Agreement of partnership
As stated above a partnership is constituted
by an agreement between the partners. The agreement may be in writing or oral.
But from the practical point of view and particularly in view of the provisions
of other Acts such as the Income Tax Act as well as Partnership Act
an oral partnership is not practicable, and therefore, a partnership agreement
is necessarily required to be in writing.
Therefore, the mere fact that two persons as
joint owners either as heirs or legatees are carrying on a business it does not
necessarily mean that they are partners and if they want to carry on the
business in partnership, then a Partnership agreement in writing becomes
necessary. For example, if a person dies leaving a running business and his
heirs continue to carry on such business, it will not be a business carried on
in partnership and if they want to do so they will have to enter into a regular
agreement of partnership.
Being an agreement and an agreement
enforceable at law, such an agreement must fulfill the basic requirements of a
valid contract, as required by the Contract Act. Therefore, a minor or a
mentally handicapped person cannot enter into a partnership agreement though by
virtue of the provisions of the Partnership Act a minor can be admitted only to
the benefits of the partnership. But that only means that a minor can have a
share in the profits of the business, but he cannot become a partner, and
cannot execute any agreement of partnership.
Similarly if a partnership deed provides that
on the death of a partner his heirs or any one or more of them should be
admitted as partners or partner in place of the deceased partner even in such a
case on the death of a partner his heirs or any of them do not become partners
automatically on such death. But a fresh agreement of partnership will have to
be executed between the existing partners and the heirs or heir of the deceased
partner and if the heir is a minor the new partnership will stand postponed
till the minor attains majority or if the surviving partners are more than one,
the minor can only be admitted to the benefits of partnership.
Test of partnership
As stated before, a partnership agreement can
be oral or in writing. It is not the general practice to enter into a
preliminary agreement to enter into a regular partnership agreement. But if
such a preliminary agreement is entered into and the partners start business in
anticipation of executing a formal deed of partnership, the partnership shall
be deemed to have commenced from the commencement of the business, unless the
preliminary agreement is conditional upon the happening or not happening of
some event in which case the partnership cannot be said to have come into
existence unless the event has happened or not happened. Another test of
partnership as mentioned above is that of sharing profits, and which is an
essential requirement of a partnership. Profits may be shared in such
proportions as the parties may agree, but sharing of profits is most essential.
As against that, sharing of losses only suffered in business is not a test to
constitute a partnership.
Therefore, the partnership agreement may
provide that a particular partner or partners will not be liable to bear any
losses of the firm. As regards sharing in profits the agreement may provide
that a partner shall receive only a fixed share in the profits or a fixed
periodical amount and It is not necessary that profits should be shared in
Section 6 of the Partnership Act provides
that In determining whether a group of persons is or is not a firm or whether a
person is or is not a partner in a firm regard shall be had to the real
relation between the parties as shown by all the relevant facts taken together.
It further provides that sharing of profits
or gross returns arising from property by persons holding joint or common
interest in that property does not of itself make such persons partners, that
is, as stated above, mere joint ownership of business does not constitute a
Similarly, receipt by a person of a share of
the profits of a business or a payment contingent upon earning of profits or
carrying with the profits earned by a business, does not of itself make him a
partner with the person carrying on the business. For example, the receipt of a
share or payment by a lender of money to persons engaged or about to engage in
a business does not make such lender a partner.
Similarly, a share given in profits to a
servant or agent as remuneration does not make him a partner, or if a widow or
child of a deceased partner is given any annuity in payment of the share of the
deceased partner It does not make the widow or child a partner, or if a
business is sold with goodwill and the seller is given a share in profits
towards payment of the sale price it will not make him a partner of the firm.
But otherwise wherever the agreement is for sharing of business carried on by
two or more persons the partnership relation will be inferred.
The partnership business may consist of doing
anything which is not illegal or against public policy. Business may consist of
carrying a continuous trade. or profession or any manufacture and any other
activity of which the object is to earn profits. Or it may be limited to a