CHAPTER 3

THE INDIAN PARTNERSHIP

ACT, 1932
UNIT -1: GENERAL NATURE OF PARTNERSHIP

LEARNING OUTCOMES
After studying this unit, you would be able to understand-
♦ Understand the concept of partnerships and be clear about its essentials.
♦ Try to understand the ‘principal - agent relationship’ among the partners.
♦ Note the points of difference between partnership and other various forms of
organization.

UNIT OVERVIEW

General Nature of Partnership

What is Distinction with

Type of
Partnership other forms of
Partners
organisation

Essential True test of Vs.

Vs. Co- Vs.
elements partnership Joint Stock Vs. Club Vs. HUF
ownership Association
Company

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3.2 BUSINESS LAWS

1.1 DEFINITION OF ‘PARTNERSHIP’, ‘PARTNER’, ‘FIRM’ AND

‘FIRM NAME’ (SECTION 4)
‘Partnership’ is 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’, and the name under which their
business is carried on is called the ‘firm name’.

1.2 ELEMENTS OF PARTNERSHIP

The definition of the partnership contains the following five elements which must co-exist before a partnership
can come into existence.

We shall now discuss the aforestated elements one by one.

1. ASSOCIATION OF TWO OR MORE PERSONS: Partnership is an association of 2 or more persons.
Again, only persons recognized by law can enter into an agreement of partnership. Therefore, a firm,
since it is not a person recognized in the eyes of law cannot be a partner. Again, a minor cannot be a
partner in a firm, but with the consent of all the partners, may be admitted to the benefits of partnership.
The partnership Act is silent about the maximum number of partners but section 464 of the Companies
Act, 2013 has now put a limit of 50 partners in any association/partnership firm.
2. AGREEMENT: It may be observed that partnership must be the result of an agreement between two or
more persons. There must be an agreement entered into by all the persons concerned. This element
relates to voluntary contractual nature of partnership. Thus, the nature of the partnership is voluntary
and contractual.
An agreement from which relationship of Partnership arises may be express. It may also be implied from
the act done by partners and from a consistent course of conduct being followed, showing mutual
understanding between them. It may be oral or in writing.

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.3 THE INDIAN PARTNERSHIP ACT, 1932 3.3

3. BUSINESS: 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 existence of business
is essential. Secondly, 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.

4. AGREEMENT TO SHARE PROFITS: The sharing of profits is an essential

feature of partnership. There can be no partnership where only one of the
partners is entitled to the whole of the profits of the business. Partners must
agree to share the profits in any manner they choose.
But an agreement to share losses is not an essential element. It is open to one
or more partners to agree to share all the losses. However, in the event of losses, unless agreed
otherwise, these must be borne in the profit-sharing ratio.
Example 1: Co-owners who share amongst themselves the rent derived from a piece of land are not
partners, because there does not exist any business.
Example 2: No charitable institution or club may be floated in partnership [A joint stock company may,
however, be floated for non-economic purposes].
Example 3: X and Y buy certain bales of cotton which they agree to sell on their joint account and to
share the profits equally. In these circumstances, X and Y are partners in respect of such cotton
business.
5. BUSINESS CARRIED ON BY ALL OR ANY OF THEM ACTING FOR ALL: The business must be carried
on by all the partners or by anyone or more of the partners acting for all. This is the cardinal principle of
the partnership Law. In other words, there should be a binding contract of mutual agency between the
partners.
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. He is an
agent in so far as he can bind the other partners by his acts and he is a principal to the extent that he is
bound by the act of other partners.
It may be noted 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.
In KD Kamath & Co.
The Supreme Court has held that the two essential conditions to be satisfied are that:
(1) there should be an agreement to share the profits as well as the losses of business; and

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3.4 BUSINESS LAWS

(2) the business must be carried on by all or any of them acting for all, within the meaning of the
definition of ‘partnership’ under section 4.
The fact that the exclusive power and control, by agreement of the parties, is vested in one partner or
the further circumstance that only one partner can operate the bank accounts or borrow on behalf of the
firm are not destructive of the theory of partnership provided the two essential conditions, mentioned
earlier, are satisfied.
Note:- The ‘Partnership Agreement’ is also known as ‘Partnership Deed’.

