Contract-II -Cover Page -

DR. RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY
2018-19
CONTRACT-II

ON TOPIC

“MODE OF DETERMINING EXISTENCE OF PARTNERSHIP:

STATUTORY PROVISIONS AND JUDICIAL
PRONOUNCEMENTS”

SUBMITTED TO SUBMITTED BY
DR. VISALAKSHI VEGESNA NEHA KUMARI BIND
ASSOCIATE PROF. (LAW) (170101086)
RMLNLU 2 nd YEAR (3rd SEMESTER)
Contract-II -Table Of Contents -

TABLE OF CONTENTS

DECLARATION ............................................................................................................................. i
ACKNOWLEDGEMENT .............................................................................................................. ii
Section 6 in the Indian Partnership Act, 1932 ................................................................................ 1
Mode of Determining Existence of Partnership.............................................................................. 1
A. Test for Determining Existence of Partnership:................................................................... 2
I. Mixed Question of Fact and Law......................................................................................... 2
II. Legality of Business: Assignment of Licensed Business ................................................. 3
B. Reality of Relation ............................................................................................................... 5
Cox v. Hickman .............................................................................................................................. 5
I. Parties Terminology Not Binding ........................................................................................ 7
II. Sharing Losses Not Necessary ......................................................................................... 9
III. Fixed Sum In Lieu of Profits .......................................................................................... 10
IV. Importance Of Sharing Profits And Losses ................................................................... 10
V. Declaration Under Specific Relief Act To Be Partner ................................................... 11
C. Sharing Of Profits or Gross Returns Arising From Property (Exp. 1)............................... 11
I. Joint Ownership Of Property ............................................................................................. 12
II. Joint Ownership Of Goods ............................................................................................. 13
D. Profit-Sharing By Non-Partnership Interests (Exp. 2) ....................................................... 14
I. Lender of Money Receiving Profits [Clause (a)] ............................................................... 14
II. Servant or Agent Receiving Profits [Clause (b)] ........................................................... 15
III. Widow Or Child Of A Deceased Partner Receiving Profits [Clause (c)] ...................... 17
IV. Seller Of Goodwill Receiving Profits [Clause (d)] ........................................................ 17
Critical Analysis............................................................................................................................ 22
Conclusion .................................................................................................................................... 23
Bibliography .................................................................................................................................. iii
Contract-II -Declaration-

DECLARATION

I hereby declare that the work reported in this project report entitled “Mode Of Determining

Existence of Partnership: Statutory Provisions and Judicial Pronouncements” submitted at

Dr. Ram Manohar Lohiya National Law University, Lucknow is an outcome of my work

carried out under the supervision of Dr Visalakshi Vegesna. I have duly acknowledged all the

sources from which the ideas and extracts have been taken. To the best of my understanding, the

project is free from any plagiarism issue.

Neha Kumari Bind

Dr. RMLNLU, Lucknow

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ACKNOWLEDGEMENT

The importance of research in Academics cannot be emphasized enough. While classroom

teaching helps a student with understanding the fundamental concepts of a subject, research

papers like this push one towards the detailed analysis of particular topics.

The fundamentals of my understanding of this topic were established with the classroom lectures

of Dr Visalakshi Vegesna, Associate Professor (Law) at this University. He has since guided me

on this topic for which I am very grateful. I am also grateful to Dr. Madhu Limaye Library, Dr.

Ram Manohar Lohiya National Law University, Lucknow which provided me with the required

support both in the form of books and online database which has been of immense value to this

project.

This research was only built upon existing research of stalwarts in the field of law, parts of which

have been reproduced and duly cited. I am thankful to the authors of all such existing research.

Finally, I acknowledge the support of my peers, the blessings of my parents and the never

ending grace of the almighty which has been the driving force of everything good in my life

including this research paper.

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Contract-II -Mode of Determining Existence of Partnership-

Section 6 in the Indian Partnership Act, 1932

Mode of Determining Existence of Partnership: 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 relevant facts taken together.

Explanation 1: The sharing of profits or of gross returns arising from property by persons
holding a joint or common interest in that property does not of itself make such persons partners.
Explanation 2: The receipt by a person of a share of the profits of a business, or of a payment
contingent upon the earning of profits or varying with the profits earned by a business, does not
of itself make him a partner with the persons carrying on the business;
And, in particular, the receipt of such share or payment:
(a) by a lender of money to persons engaged or about to engage in any business,
(b) by a servant or agent as remuneration,
(c) by the widow or child of a deceased partner, as annuity, or
(d) by a previous owner or part owner of the business, as consideration for the sale of the
goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying
on the business.1
The Section is divided into 3 parts. The first part is of general nature and gives guidance as to
mattes to be considered in determining the existence of a partnership. This was necessary
because there are varied situations of business relations and many of them may fall within the
letter of the definition in Section 4 and yet in spirit they may lack the base or substance of a
partnership. That is why Section 6 in the very first instance declares that in considering whether
a person is a partner or not or whether a group of persons is a partnership or not regard shall be
had not merely to the fact of the agreement, business or profit-sharing, but to the totality of
relations as shown by all the facts and circumstances taken together.

