Question: What are the essentials to constitute a partnership firm? Explain with relevant examples or case-laws.

 

Note: this post is a part of our important question answer series on Partnership act. You can read other questions by clicking here.

 

Answer

Section 4 of the Indian Partnership Act, 1932 defines “Partnership” as

‘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’. Persons who have entered into partnership with one another are called individually “partners” and collectively a “firm”.

 

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By reading out this section, following essentials can be inferred:

1.      Existence of an agreement

The term 'agreement' is defined under clause (e) of section 2 of the Indian Contract Act, 1872 as follows:

“Every promise or set of promises forming the consideration for each other is an agreement.”

Section 4 makes it clear that partnership is a relation between persons who have agreed to share profits. There can be no partnership without an agreement. The agreement must be enforceable by law. Section 5 further clarifies this by providing that the relation of partnership arises from contract not from status.

In the case of Haji Isa v. Sarnbai, AIR 1938 Nag 324, it was observed that an agreement is sine qua non of every partnership which may be oral or in writing, may be expressed or implied.

 

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

A very wide definition of word 'Business' has been given in section 2(b) of Indian Partnership Act. "Business" includes every trade, occupation and profession. The same provision is inserted in consonance with article 19(1)(g) of Indian Constitution.

I.                     The business which the partners agree to carry on must not be unlawful or opposed to public policy.

II.                   A single commercial transaction may constitute a business, it is not necessary that the business should be of long standing and permanent nature.

III.          If the persons are not already partners, but for a particular transaction, they agrees to share profits or losses arising out of said transaction, they may be partners for the said particular transaction.

 

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

The object of every partnership must be to carry on business for the sake of profits and to share the same. Although the term profit has not been defined in the Act, it means net gain i.e., the excess of return over outlay.

Provided that section 4 of the Partnership Act does not provide that profit must be actually shared by the partners, the same was also held in the case of Abdul Badsha v. Century Wood Centuries.

In case of Raghunandan v. Harmasjee, it was decided that the partners may agree even on this point that anyone of them shall receive a fixed amount monthly or annually. There can even be such an agreement that whether there is profit in a business or not, one of them shall get a fixed amount annually or monthly as profit.

 

4.      Principle of Mutual Agency should be followed

The expression, “must be carried on by all or any of them acting for all”, mentioned under section 4 signifies that every partner can be the agent of any other partner, and can bind other partners by his act alone on behalf of the firm.

In simple terms, the principle of Mutual Agency implies that every partner is both an agent and a principal of other partners.

 

Solve the problem, Answer in Comment Box

'A' carries on in his name the business of loading and unloading wagons of a limited company. 'A' employed 'B' to manage the business. It is agreed between them that 'B' shall get 75 paise share out of the net profit as remuneration and that 'A' shall get a 25 paise but shall not be liable for loss. Are 'A' and 'B' partner?

 

Also visit: Important Solved Questions on Constitutional Law, (Updated), Click Here.

 

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