1.3 TRUE TEST OF PARTNERSHIP

Mode of determining existence of partnership (Section 6): In determining whether a group of persons is or is
not a firm, or whether a person is or 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.
For determining the existence of partnership, it must be proved.
1. There was an agreement between all the persons concerned;
2. The agreement was to share the profits of a business and
3. the business was carried on by all or any of them acting for all.
1. Agreement: Partnership is created by agreement and not by status (Section 5). The relation of
partnership arises from contract and not from status; and in particular, the members of a Hindu Undivided
family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on
business as such are not partners in such business.
2. Sharing of Profit: 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.
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 a 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.
As discussed earlier, 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.

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.5 THE INDIAN PARTNERSHIP ACT, 1932 3.5

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.
According to Section 6, regard must be had to the real relation between the parties as shown by all
relevant facts taken together. The rule is easily stated and is clear but its application is difficult.
Cumulative effect of all relevant facts such as written or verbal agreement, real intention and conduct of
the parties, other surrounding circumstances etc., are to be considered while deciding the relationship
between the parties and ascertaining the existence of partnership.
3. Agency: Existence of Mutual Agency which is the cardinal principle of partnership law, is very much
helpful in reaching a conclusion in this regard. 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.
Existence of Mutual Agency which is the cardinal principle of partnership law, is very much helpful in
reaching a conclusion in this regard. 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.
Santiranjan Das Gupta Vs. Dasyran Murzamull (Supreme Court)
In Santiranjan Das Gupta Vs. Dasyran Murzamull, following factors weighed upon the Supreme Court to
reach the conclusion that there is no partnership between the parties:
(a) Parties have not retained any record of terms and conditions of partnership.
(b) Partnership business has maintained no accounts of its own, which would be open to inspection
by both parties.
(c) No account of the partnership was opened with any bank.
(d) No written intimation was conveyed to the Deputy Director of Procurement with respect to the
newly created partnership.

1.4 PARTNERSHIP DISTINGUISHED FROM OTHER FORMS OF

ORGANISATION
Partnership Vs. Joint Stock Company
Basis Partnership Joint Stock Company
Legal status A firm is not legal entity i.e. it has no legal A company is a separate legal entity distinct
personality distinct from the personalities of from its members (Salomon v. Salomon).
its constituent members.

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3.6 BUSINESS LAWS

Agency In a firm, every partner is an agent of the In a company, a member is not an agent of
other partners as well as of the firm. the other members or of the company, his
actions do not bind either.
Distribution of The profits of the firm must be distributed There is no such compulsion to distribute its
profits among the partners according to the terms profits among its members. Some portion of
of the partnership deed. the profits, but generally not the entire profit,
become distributable among the
shareholders only when dividends are
declared.
Extent of liability In a partnership, the liability of the partners In a company limited by shares, the liability
is unlimited. This means that each partner of a shareholder is limited to the amount, if
is liable for debts of a firm incurred in the any, unpaid on his shares, but in the case
course of the business of the firm and these of a guarantee company, the liability is
debts can be recovered from his private limited to the amount for which he has
property, if the joint estate is insufficient to agreed to be liable. However, there may be
meet them wholly. companies where the liability of members is
unlimited.
Property The firm’s property is that which is the “joint In a company, its property is separate from
estate” of all the partners as distinguished that of its members who can receive it back
from the ‘separate’ estate of any of them only in the form of dividends or refund of
and it does not belong to a body distinct in capital.
law from its members.
Transfer of shares A share in a partnership cannot be In a company a shareholder may transfer
transferred without the consent of all the his shares, subject to the provisions
partners. contained in its Articles. In the case of
public limited companies whose shares are
quoted on the stock exchange, the transfer
is usually unrestricted.
Management In the absence of an express agreement to Members of a company are not entitled to
the contrary, all the partners are entitled to take part in the management unless they
participate in the management. are appointed as directors, in which case
they may participate. 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.
Registration Registration is not compulsory in the case A company cannot come into existence
of partnership. unless it is registered under the Companies
Act, 2013.
Winding up A partnership firm can be dissolved at any A company, being a legal person is either
time if all the partners agree. wind up by the National Company Law
Tribunal or its name is struck of by the
Registrar of Companies.
Number of According to section 464 of the Companies A private company may have as many as
membership Act, 2013, the number of partners in any 200 members but not less than two and a
association shall not exceed 100. public company may have any number of

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.7 THE INDIAN PARTNERSHIP ACT, 1932 3.7

However, the Rule given under the members but not less than seven. A private
Companies (Miscellaneous) Rules, 2014 Company can also be formed by one
restrict the present limit to 50. person known as one person Company.
Duration of Unless there is a contract to the contrary, A company enjoys a perpetual succession.
existence death, retirement or insolvency of a partner
results in the dissolution of the firm.
Partnership Vs. Club

Basis of Difference Partnership Club

Definition It is an association of persons formed for A club is an association of persons formed

earning profits from a business carried on with the object not of earning profit, but of
by all or any one of them acting for all. promoting some beneficial purposes such
as improvement of health or providing
recreation for the members, etc.