Section 4 of the Act 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’.
Under the Act, three elements are necessary to be present to constitute a “partnership”:

i. There must be an agreement entered into by all the persons concerned;

1
DR. AVATAR SINGH, LAW OF PARTNERSHIP (3 ed. 2003) p- 70-71.

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

iii. The business must be carried on by all or any of the persons concerned acting for all.
These three elements though appear to overlap, but they are nevertheless distinct. The first
element relates to the voluntary contractual nature of the partnership; the second gives the
motive which leads to the formation of the firm; i.e. acquisition of gain; and the third shows that
the persons of the group who conduct the business do so as agents for all the persons in the group
and are therefore, liable to account to all.
Under Section 6, in determining whether a group of persons constitute a firm or not, it is
necessary to look into the real relationship between the parties as shown by all relevant facts
taken together. Undoubtedly, it is not an easy task to decide whether a group of persons are
partners in a business carried on by some one or more of them. The word partner very often is
used in a specific deed in a very loose sense without caring for and keeping in view the essential
element of a legal partnership. A statement in a document that “nothing therein contained would
constitute the parties as partners” will not necessarily prevent them from being partners in the
eye of law. Similarly, a mere statement that parties are to be partners will not necessarily
constitute them partners in law. Therefore, it has to be decided taking into account all the
relevant facts taken together keeping in view the three elements of partnership, as stated earlier. 2

A. Test for Determining Existence of Partnership:

I. Mixed Question of Fact and Law

Partnership or no partnership is ordinarily a question of fact, but it can be agreed that it is a
mixed question of fact and law in the sense that if the authorities who have to ascertain
questions of fact apply a wrong principle of law in instructing themselves as to what they have
to find, then their finding of fact is not conclusive because they have done it according to wrong
principles. To the extent to which the law has to go by the reality of the relation, it is a question
of fact. But it be a question of law whether the reality of the relation is such as to entitle one to
the profits of an act done by another and to be answerable for the fact. 3

2
Raghunath Sahu v Trinath Das, 1984 SCC Ori 71.
3
Chimanram v Jayantilal, (1939) 41 Bom LR 899.

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II. Legality of Business: Assignment of Licensed Business

Under the Indian Electricity Act, 1910 permission may be necessary to obtain a licence or to
have a licence assigned to a partnership, but there is nothing in the Act to warrant the
submission that because no permission was taken for assignment of the licence in the name of
the partnership, the claims of the partners against each other cannot be adjudicated upon, and
that the partners will have no rights in the assets held by the partnership.

The arrangement between the partners and the licensee does not attract sub-sections (2) and (3)
of Section 9 of the Act which merely debar a licensee's association in the business of supplying
energy under the same licence. Sub-section (2) inhibits the licensee from assigning his licence or
transferring his undertaking or any part thereof by sale, mortgage etc. without the previous
consent in writing of the State Government. Sub- section (3) makes an agreement relating to any
transaction described in sub-section (2), unless made with or subject to the previous consent as
aforesaid, void. Owning of the properties by the Corporation was not in contravention of any of
the provisions of the Act. The agreement, therefore, is not void.

The persons who have contributed the money to provide the capital for the undertaking are
entitled to recover the amounts in accordance with their respective shares. This relief is not
dependent upon the validity of the partnership

Even if it is void, what we have to consider is, as pointed out earlier, whether the money of the
partners which went to purchase the electrical undertaking at the auction sale and which by
virtue of Section 14 of the Partnership Act became the assets of the partnership, those assets
which have been converted into money which has been deposited in the Court, can be claimed by
all those who had originally contributed the amount. Section 65 of the Contract Act will readily
come to the rescue of the partners. 4

There are certain additional criteria for determining the existence of partnership:

 Agreement: Partnership must be the result of an agreement between two or more person,
arising only out of a contract and not from status. The nature of the partnership is voluntary
and contractual. An agreement may be express or implied from the act done by partners and

4
Ramagya Prasad Gupta v Murli Prasad, (1974) 2 SCC 266.

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from a consistent course of conduct being followed, showing mutual understanding between
them. It may be oral or in writing.
 Sharing profit of business: Sharing of profit is an essential element to constitute a
partnership but, it is only a prima facie evidence and not conclusive evidence, in that regard.
The sharing of profits or of gross returns accruing from property by persons holding joint or
common interest in the property would not by itself make such persons partners. Although
the right to participate in profits is a strong test of partnership, and there may be cases where,
upon a simple participation in profits, there is a partnership, yet whether the relation does or
does not exist must depend upon the whole contract between the parties. In this context, we
will consider two propositions. First, there must exist a business. For the purpose, the term
‘business’ includes every trade, occupation and profession. The motive of the business is the
“acquisition of gains” which leads to the formation of partnership. Therefore there can be no
partnership where there is no intention to carry on the business and to share the profit thereof.
 Business carried on by all or any of them acting for all: The third requirement is that the
business must be carried on by all the partners or by anyone or more of the partners acting for
all, is the cardinal principle of the partnership law. An act of one partner in the course of the
business of the firm is in fact an act of all partners. Each partner carrying on the business is
the principal as well as the agent for all the other partners. It, therefore, can be said that the
true test of partnership is mutual agency rather than sharing of profits. If the element of
mutual agency is absent then there will be no partnership.
Where there is an express agreement between partners to share the profit of a business and
the business is being carried on by all or any of them acting for all, there will be no difficulty
in the light of provisions of Section 4, in determining the existence or otherwise of
partnership. But the task becomes difficult when either there is no specific agreement or the
agreement is such as does not specifically speak of partnership. In such a case for testing the
existence or otherwise of partnership relation, Section 6 has to be referred.
Each partner carrying on the business is the principal as well as an agent of other partners.
So, the act of one partner done on behalf of firm, binds all the partners. If the elements of
mutual agency relationship exist between the parties constituting a group formed with a view
to earn profits by running a business, a partnership may be deemed to exist.

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B. Reality of Relation
The general principle is that in determining the existence of a partnership on must not merely see
the words of the definition in Section 4 are satisfied, but also whether the substance or essence a
partnership was intended or was the result of the relations which the parties developed among
themselves. This has been emphasized in a large number of cases since the decision of the House
of Lords in Cox v Hickman and has been given statutory shape in Section 6.

