if a minor even after leaving the partnership represents
himself as a partner, he’ll be estopped from denying it later.
CONCLUSION

Partnership is very important because in day to day activities we enter into partnership
agreements and by making partners big goals are achieved with the help of joint and more
number of people. The joint efforts of all the member results in successful accomplishment of
tasks and that task or job can be easily afforded. Division of work leads to increase in efficiency
at work among different partners.

When some job is done by consent of all the members and if some profit is earned then it is
shared among the different partners. And similar is the case when some loss occurs then that is
also beard among all the members and its not that only one has to take responsibility or give
compensation. So in my view Partnership is a good form of doing business than a company
which is owned by a single person.

Partnership is one of the oldest forms of business relationships. Though limited liability
companies have replaced partnership firms in complex businesses, partnerships are still preferred
by professionals and small trading and business enterprises in India and abroad.

The Indian partnership act of 1932 provides for a general form of partnership which is the most
prevalent form in India, but, over time the general form of partnership has lost its charm because
of the inherent disadvantages in it, the most important is the unlimited liability of all partners for
business debts and legal consequences, regardless of their holding, as the firm is not a legal
entity.
General partners are also jointly and severally liable for tortuous acts of co-partners. Each
partner has the exposure of their personal assets being appropriated and liquidated to meet
partnership dues. These are statutory position, which cannot be altered by contract inter-se,
though at times subterfuges are resorted to by unscrupulous partners to avoid personal liability.

General partnership holdings are not easy to transfer; typically all other partners have to agree.
Yet partnership is preferred in India, because of the ease of formation and lack of compliances
involved.