Relationship Persons forming a partnership are called Persons forming a club are called
partners and a partner is an agent for other members. A member of a club is not the
partners. agent of other members.

Interest in the Partner has interest in the property of the A member of a club has no interest in the
property firm. property of the club.

Dissolution A change in the partners of the firm affect A change in the membership of a club does
its existence. not affect its existence.

Partnership vs. Hindu Undivided Family

Basis of difference Partnership Joint Hindu family
Mode of creation Partnership is created necessarily by an The right in the joint family is created by
agreement. status means its creation by birth in the
family.
Death of a member Death of a partner ordinarily leads to the The death of a member in the Hindu
dissolution of partnership. undivided family does not give rise to
dissolution of the family business.
Management All the partners are equally entitled to take The right of management of joint family
part in the partnership business. business generally vests in the Karta, the
governing male member or female
member of the family. 1

1 Joint Hindu Family: The amendment in the Hindu Succession Act, 2005, entitled all adult members – Hindu
males and females to become coparceners in a HUF. They now enjoy equal rights of inheritance due to this
amendment. On 1st February 2016, Justice Najmi Waziri gave a landmark judgement which allowed the eldest
female coparceners of an HUF to become its Karta.

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3.8 BUSINESS LAWS

Authority to bind Every partner can, by his act, bind the firm. The Karta or the manager, has the
authority to contract for the family business
and the other members in the family.
Liability In a partnership, the liability of a partner is In a Hindu undivided family, only the
unlimited. liability of the Karta is unlimited, and the
other coparcener are liable only to the
extent of their share in the profits of the
family business.
Calling for accounts A partner can bring a suit against the firm On the separation of the joint family, a
on closure for accounts, provided he also seeks the member is not entitled to ask for account of
dissolution of the firm. the family business.
Governing Law A partnership is governed by the Indian A Joint Hindu Family business is governed
Partnership Act, 1932. by the Hindu Law.
Minor’s capacity In a partnership, a minor cannot become a In Hindu undivided family business, a
partner, though he can be admitted to the minor becomes a member of the ancestral
benefits of partnership, only with the business by the incidence of birth. He does
consent of all the partners. not have to wait for attaining majority.
Continuity A firm subject to a contract between the A Joint Hindu family has the continuity till it
partners gets dissolved by death or is divided. The status of Joint Hindu family
insolvency of a partner. is not thereby affected by the death of a
member.
Number of Members In case of Partnership number of members Members of HUF who carry on a business
should not exceed 50. may be unlimited in number.
Share in the In a partnership, each partner has a In a HUF, no coparceners has a definite
business defined share by virtue of an agreement share. His interest is a fluctuating one. It is
between the partners. capable of being enlarged by deaths in the
family diminished by births in the family.
Partnership Vs. Co-Ownership or joint ownership i.e. the relation which subsists between persons who
own property jointly or in common.
Basis of difference Partnership Co-ownership
Formation Partnership always arises out of a Co-ownership may arise either from
contract, express or implied. agreement or by the operation of law, such
as by inheritance.
Implied agency A partner is the agent of the other partners. A co-owner is not the agent of other co-
owners.
Nature of interest There is community of interest which Co-ownership does not necessarily involve
means that profits and losses must have sharing of profits and losses.
to be shared.
Transfer of interest A share in the partnership is transferred A co - owner may transfer his interest or
only by the consent of other partners. rights in the property without the consent of
other co-owners.

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.9 THE INDIAN PARTNERSHIP ACT, 1932 3.9

Partnership vs. Association

Basis of difference Partnership Association
Meaning Partnership means and involves setting up Association evolve out of social cause
relation of agency between two or more where there is no necessarily motive to
persons who have entered into a business earn and share profits. The intention is not
for gains, with the intention to share the to enter in a business for gains.
profits of such a business.
Examples Partnership to run a business and earn Members of charitable society or religious
profit thereon. association or an improvement scheme or
building corporation or a mutual insurance
society or a trade protection association.