Cox v. Hickman5
Facts
S and S were iron merchants in partnership. They become financially embarrassed and, therefore,
made a compromise with their creditors. Under the compromise the property of the firm was
assigned to a few creditors selected as trustees. They were empowered to carry on the business,
to divide the net income among the crediotrs in a rateable proportion and after the debts has been
discharged, the business was to be returned to S and S. Cox was among the trustees although be
never acted. The other trustees continued the business. They purchased a quantity of coke from
the plaintiff, Hickman, and gave him a bill of exchange for the price. The bill remaining unpaid,
Hickman brought an action against the trustees, including Cox, for the price.
The suit was first tried in front of Lord Jervis who ruled in favour of the defendants. The action
was then taken to the Exchequer Chamber wherein three judges wanted to uphold the judgement
and the other three were for reversing it.

Issue: Whether there is a partnership between the traders who were in essence the creditors of
the firm?

Contentions

The counsel for Wheatcroft contended that:

i. There was no action against the appellant, as if Hickman had heard that Cox and Wheat
croft were the trustees, he would have realized that Cox had never been a trustee and Wheat
croft had resigned.

5
(1860) 8 HLC 268.

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ii. The ownership of the partnership never changed and was still owned by the Smiths.
iii. A qualified benefit derived from a trade does not make a person a partner in it. Here, unless
the profits are taken, there exists no partnership.

The counsel for Cox contended that:

i. The defendant can be held liable only if:

 He put his name on the bill
 Authorised someone else to put their name on the bill
 Held himself to have given the authority
ii. As to the first and third points he is not liable. As far as the second is concerned, the
defendant cannot be held liable unless an agency is proved.
iii. It is up to the defendant to show that the plaintiff is a partner.

The counsel for Hickman contended that:

i. There was a contract of partnership under which business was to be carried out for the
benefit of creditors.
ii. The scheduled creditors are allowed to participate in the profits of the firm thereby making
them partners.
iii. Any one of the partners may bind all the others by the acceptance of the bills in the regular
course of business.

It was held that they were not partners and, therefore, not liable. The creditors, instead of taking
legal proceedings, came to an agreement about the way in which their claims could be satisfied.
That did not make them partners. Lord Cransworth said: “the liability of one partner for the
acts of his co-partner is in truth the liability of a principal for the acts of his agent. Where two or
more persons are engaged as partners in an ordinary trade, each of them has an implied
authority from the other to bind all by contracts entered into according to the usual course of
business in that trade. Every partner in trade is, for the ordinary purpose of the trade, the agent
of his co-partners; all are, therefore liable for the ordinary trade contract of the other. The
public have a right to assume that every partner has authority from his co-partners to bind the
whole firm in contracts made according to the ordinary usages of trade.”

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Referring to the case, his Lordship continued:

It was argued that as they (the trustees) would be interested in the profits, therefore, they would
be partners. But this is a fallacy. It is often said that the test is whether he is entitled to participate
in the profits. This is no doubt a sufficiently accurate test, for a right to participate in the profits
affords a good evidence that the trade in which profits have been made was carried on on behalf
of the person sharing profits. But the real ground of the liability is that the trade has been carried
on by persons acting on his behalf. The correct mode of stating the proposition is that the same
thing which entitles him to the one makes him liable to the other, namely, the fact that the trade
has been carried on on his behalf; that he stood in the relation of principal. Every partner is an
agent of the partnership, and his position is governed by the same rules as that of an agent. A
partner virtually embraces the character of both principal and agent.

Stating the effect of such cases in a case before Lord Jessel MR observed: 6

“It is said that the mere participation in profits inter se affords cogent evidence of partnership.
But it is now settled by the cases of Cox v Hickman, Burton v Sharp and Mollwo March & Co v
Court of Wards, that although a right to participate in profits is a strong test of partnership, and
there may be cases where upon a simple participation in profits there is a presumption, not of
law, but of fact, that there is a partnership, yet whether the relation of partnership does or does
not exist must depend upon the whole contract between the parties, and that circumstances is not
conclusive.”

I. Parties Terminology Not Binding

In considering whether a partnership was intended or not, the court is not bound by the
terminology used by the parties. If the facts and circumstances justify an inference of
partnership, then there is no escape from that conclusion even if the parties deny that the
intended to be partners. If the facts are otherwise, the fact that the parties describe themselves as
partners will be immaterial.
Acting upon this kind of practical approach, the supreme court in its decision in M.P. Davis v
C.A.I.T.7 refused to accept that the relation created by a declaration of partners were those of

6
Ross v Parkyns, (1875) LR 20 Eq 9 331 at 335.
7
AIR 1959 SC 719.

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partners. The owner of a coffee estate was assessed to tax an individual and his brother was
shown as his agent for the business. Subsequently he entered into a partnership agreement with
his brother and claimed registration as a firm for tax purposes. The authorities found that some of
the terms of the deed were repugnant to the very concept of partnership. They refused to accept
that the firm was genuine and the stand taken by them was upheld by the Supreme Court. The
unusual terms were that the estate would remain the owner’s property and on dissolution it
would go back to him; that all responsibility for conduct of business would rest on the brother
and a number of restrictions were imposed upon his power, which showed that the real control
was in the appellant and the brother had no real hand in the management of the business.
P.B. Gajendragadkar J said:
“We think that these provisions taken along with the conduct of the parties to the instrument
earlier mentioned, clearly indicate that it was not the intention of the parties to bring about the
relationship of partners but only to continue under the cloak of a partnership the pre-existing and
real relationship, namely, that between a master and his servant. The powers that are given by the
document to the appellant's brother we such as a master would give to his servant in connection
with his business or a principal to his agent. The remuneration provided for the appellant's
brother was out of the profits and none was payable if there was a loss…. Then again the
instrument makes no provision as to how losses are to be dealt with, and the complicated manner
in which the profits are to be shared under its terms would seem to make it impossible for the
losses to be shared in the same manner. If it was intended to create a real partnership, one would
have thought that some provision would have been made for the sharing of the loss, especially as
the share of the profit going to the appellant is immensely large compared with the share going to
his brother. In our view, taking all the circumstances of the case, especially the conduct of the
parties, together with the important terms of the document, it cannot be said that it was intended
to bring about the relation of partnership.” 8
Bhagwati J found sufficient evidence of the ingredients of partnership:
“On a true construction of the agreement we have, therefore, come to the conclusion that Burma
was a partner along with Steels and Ellermans in the Combination and had a joint share with the
Steels in the profit or loss of the Combination. It was entitled to terminate the partnership by
giving notice to the other partners as specified in clause 12 of the Agreement. There was also an

