Indian Partnership Act,1932:Essential elements of partnership

Introduction to Partnership Act,1932

The law of partnership is contained in the Indian Partnership Act,1932, which came into force on 1st October 1932, Except Section 69,(dealing with the effect of non-registration of firms), which came into force on 1st October, 1993. Science partnership comes into existence only by a contract between the parties for the purpose, the provisions of the Indian Contract Act,except when they are inconsistent with the express provisions of the partnership Act, continue to apply to partnership firms (section 3). The Act is substantially based on the English Law on the subject as contained in the Partnership Act, 1890. The main principles are the same but at place certain alterations have been made to adapt the law to the peculiar conditions prevailing in India.

Features of Indian Partnership Act 1932

  1. Indian Partnership Act, 1932 is a Central Act. (made by parliament)
  2. this Act deals with special type of contract. (contract of partnership)
  3. Provisions regarding contract of partnership were earlier contained in the Indian Contract Act, 1872.
  4. This act extends to the whole of India except the state of Jammu and Kashmir.
  5. This Act came in to force on 1.10.1932, except Section 69 which came into force on the 1st Day of October, 1933.

Short title, Extent and Commencement

  1. This Act may be called the Indian Partnership Act, 1932.
  2. It extends to the whole of Indian except the state of Jammu and Kashmir.
  3. It shall come into force on the 1st day of October, 1932, Except section 69 which shall come into force on the 1st day of October, 1933.

Indian partnership Act

Essential Elements of Partnership

The partnership contains the following elements, namely:

  1. Agreement.
  2. Between two or more persons.
  3. Who agree to carry-on a business.
  4. With the objective of sharing profits.
  5. The business must be carried-on by all or any of them acting for all.

1. Agreement: Partnership is the result of an agreement. It does not arise from status, operation of law or inheritance. Thus at the death of father, who was a partner in a firm, the son can claim share in the partnership property but cannot become a partner unless he enters into a contract for the same with other persons concerned.

2. Association of Two or More Persons: A partnership must have two persons are necessary to constitute a partnership. The partnership Act does not mention anything about the maximum number of persons who can be partners in a partnership firm but section 11 of the companies Act, 1956, lays down that a partnership consisting of more than 10 persons for banking business and 20 persons for any other business would be illegal. Hence these should be regarded as the maximum limits to the number of partners in a partnership firm.

3. Carrying on Business: The third essential element of a partnership is that the parties must have agreed to carry on a business. The term ‘business’ is used in its widest sense and includes every trade, occupation or profession [Sec. 2(b)]. If the purpose is to carry on some charitable work, it will not be a partnership. Similarly, if a number of persons agree to share the income of a certain property or to divide the goods purchased in bulk amongst them, there is no partnership and such persons cannot be called partners because in neither case they are carrying on a business. Thus, where A and B jointly purchased a tea shop and incurred additional expenses for purchasing pottery and utensils for the job, contributing necessary money half and half and then leased out the shop on rent which was shared equally by them, it was held that they are only co-owners and not partners as they never carried on any business.

4. Sharing of Profits: This essential element provides that the agreement to carry on business must be with the object of sharing profits amongst all the partners. Impliedly the partnership must aim to make profits because then only profits may be divided amongst the partners. Thus, there would be no partnership where the business is carried on with a philanthropic motive and not for making a profit or where only one of the partners is entitled to the whole of the profits of the business. The partners may, however, agree to share profits in any ratio they like.

5. Mutual Agency: The fifth element in the definition of a partnership provides that the business must be carried on by all the partners or any (one or more) of them acting for all, that is, there must be mutual agency. Thus every partner is both an agent and principal for himself and other partners, i.e. he can bind by his acts the other partners and can be bound by the acts of other partners in the ordinary course of business.

6. Unlimited Liability: Every partner is liable for the debts of the firm jointly as well as severally to an unlimited extent. His private assets may also be held responsible for the payment of the liabilities of the firm since in the eyes of law partnership is not distinct from its partners. An agreement between the partners to limit their liability shall be void.