1.5 KINDS OF PARTNERSHIPS

The following chart illustrates the various kinds of partnership:

Kind of
Partnership

With regard to
With regard to
the extent of
duration
the business

Partnership
Partnership at Particular General
for a fixed
will partnership partnership
period

The various kinds of partnership are discussed below:

1. Partnership at will according to Section 7 of the Act, partnership at will is a partnership when:
1. no fixed period has been agreed upon for the duration of the partnership; and
2. there is no provision made as to the determination of the partnership.
These two conditions must be satisfied before a partnership can be regarded as a partnership at will.
But, where there is an agreement between the partners either for the duration of the partnership or for
the determination of the partnership, the partnership is not partnership at will.
Where a partnership entered into for a fixed term is continued after the expiry of such term, it is to be
treated as having become a partnership at will.

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3.10 BUSINESS LAWS

A partnership at will may be dissolved by any partner by giving notice in writing to all the other partners
of his intention to dissolve the same.
2. Partnership for a fixed period: Where a provision is made by a contract for the duration of the
partnership, the partnership is called ‘partnership for a fixed period’. It is a partnership created for a
particular period of time. Such a partnership comes to an end on the expiry of the fixed period.
3. Particular partnership: A partnership may be organized for the prosecution of a single adventure as
well as for the conduct of a continuous business. Where a person becomes a partner with another
person in any particular adventure or undertaking the partnership is called ‘particular partnership’.
A partnership, constituted for a single adventure or undertaking is, subject to any agreement, dissolved
by the completion of the adventure or undertaking.
4. General partnership: Where a partnership is constituted with respect to the business in general, it is
called a general partnership. A general partnership is different from a particular partnership. In the case
of a particular partnership, the liability of the partners extends only to that particular adventure or
undertaking, but it is not so in the case of general partnership.
Partnership Deed
Partnership is the result of an agreement. No particular formalities are required for an agreement of partnership.
It may be in writing or formed verbally. But it is desirable to have the partnership agreement in writing to avoid
future disputes. The document in writing containing the various terms and conditions as to the relationship of the
partners to each other is called the ‘partnership deed’. It should be drafted with care and be stamped according
to the provisions of the Stamp Act, 1899. Where the partnership comprises immovable property, the instrument
of partnership must be in writing, stamped and registered under the Registration Act.
Partnership deed may contain the following information:-
1. Name of the partnership firm.
2. Names of all the partners.
3. Nature and place of the business of the firm.
4. Date of commencement of partnership.
5. Duration of the partnership firm.
6. Capital contribution of each partner.
7. Profit Sharing ratio of the partners.
8. Admission and Retirement of a partner.
9. Rates of interest on Capital, Drawings and loans.
10. Provisions for settlement of accounts in the case of dissolution of the firm.
11. Provisions for Salaries or commissions, payable to the partners, if any.
12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.
A partnership firm may add or delete any provision according to the needs of the firm.

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.11 THE INDIAN PARTNERSHIP ACT, 1932 3.11

1.6 TYPES OF PARTNERS

Based on the extent of liability, the different classes of partners are:

Types of Partners

Active or Outgoing Sleeping or Partner in Incoming Partner by

Nominal Sub-partner
Ostensible Partner Dormant Profits only Partner Holding out

Active or Actual or Ostensible partner:

Who has become a partner by

agreement, and

It is a person

Who actively participates in

the conduct of the partnership

He acts as an agent of other partners for all acts done in the ordinary course of business. In the event of his
retirement, he must give a public notice in order to absolve himself of liabilities for acts of other partners done
after his retirement.
Sleeping or Dormant Partner:

Who is a partner by
agreement, and

It is a person

Who does not actively take

part in the conduct of the
partnership business

They are called as ‘sleeping’ or ‘dormant’ partners. They share profits and losses and are liable to the third parties
for all acts of the firm. They are, however not required to give public notice of their retirement from the firm.
Nominal Partner: A person who lends his name to the firm, without having any real interest in it, is called a
nominal partner.

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3.12 BUSINESS LAWS

He is not entitled to share the profits of the firm. Neither he invest in the firm nor takes part in the conduct of the
business. He is, however liable to third parties for all acts of the firm.

Lend his name to the Without having any Not entitled to share
firm real interest in firm the profits

Does not take part in

Liable to third parties
the conduct of the
for all acts of the firm
businesss

Partner in profits only: A partner who is entitled to share the profits only without being liable for the losses is
known as the partner for profits only and also liable to the third parties for all acts of the profits only.