8
M. P. Davis v C.A.I.T., AIR 1959 SC 719.

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agency insofar as Steels were to manage and carry on the business on behalf of all the partners of
the Combination. Thus all the ingredients of partnership were satisfied and it is futile to urge that
the agreement was a hybrid document which was a tripartite agreement so far as the business of
the Combination was concerned and was a partnership agreement only between two partners viz.
Steels and Ellermans. There is not the slightest doubt whatever that Burma was a partner with
Steels and Ellermans in the business of the Combination and the partnership which was entered
into under the terms of agreement was a partnership between three partners viz. Steels, Burma
and Ellermans.”9

II. Sharing Losses Not Necessary

A provision in the partnership agreement for sharing of losses may be necessary for enjoying tax
concessions by registration under the Income Tax Act, but under the partnership Act it is not a
requisite for creatin a partnership that losses should also be shared. In the words of Marten CJ
of the Bombay High Court:10
“Now, as regards the question of losses in a business, I think it is perfectly open to partner A to
say that as between himself and his partner B, the partner A shall bear all the losses of the
business. In other words, it is not essential to constitute a partnership that the partners should
agree to share the losses. In any event this only applies as between themselves, for whatever their
agreement may be, they would both be liable to outside parties. So, too, partners may agree that
on the determination of their partnership, the assets are to be dealt with in a particular way and
that for instance all the assets are then to belong to partner A.”
It is observed in HALSBURY’S LAWS OF ENGLAND: 11
“If losses as well as profits are shared, the presumption of partnership is stronger. This is so
even if the agreement stipulates that each party is to bear only an aliquot share of loss. However,
the fact that the losses are shared is not conclusive as to the existence of a partnership…. 12
There is no partnership…. Where one person buys and pays for the goods and profit and loss is
to be shared by himself and another. To constitute a partnership the parties must be jointly
13
interested in the purchase and also jointly interested in the future sale”

9
Steel Bros. and Co. Ltd. v. CIT, AIR 1958 SC 315 : (1958) 33 ITR 1.
10
Raghunandan Nanu Kothare v. Hormasjee Bezonjee Bamjee, 1926 SCC OnLine Bom 16.
11
Para 12 (Vol. 35, 4th Edn., 1981).
12
Walker v Hirsch, (1884) 27 Ch D 460.
13
Reid v Hollinshead, (1825) 4 B&C 867.

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III. Fixed Sum In Lieu of Profits

It is observed in Halsbury’s Laws of England, partners can agree to share those profits in any
way they like. They may agree to share them equally. They may also agree that one partner is to
receive a fixed annual or monthly sum in lieu of a sum varying in accordance with the profits
actually earned.
A payment whether fixed or floating, which has no link with profits will not be sufficient to
make the recipient a partner. The only thing was that the lender was to exercise some control
over the business, but that, the court said, was not sufficient and made the case no different from
the decision of the Privy Council in Mollwo, March & Co. v Court of Wards14
Lordships of the Privy Council observed that:
“It appears to be now established that although a right to participate is a strong test of partnership
and that there may be cases where, from such participation alone, it may, as a presumption, not
of law, but of fact, be inferred; yet, whether that relation does or does not exist must depend
upon the real intention and conduct of the parties.”
In this case, Sir Montague Smith observed:
“In cases should occur when any partners under the guise of such an arrangement (that is, a loan)
are really trading as principals, and putting forward, as ostensible traders, others who are really
their agents, they must not hope by such devices to escape liability, for the law in cases of this
kind will look at the body and substance of the arrangements and fasten liability on the parties
according to their true and real character.”

IV. Importance Of Sharing Profits And Losses

One of the circumstances that create a strong evidence of partnership is an agreement to share the
profits and losses of business. Delivering the principal judgement of the Court of Appeal in
Walker v Hirsch15 Lord Baggallay stated the presumption in these words:
In most cases where there is an agreement with reference to a particular business and particular
parties entering into it, that they shall share the profits and bear the losses, in certain proportions,

14
(1872) LR 4 PC 419.
15
(1884) 27 Ch D 460.

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of carrying on the business, with nothing to explain or get rid of those words, that would
certainly be prima facie evidence of an intention to carry on business in partnership.
“Although an agreement for participation in profit and loss is primâ facie evidence of a
partnership between the contracting parties as between themselves, yet the question of
partnership must in all cases depend upon the intention of the parties as it appears on the
contract.”

V. Declaration Under Specific Relief Act To Be Partner

A person cannot seek a declaration under Section 34 of the Specific Relief Act, 1963 that there
is a partner in a firm and entitled as such to the relief of rendition of accounts merely on the basis
that there was a decision to take him into the firm when that decision was in fact never
implemented.16

C. Sharing Of Profits or Gross Returns Arising From Property (Exp. 1)

The explanation purports to exclude from the category of partnership such joint co-owners of
property as do no more than share the output of the property in terms of rent or otherwise. This
provision has often been illustrated by courts by referring to the following statement in Lindley
on Partnership: “If several persons jointly purchase goods for re-sale with a view to divide the
profits arising from the transaction, a partnership is thereby created. But persons who join in the
purchase of goods, not for the purpose of selling them again and dividing the profits, but for the
purpose of dividing the goods themselves, are not partners.” This statement was cited by the
Andhra Pradesh High Court in deciding this provisions in the judgement of Bhimasankaram
J:17
“Having regard to the fact that the subject matter of the purchase in this case is a Decree, it is
difficult to see how it could be described as a purchase of goods for resale. Nor could it be
described as having been purchased for the purpose of dividing the goods themselves. It seems to
us that in this case what the parties contemplated was nothing more than taking their shares of
the net returns obtained by the execution of the Decree, which is the common property, and that
there is no question of an agreement of partnership.”
16
A.S.C.O. Engineering Co v Surat Gas Supply Co, AIR 1988 NOC 48 Del.
17
Potta Narayana v Potta Seetharamayya, 1955 SCC AP 18.

