Friday, October 14, 2011

True Test of Partnership


According to Sec.4 of the Indian Partnership act, 1932 “Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” Generally a partnership consists of three essential elements:
(a)      There must be agreement between partners.
(b)     The agreement must be to share the profits of the business.
(c)      The business must be carried on by all or any of them acting for all.

In order to determine the existence of partnership between a group of persons, agreement between persons must be taken into consideration. If the agreement is to share the profits of a business, and the business is carried on by all or any of them acting for all, there is partnership otherwise not.

But if there is no agreement or the agreement is such as it does not specifically speak of partnership, the real relation between the parties should be taken as base in determining the existence of partnership (sec.6).

The real relation between the parties is to be determined from all the relevant facts, i.e., the written or verbal agreement, surrounding circumstances at the time when the contract was entered into, conduct of the parties and other relevant facts, e.g., books of accounts, correspondence, evidence of employees, etc. These facts are to be considered collectively not individually. In effect it is the substance of the facts, not the form that has to be looked into in determining the real relation between the parties. There may be cases where the parties expressly state in a document that they are not partners but they may turn out to be partners in the eyes of law, when all the facts are taken into account. Again, a statement by the parties in a document that they are partners may not necessarily constitute them partners in law.


The sharing of profit is an essential element to constitute a partnership. But, it is only a prima facie evidence and not conclusive evidence. The receipt of a share of the profits of a business by a person or a payment contingent upon the earnings of profits or varying with the profits earned by business, would not by itself make him a partner with the persons carrying on the business. Sec. 6 enumerates cases where there is sharing of profits but the partnership relation does not exist. These cases are:
(a)    Joint owners of property sharing profits or gross returns arising from the property do not become partners.
(b)   Where a lender lent money to persons engaged or about to engaged in business, and receives a rate of interest varying with the profit.
(c)    Where a servant or agent engaged in a business and receives his remuneration as a share of profit.
(d)   Where the widow or child of a deceased partner receives a portion of the profits.
(e)   Where a person has sold his business along with its goodwill and receives a portion of the profits in consideration of the sale.

Although the sharing of profits of a business is a strong test of partnership, yet the existence of relation of partnership must depend upon the real intention and conduct of the parties.