Entitled to share the profits Liable to the third parties for

Not liable for the losses
only all acts of the profits only

Incoming partners: A person who is admitted as a partners into an already existing firm with the consent of all
the existing partners is called as “incoming partner”. Such a partner is not liable for any act of the firm done
before his admission as a partner.
Outgoing partner: A partner who leaves a firm in which the rest of the partners continue to carry on business is
called a retiring or outgoing partner. Such a partner remains liable to third parties for all acts of the firm until
public notice is given of his retirement.
Partner by holding out (Section 28): Partnership by holding out is also known as partnership by estoppel.
Where a man holds himself out as a partner, or allows others to do it, he is then stopped from denying the
character he has assumed and upon the faith of which creditors may be presumed to have acted.

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.13 THE INDIAN PARTNERSHIP ACT, 1932 3.13

to be represented as a
When a person Knowingly permits
partner in a firm (when
represent himself, or himself,
in fact he is not)

to anyone who on the

he is liable, like a faith of such
partner in the firm representation has
given credit to the firm.

A person may himself, by his words or conduct have induced others to believe that he is a partner or he may
have allowed others to represent him as a partner. The result in both the cases is identical.
Example 4: X and Y are partners in a partnership firm. X introduced A, a manager, as his partner to Z. A remained
silent. Z, a trader believing A as partner supplied 100 T.V sets to the firm on credit. After expiry of credit period,
Z did not get amount of T.V sets sold to the partnership firm. Z filed a suit against X and A for the recovery of
price. Here, in the given case, A, the Manager is also liable for the price because he becomes a partner by
holding out (Section 28, Indian Partnership Act, 1932).
It is only the person to whom the representation has been made and who has acted thereon that has right to
enforce liability arising out of ‘holding out’.
You must also note that for the purpose of fixing liability on a person who has, by representation, led another to
act, it is not necessary to show that he was actuated by a fraudulent intention.
The rule given in Section 28 is also applicable to a former partner who has retired from the firm without giving
proper public notice of his retirement. In such cases a person who, even subsequent to the retirement, give credit
to the firm on the belief that he was a partner, will be entitled to hold him liable.
Example 5: A partnership firm consisting of P, Q, R and S. S retires from the firm without giving public notice
and his name continues to be used on letterheads. Here, S is liable as a partner by holding out to creditors who
have lent on the faith of his being a partner.

SUMMARY
It is not quite easy to define the term ‘Partnership’. The definition given by Section 4 of the Act brings out very
clearly the fundamental principle that each partner, when carrying on the business of the firm, is an agent as well
as principal, and is probably the most business like definition of the term. The definition contains three elements
which must be present before a group of persons can be held to be partners, namely; (a) agreement among all
the partners; (b) agreement to share the profits of the business; (c) the business must be carried on by all or any
of them, acting for all. These three elements may appear to overlap, but they are nevertheless distinct.
The element of agreement in partnership distinguishes it from various other relations which arise by operation of
law and not from agreement, such as, joint-owners, Hindu Undivided Family, etc.

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TEST YOUR KNOWLEDGE

Multiple Choice Questions
1. The term ‘Partnership’ has been defined under ____ of the Partnership Act, 1932:
(a) Section 3 (b) Section 4
(c) Section 5 (d) Section 6
2. A partnership for which no period or duration is fixed under the Indian Partnership Act is known as:
(a) Unlimited partnership (b) Co-ownership
(c) Particular partnership (d) Partnership at will
3. The most important elements in partnership is:
(a) Business
(b) Sharing of profits
(c) Agreement
(d) Business to be carried on by all or any of them acting for all.
4. A firm is the name of:
(a) The partners
(b) The minors in the firm
(c) The business under which the firm carries on business
(d) The collective name under which it carries on business
5. A partnership formed for the purpose of carrying on particular venture or undertaking is known as:
(a) Limited partnership (b) Special partnership
(c) Joint venture (d) Particular partnership
6. In the absence of agreement to the contrary all partners are:
(a) Not entitled to share profits (b) Entitled to share in capital ratio
(c) Entitled to share in proportion to their ages (d) Entitled to share profits equally
7. A partnership at will is one:
(a) Which does not have any deed
(b) Which does not have any partner
(c) Which does not provide for how long the business will continue
(d) Which cannot be dissolved.