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I. Joint Ownership Of Property

No partnership necessarily subsists between persons-

i. Who hold property jointly or in common, or

ii. On whom property devolves by heirship, whether jointly or in common, or

iii. To whom property is gifted, whether jointly or in common.

Ordinarily such persons remain joint co-owners with no contractual relation between them. Even
where two or more persons buy property to hold jointly or in common, by the purchase they
become co-owners, but they do not become partners unless-

i. By the aid of that property they carry on some business in common, and

ii. Agree to share the profits of that business

Decision of the madras high court is to be found in Govindan Nair v Nagabhushanamal.18

Satyanarayana Rao J observed on the facts of the case as follows:

“Nothing more is done by the parties than utilising the common property and obtaining a return
for such use by leasing the property for rent. The contribution made by the plaintiff and the first
defendant towards the price for the acquisition of the property in equal moieties would only
make them co-owners and, not partners. They never carried on any business but only obtained a
return by using the common property. The distinction between part ownership and partnership is
no doubt very difficult to define. As pointed out by Lindley on Partnership, 10th edition at page
32, “If each owner does nothing more than take his share of the gross returns obtained by the use
of the common property, partnership is not the result.” The learned author observes:

“Moreover, part owners who divide what is obtained by the use or the employment of the thing
owned are not thereby constituted partners. For example, if two tenants in common of a house let
in and divide the rent equally between them, they are not partners although they may pay for the
repairs out of the rents before dividing it. So two persons who are co-owners of a race horse, and
share his winnings on the one hand, and the expenses of his keep on the other, are not partners
but co-owners only.”
A group of co-owners collecting rent of properties gifted to them and not carrying on any
business does not by itself become a partnership. 19

18
AIR 1948 Mad 343.

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II. Joint Ownership Of Goods

A co-ownership can grow into partnership where the co-owners do something which amounts to
a business and by reason of which “agency” becomes established between them. Sometimes even
the very scale of co-ownership may develop the appearance of a partnership.
Hilton v Lister20 is an illustration in point. A solicitor was engaged in various land speculation
jointly with C. The speculations consisted in the buying and selling of plots of land, the laying
out of the land building purposes and the advancing of money to builders. The lands were
generally bought on rent and then sold on higher rents. A banking account was kept in the name
of both, and statements of accounts were made out every half-year, but there was no agreement
of partnership. The solicitor died and the question of succession to his property arose. It was held
that the proper inference to be drawn from the evidence and statements of accounts was, that the
relation which had existed between them was that of partners, and they were not co-owners of
real state but the property in question constituted partnership assets. 21
In a matter on the subject before the Supreme Court22, a vast tract of land used for growing cane
was jointly purchased by two persons and managed through a manager. Profits arising out of the
joint cultivation were divided between them. The question was whether for taxation purposes the
arrangement should be regarded as a co-ownership or partnership. S.K.Das J conceded that an
arrangement of this kind can consistently go with a co-ownership. He said:
Two co-owners may appoint a common manager for facility of cultivation and management
without entering into a partnership and the fact that the profits or even the losses are distributed
in accordance with the shares of the two owners does not necessarily establish a partnership
within the meaning of the Partnership Act, 1932. In Lindley on Partnership (Twelfth Edn. p. 57)
the main differences between co-ownership and co-partnership have been compared.
i. The principal difference is that co-ownership is not necessarily the result of agreement,
whereas partnership is. In the cases before us there is nothing in the record to show that
there was any agreement between the two proprietors to form a partnership firm.
ii. Co-ownership does not necessarily involve community of profit or of loss, but partnership
does. In the cases before us there is a finding that there is community of profit.

19
Ibrahim Shah Mohd. Noor Ahmed, AIR 1984 Guj 126.
20
(1980) 62 LT 200.
21
Mamooji v Tyabali, AIR 1933 Sind 210.
22
Champaran Cane Concern v State of Bihar, AIR 1963 SC 1737.

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iii. One co-owner can without the consent of the other, transfer his interest etc. to a stranger. A
partner cannot do this.
About this point there is no evidence nor any finding that the two proprietors could not transfer
their interests in the concern without the consent of each other. Nor is there any fact or
circumstance from which it can be inferred that one proprietor was the agent, real or implied, of
the other. There is a complete absence of any fact or circumstance establishing a relation of
agency between the two proprietors in the present case.

D. Profit-Sharing By Non-Partnership Interests (Exp. 2)

The explanation after laying down the general principle that mere receipt of profits of a business
may not make the recipient to be a partner, goes on to give as many as four specific instances of
such cases.
The receipt by a person of a share of the profits of a business or a payment contingent upon the
earning 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, particularly, when such share of payment is
received by the following persons:23

I. Lender of Money Receiving Profits [Clause (a)]

The second explanation to section 6 after stating the general principle, goes on to cite four
specific instances of cases in which profit-sharing by itself does not create a partnership. The
statement in the first parts reads like this:
“….in particular, the receipt of such share or payment by a leader of money to persons engaged
or about to engage in any business does not of itself make the receiver a partner with the persons
carrying on the business.”
The decision of the Privy Council in Mollwo, March & Co. v Court of Wards24. Their Lordship
laid down that although a right to participate in the profits of a trade is a strong test of
Partnership, and there may be cases where, from such participation alone, it may as a
presumption- not of law, but of fact, be inferred, yet whether that relation does or does not exist
must depend on the real intention and contract of the parties:

23
DR. AVATAR SINGH, LAW OF PARTNERSHIP (3 ed. 2003) p-87.
24
(1872) LR 4 PC 419.

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Facts
Two British merchants were carrying on business at Calcutta under the name of W & Co. A
Hindu Rajah entered into an agreement with them under which he advanced, and was to make
further advances, of money to them. They, in turn, agreed to carry on the business subject to the
control of the Rajah in several respects, stipulating that the Rajah should receive a commission of
20percent on all profits made by the firm until the whole amount of the debt due to him should
be paid off with 12percent interest upon all cash advances. Further advances having been made
by the rajah to the firm, executed to him a mortgage of certain tea plantations. The Rajah
received back nothing and did not interfere in, or exercise any control over, the business so as to
make him an ostensible partner in the firm. The business having failed, the question was whether
the Rajah could be held liable as a partner.
Held
Looking at the whore scope of the Agreement, the primary object was to give security to
the Rajah as a Creditor of the Firm of W. & Co ., and that the participation given him in the net
profits of the business was not sufficient to establish a partnership between W. & Co . and
the Rajah , as regarded third parties. Participation requires a community of interests and not a
conflict of them. The interest of the merchants and that of the Rajah were at conflict and the
provisions of the agreement were designed to protect the Rajah’s interest.

II. Servant or Agent Receiving Profits [Clause (b)]

The second explanation to section 6 which mentions specific instances of cases involving profit-
sharing without amounting to partnership, says, in the second place, that receipt by a servant or
agent of a part of the profits of the business in which he is working by way of remuneration, will
not make such receiver a partner in the business. The decision of the Calcutta High Court in
Abdul Latif v Gopeshwar Chattoraj25 furnishes a working illustration.
The plaintiff had worked as a contractor for loading and unloading wagons for a company at
Santa for a long time. As he had various other businesses to attend to, it was inconvenient for
him to look after the said contract work personally, and so he made up his mind to appoint
somebody to whom he might entrust the same. The defendant, who is a pleader, on coming to

25
AIR 1933 Cal 204.

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know of his intention, approached him to be so appointed. Upon that it was agreed between the
plaintiff and the defendant that the defendant would carry on and look after the business, by
bestowing personal labour, and would receive advances from the company and make advances
from his own pocket whenever necessary, would keep proper accounts of all income and
expenditure and explain the same to the plaintiff, and would be liable to make good to the
plaintiff all losses that would accrue by reason of negligent performance of the work; and that the
profits would be divided half and half between the parties, but the loss, if any, would be borne
entirely by the defendant. The defendant misconducted himself and the plaintiff informed the
company snapping the power which he had vested in the defendant. The plaintiff sued the
defendant for an account of the work done by him as if the defendant were his agent whereas the
defendant contended that it was a case of partnership and the suit should have been differently
instituted. Thus, the court had to see whether it was a case of partnership or of simple agency.
The court admitted that “the distinction between agency and partnership is sometimes a very
subtle one, especially in cases where one party gets as his remuneration a share in the profits and
does not remain liable for the loss, and this distinction becomes important when a question arises
in connexion with their dealings with third parties. Although every partner is an agent of the firm
and his other partners for the purposes of the business”.
“The receipt by a person of a share in the profits of a business is prima facie evidence that he is a
partner in the business, but it is now well settled, notwithstanding many dicta and decisions to
the contrary, that the receipt of a share of the profits is not a conclusive test of partnership.” 26

 Salaried Partner
The concept of a salaried partner has found further recognition in the decision of Megarry J of
the Chancery Division in Stekel v Ellice.27 Explaining the term, the learned judge said:
Certain aspects of a salaried partnership were not disputed. The term ‘salaried partner’ is not a
term of art, and to some extent it may be said to be a contradiction in terms. However, it is a
convenient expression which is widely used to denote a person who is held out to the world as
being a partner, with his name appearing as partner on the notepaper of the firm and so on. At the
same time, he receives a salary as remuneration, rather than a share of the profits, though he

26
Ross v Parkyns, (1875) LR 20 Eq 331.
27
(1973) 1 All ER 465, Ch D.

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may, in addition to his salary, receive some bonus or other sum of money dependent upon the
profits. Quoad the outside world it often will matter little whether a man is a full partner or a
salaried partner; for a salaried partner is held out as being a partner, and the partners will be
liable for his acts accordingly. But within the partnership it may be important to know whether a
salaried partner is truly to be classified as a mere employee, or as a partner.

III. Widow Or Child Of A Deceased Partner Receiving Profits [Clause (c)]

Clause (c) of the second explanation to section 6 deals with the position of a widow or child of a
deceased partner who has been granted by the surviving partner a share in the profits of the firm.
Naturally, such a grant cannot in itself be regarded as equivalent to accepting the widow or child,
as the case may be, into partnership with the surviving partners. The section therefore says that
receipt of a share in profits or payment linked with profits by the widow or child of a deceased
partner by way of an annuity does not of itself make the recipient a partner with the persons
carrying on the business. Where the agreement for the payment of annuity out of profits to the
survivors of a deceased partner does not amount to their becoming partners, their claim will be
that of a creditor and, therefore, cannot be postponed to those of the other creditors. Thus, where
the surviving partner, before paying the stipulated annuity, became bankrupt and the annuity was
not expressed to be payable out of profits, it was held that the annuity was not a share of the
profits of the business and, therefore the widow’s claim was not postponed until the claims of
other creditors has been paid in full.28

IV. Seller Of Goodwill Receiving Profits [Clause (d)]

A person who sells the goodwill of his business is sometimes granted by the buyer the benefit of
a share in the profits of his business. Such a profit-sharer does not of itself become a partner in
the business. This principle is incorporated in clause (d) of the second explanation to section 6
and can be presented like this:
“The receipt of such share or payment by a previous owner or a part owner of the business, as
consideration for the sale of the goodwill or share thereof does not of itself make the recipient a
partner with the persons carrying on the business.”