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.15 THE INDIAN PARTNERSHIP ACT, 1932 3.15

8. What among the following is not an essential element of partnership:

(a) There must be an agreement entered into by all the persons concerned
(b) The agreement must be to share the profits of a business
(c) The business must start within six months from the date of agreement
(d) The business must be carried on by all or any one of them acting for all.
9. Partnership is a relationship, which arises from:
(a) Operation of law (b) An agreement
(c) Status (d) Almighty
10. Which is not a characteristics of partnership firms?
(a) Perpetual succession (b) Unlimited liability of partners
(c) Mutual agency (d) Sharing of profits of business
11. Select the odd one out of the available options for the entitlement of “Partners in profits only”:
(a) He is entitled to share the profits only.
(b) He is liable for the losses of the firm.
(c) He is not liable for the losses of the firm.
(d) He is liable to the third parties for all acts of the profits only.
12. Mr. Pawan is nominal partner in the partnership firm so he:
(a) is not entitled to share the profits.
(b) is entitled to share the profits.
(c) can take part in the conduct of business.
(d) Is not liable to third parties for all acts of the firm.
13. When partnership entered into for a fixed term is continued after the expiry of such term, it is to be
treated as having become a:
(a) Partnership for a fixed period.
(b) Particular partnership
(c) Partnership at will.
(d) General partnership.
14. Mr. Samarth retires from the partnership firm without giving public notice and his name continues to be
used on letterhead of the firm. Mr. Samarth is ________ in the case of repayment of loan to creditors.
(a) liable as a partner.
(b) not liable as a partner.

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3.16 BUSINESS LAWS

(c) responsible.
(d) liable as a retiring partner.
15. The “dormant partner” of the firm is:
(a) not required to give notice of his retirement.
(b) required to give notice of his retirement
(c) not liable to the third parties for all act of the firm.
(d) does not share profits and losses.

Answers to MCQs

1. (b) 2. (d) 3. (d) 4. (d) 5. (d)

6. (d) 7. (c) 8. (c) 9. (b) 10. (a)

11. (b) 12. (a) 13. (c) 14. (a) 15. (a)

Descriptive Questions
1. Mr. XU and Mr. YU are partners in a partnership firm. Mr. XU introduced MU (an employee) as his partner
to ZU. MU remained silent. ZU, a trader believing MU as partner supplied 50 Laptops to the firm on
credit. After expiry of credit period, ZU did not get amount of Laptop sold to the partnership firm. ZU filed
a suit against XU and MU for the recovery of price. Does MU is liable for such purpose?
2. Ms. Lucy while drafting partnership deed taken care of few important points. What are those points? She
want to know the list of information which must be part of partnership deed drafted by her. Also, give list
of information to be included in partnership deed?

Answers to the Descriptive Questions

1. As per Section 28 of Indian Partnership Act, 1932, Partnership by holding out is also known as
partnership by estoppel. Where a man holds himself out as a partner, or allows others to do it, he is then
stopped from denying the character he has assumed and upon the faith of which creditors may be
presumed to have acted. A person may himself, by his words or conduct have induced others to believe
that he is a partner or he may have allowed others to represent him as a partner. The result in both the
cases is identical.
In the given case, MU (the Manager) is also liable for the price because he becomes a partner by holding
out as per Section 28 of Indian Partnership Act, 1932.
2. Ms. Lucy while drafting partnership deed must take care of following important points:
• No particular formalities are required for an agreement of partnership.
• Partnership deed may be in writing or formed verbally. The document in writing containing the various
terms and conditions as to the relationship of the partners to each other is called the ‘partnership deed’.

© The Institute of Chartered Accountants of India

.17 THE INDIAN PARTNERSHIP ACT, 1932 3.17

• Partnership deed should be drafted with care and be stamped according to the provisions of the Stamp
Act, 1899.
• If partnership comprises immovable property, the instrument of partnership must be in writing, stamped
and registered under the Registration Act.
List of information included in Partnership Deed while drafting Partnership Deed by Ms. Lucy:
• Name of the partnership firm.
• Names of all the partners.
• Nature and place of the business of the firm.
• Date of commencement of partnership.
• Duration of the partnership firm.
• Capital contribution of each partner.
• Profit Sharing ratio of the partners.
• Admission and Retirement of a partner.
• Rates of interest on Capital, Drawings and loans.
• Provisions for settlement of accounts in the case of dissolution of the firm.
• Provisions for Salaries or commissions, payable to the partners, if any.
• Provisions for expulsion of a partner in case of gross breach of duty or fraud.
Note: Ms. Lucy may add or delete any provision according to the needs of the partnership firm.

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