28
Gieve, Re, Shaw, ex p., (1899) 80 LT 737.

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An illustration is to be found n the facts of Rawbinson v Clarke.29 A doctor sold by a deed his
interest in the profession and practice of a surgeon and apothecary for a price of £900, £500 to be
paid on the execution of the deed, and £400 at the expiration of a year. The seller covenanted not
to exercise the profession within three miles of his then place of business; to attend for one year
the practice under sale as usual; and that he would, to the utmost of his power, introduce the
buyer to his patients and do every reasonable act for promoting the interest of the concern. In
return for all this, the buyer covenanted to pay at the end of the year a moiety of the clear profits
of the firm. It was held that the parties were not thereby constituted partners in the trade during
the first year and, therefore, the buyer was entitled to sue the seller for moneys received by him
from their patients during the year. Tindal CJ said: “It is very difficult to say how they can be
called partners, where there is no joint interest in the matter in question.”
1. Partnership And Co-ownership
Some of the difference have already been discussed earlier in Champaran Cane Concern v State
of Bihar30. Apart from the differences laid down in the above case there are following difference
between partnership and co-ownership.
Basis of difference Partnership Co-ownership
Partnership always arises out Co-ownership may arise either
of a contract, express or from agreement or by the
Formation implied. operation of law, such as by
inheritance.
Implied agency A partner is the agent of the A co-owner is not the agent of
other partners. other co-owners.
There is community of interest Co-ownership does not
Nature of interest which means that profits and necessarily involve sharing of
losses must have to be shared profits and losses.
A share in the partnership is A co-owner may transfer his
Transfer of interest transferred only by the consent interest or rights in the
of other partners property without the consent
of other coowners.

29
(1846) 153 ER 860.
30
AIR 1963 SC 1737.

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2. Partnership And Trading Family

A joint Hindu family carrying on a family business has many features common with partnership.
Legislature through the process of definition of partnership in Section 4, have excluded joint
Hindu trading families from the operation of the Partnership Act. The point of difference has
been stated as follows:
Basis of difference Partnership Trading Family
Partnership is created necessarily The right in the joint family is
Mode of creation by an agreement. created by status means its
creation by birth in the family.
Death of a partner ordinarily leads The death of a member in the
to the dissolution of partnership. Hindu undivided family does
Death of a member not give rise to dissolution of
the family business.
All the partners are equally entitled The right of management of
to take part in the partnership joint family business generally
business. vests in the Karta, the
Management governing male member of the
family.
Every partner can, by his act, bind The Karta or the manager, has
the firm. the authority to contract for
the family business and the
Authority to bind other members in the family.
In a partnership, the liability of a In a Hindu undivided family,
partner is unlimited only the liability of the Karta
is unlimited, and the other
Liability co-partners are liable only to
the extent of their share in the
profits of the family business.
A partner can bring a suit against On the separation of the joint
Calling for accounts the firm for accounts, provided he family, a member is not

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on closure also seeks the dissolution of the entitled to ask for account of
firm. the family business.
A partnership is governed by the A Joint Hindu Family business
Governing Law Partnership Act. is governed by the Hindu Law.
In a partnership, a minor cannot In Hindu undivided family
Minor’s capacity become a partner, though he can business, a minor becomes a
be admitted to the benefits of member of the ancestral
partnership, only with the consent business
of all the partners. by the incidence of birth. He
does not have to wait for
attaining majority.
A firm subject to a contract A Joint Hindu family has the
between the partners gets dissolved continuity till it is divided.
by death or insolvency of a partner. The
Continuity status of Joint Hindu family is
not thereby affected by the
death of a member.

3. Partnership And Company

There are certain points of difference between partnership and company.

Basis of Partnership Company

Difference
A firm is not legal entity i.e., it has no A company is a separate legal
legal personality distinct from the entity distinct from its members
Legal status personalities of its constituent members. (Salomon v. Salomon).
In a firm, every partner is an agent of In a company a member is not an
the other partners, as well as of the firm. agent of the other members or of
Agency the company, his actions do not
bind either.
There is no such compulsion to

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The profits of the firm must be distribute its profits among its
distributed among the partners members. Some portion of the
Distribution of according to the terms of the partnership profits, but generally not the
Profits deed. entire profit, become distributable
among the shareholders only
when dividends are declared.
In a company limited by shares,
In a partnership, the liability of the the liability of a shareholder is
partners is unlimited. This means that limited to the amount, if any,
each partner is liable for debts of a firm unpaid on his shares, but in the
Extent of incurred in the course of the business of case of a guarantee company, the
Liability the firm and these debts can be liability is limited to the amount
recovered from his private property, if for which he has agreed
the joint estate is insufficient to meet to be liable. However, there may
them wholly. be companies where the liability
of members is unlimited.
The firm’s property is that which is the In a company, its property is
“joint estate” of all the partners as separate from that of its members
Property distinguished from the ‘separate’ estate who can receive it back only in
of any of them and it does not belong to the form of dividends or refund of
a body distinct in law from its members. capital.
In a company a shareholder may
transfer his shares, subject to the
A share in a partnership cannot be provisions contained in its
transferred without the consent of all the Articles. In the case of public
Transfer of partners. limited companies whose shares
shares are quoted on the stock exchange,
the transfer is usually
unrestricted.
Members of a company are not
entitled to take part in the

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In the absence of an express management unless they are

agreement to the contrary, all the appointed as directors, in which
Management partners are entitled to participate in the case they may participate.
management Members, however, enjoy the
right of attending general meeting
and voting where they can decide
certain questions such as election
of directors, appointment of
auditors, etc.
In the case of firms carrying on business A private company may have as
other than banking, the number must not many as 50 members but not less
Number of exceed 20 and in than two and a public company
membership the case of banks such number must not may have any number of
exceed 10. members but not less than seven.
Unless there is a contract to the
Duration of contrary, death, retirement or insolvency A company enjoys a perpetual
existence of a partner results in the dissolution of succession.
the firm.
Audit The audit of the accounts of a firm is not The audit of the accounts of a
compulsory. company is obligatory.

Critical Analysis
Section 6 of the Act lays down in determining whether a group of persons are a firm or not and
whether a person is or is not a partner in a firm, regard shall be given to the relation between the
parties as shown by all the relevant facts taken together.

The intentions of the partners will have to be decided with reference to the terms of the
agreement and all the surrounding circumstances including evidence as to the interfacing or
interlocking of management finance and other incidents of the respective businesses. The
members of a Hindu Undivided family carrying on family business are not partners, because a
male child of a Hindu acquires an interest in such business by birth apart from any agreement to

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that fact. He is not a partner but a joint owner. Joint ownership is a family quasi-partnership
created by the operation of law and is not a partnership arising out of a contract. Similarly, a
Burmese Buddhist husband and wife carrying on business are not partners.
The true test for determining the existence of partnership is Agency and Authority. In
determining the existence of partnership it is essential to trace the real intention of the parties to
the agreement and circumstances of the case, whether the relation of principal and agent exists
between the parties? It is the reaction of agency which distinguishes a partnership from co-
ownerships. It was held that in cases where losses as well as profits are shared, the presumption
about the existence of partnership still becomes stronger, though not conclusive. Agency is an
essential element of partnership just sharing of profits and contribution to losses is not sufficient.
It was held that the receipt by a person of a share in the profits of a businesses is prima facie
evidence that he is a partner, but this is not a conclusive test. The question whether a person is a
partner or not therefore depends in nearly all cases upon whether or not he has the authority to
act for other partners and whether or not other partners have the authority to act for him.
Intention of parties to be gathered from the language used in the deed read as a whole and having
regard to the ordinary sensible meaning.

It is only where there is a difference of opinion between the partners that the matter is connected
with the business has to be decided by a majority of partners. Hence control and management
can be exercised by a single partner and need not be by the majority.

Conclusion
A partnership results from agreement, express or implied. If denied, it may be proved by the
production of some written instrument, and by other evidence, even circumstantial. But mere
receipt of a share of profits is not enough. If an agreement of partnership is complete, if it
expresses in good faith the full understanding and obligation of the parties, then it is for the court
to say whether a partnership exists. It may, however, be a sham intended to hide the real
relationship. Then other results should follow. In passing upon it, effects is to be given to each
provisions. Mere words should not misguide and make the court depart from realities. Statements
that no partnership is intended are not conclusive. If, as a whole, an agreement contemplates as
association of two or more persons to carry on, a partnership exist. But not, if it be less than this.

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Passing on the agreement as a whole, an arrangement for sharing profits, as such, of a business
carried on by all, or any of them acting for all, is to be considered. It is to be given its due
weight. But it is to be weighed in connection with all the rest. The arrangement alone is no
decisive. It may be merely the method adopted to pay a debt advanced by a lender, or wages or
salaries of servants or agents, oral or written. A partnership may be so created where there was
none before. The original agreement may be modified as shown by circumstantial evidence such
as the conduct of the parties.

The following facts are helpful in existence of a partnership:

a) Participation in the profits of the business as profits,

b) The participant being a principal in the business from which the profits are derived, the
business being carried on his behalf as well,

c) Each party having an interest in the profits as principal ,

d) Each party having the ownership and control of the business and also over profits while
they are undivided.

e) There being a community of interest inter se for business purposes, which enables each
party to make contracts, manage the business and dispose of property in the usual way,

f) The intention of the parties being to be partners, as is manifest by their agreement.

In sum, for the determination of the existence of a partnership, it must be found;

i. There was an agreement between all the persons concerned

ii. The agreement was to share the profits of a business;

iii. The business was carried o by all or may of them acting for all and error avoided in the
light of explanation I and II.

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Bibliography
Books Referred

 DR. AVATAR SINGH, LAW OF PARTNERSHIP, 3rd Edn. ( Lucknow: Eastern Book Company,
2003).
 J. P. SINGHAL, LAW OF PARTNERSHIP, 6th Edn. (New Delhi: Universal Law Publishing Co.
Pvt. Ltd., 2013).

Case Cited

 Cox v Hickman, (1860) 8 HL Cases 268.

 Ramagya Prasad Gupta v Murli Prasad, (1974) 2 SCC 266.
 Raghunath Sahu v Trinath Das, 1984 SCC Ori 71.
 Chimanram v Jayantilal, (1939) 41 Bom LR 899.
 Ross v Parkyns, (1875) LR 20 Eq 9 331 at 335.
 M.P. Davis v C.A.I.T. AIR 1959 SC 719.
 Steel Bros. and Co. Ltd. v. CIT, AIR 1958 SC 315.
 Raghunandan Nanu Kothare v. Hormasjee Bezonjee Bamjee, 1926 SCC Bom 16.
 Walker v Hirsch, (1884) 27 Ch D 460.
 Mollwo, March & Co. v Court of Wards (1872) LR 4 PC 419.
 Govindan Nair v Nagabhushanamal. AIR 1948 Mad 343.
 Abdul Latif v Gopeshwar Chattoraj AIR 1933 Cal 204.

Journals Referred

 George Wharton Pepper, What Constitutes A Partnership?, 46 THE AMERICAN LAW

REGISTER(1898-1907), https://www.jstor.org/stable/3306405.
 S.D. Davies, Criteria Of Partnership, 19 The American Law Register(1852-1891),
https://www.jstor.org/stable/3303680
 Paul Dias, ELEMENTS, TESTS AND PROOFS OF A GENERAL PARTNERSHIP, SANTA CLARA
LAW DIGITAL COMMONS, http://digitalcommons.law.scu.edu/stutheses.

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