MODES OF DETERMINING EXISTENCE OF PARTNERSHIP

Modes of determining existence of partnership

Introduction

In determining whether there is group of people or is a not a firm, or whether it there is an individual not any partner in a firm it must have the real relation between the parties, as shown by all the relevant facts taken together.

This article speaks about section 6 of Indian partnership Act, 1932 – the sharing of profit or of gross returns arising from property by persons possessing a joint or common interest therein property doesn’t build such person partners1.  

Sharing of profits in a business or a payment contingent upon the earning of profit does not make any person a partner. This section is based on the rule in Cox v. Hickman where it was laid down that a court should look upon all the relation between the partners, their written, verbal agreements, their conducts and all their factual relations into consideration. This section has a relevance with the earlier sections of Indq11ian Contract Act which are repealed now. These are Section 240, 242, 243 and 244.

Main Content

There must be a contract

Indian Partnership Act, 1932 says that a contract between partners forming partnership is necessary which is known as partnership deed. This contract or agreement between them contain all the required information for carrying out business. 

Persons required for forming 

Partnership is considered a relationship between persons, minimum there should be 2 members and there is no limit for maximum members required. It is created between two or mare than two “legal persons”. Legal persons includes both artificial person as well as natural person. 

Profits sharing

Business is all about earning profits. Therefore, profits must be shared among all the members of the firm in their decided ratio.

Sharing of profits is considered as a facet to test true partnership, it is believed that it is an evidence to check whether partnership firm exists or not. But the act doesn’t think about a bit of incontrovertible proof because of the exposure of some profit-sharing cases wherever profit sharing has been proved contradictory to the partnership.

Let’s have a glance at a landmark case wherever portion wasn’t thought of as a real check of partnership. 

There are some more conditions also that are found contradictory to partnership

  • In case a partner dies and his share of profit is given to his nominee, his wife or his son then the person will not be considered as a partner of the firm.
  • If a servant or agent is given the share of profit as his salary, then the servant will not be the partner.
  • If the  some parts of profits have been share to previous partner as goodwill or a part of consideration, then it will conjointly not build him a partner. 

These factors prove that sharing of profits will not be an evidence to determine the existence of partnership.   

Mutual agency

In section 6, we talk about of mode of determining existence of partnership, it basically checks whether partnership exists or not, because sometime people invest money together and share profits among them, but partnership firm does not exist between them. 

Let’s take an example, two friends Karan and Rahul purchased a land together, and then rented it and the profit came from rent was divided between them in equal shares. In this case partnership does not exists between Karan and Rahul and they are not acting as an agent for each other. They will be considered only the joint-owners of the property sharing profits. 

This section helps in determining existence of partnership, following are the factors which are requires to be prove necessarily to determine the existence of partnership:

  • It is important to have agreement between concerned parties
  • The law of agency must govern the relationships.
  • The agreement which exists between parties was to share profits.

Mutual agency is considered as the chief core of the partnership law. It is very much important aspect to determine whether a partnership firm exists or not. 

If the partner of the firm act as an agent and also as the principal for themselves, then it will be deduced that mutual agency exists. So at no purpose there’s a disarray concerning the existence of AN association between people we have a tendancy to check for the extant of mutual agency within the event that such workplace exists between the partners World Health Organisation continue a partnership and portion advantage it’ll be reputable that this consortium exists. 

In the very famous supreme court case i.e. Santiranjan das Gupta vs. Murzamull, where he court has amused various factors to come to the conclusion that whether partnership exists or not. 

  • In the case concerned parties does not have any agreement like partnership deed between them 
  • They don’t have any account in any bank 
  • They do not have given any written information to deputy director of procurement of newly formed partnership.

 

Agreement

Section 5 of Indian Contract Act distinctly states that it is an agreement and not the standing that makes a partnership. It implies that partnership appear from the contract and not the standing.

For example: A Jain husband and wife carrying business on Hindu Undivided Family business are not partners in such business because there does not exists any partnership between them.   

PARTNERSHIP OR SUB-LETTING

There may be a circumstance in which a partner of firm can let his property to another individual rather than existence of partnership. It can be explained by taking the case United India Insurance Co. Ltd. vs. T Venkata Narsaiah, AIR 2003 NOC 119 (AP). In this case 

On the other side, there could be a type of partnership, in which even if the matter is related to simple subletting of premises, court can shread the veil of organisation. To check whether there is actually subletting of property. The supreme court has command that even wherever the justification is supposedly created for a partnership, if the aim of such partnership is apparent and therefore the agreement of partnership is drawn to hide the important group action of subletting, then the court will life the veil of partnership to search out the important nature of transaction entered into by the parties. 

There are some principles which have been deducted by Apex Court to judge the true intent of the parties:

  1. In ordinance to demonstrate misbehaviour of renting as a ground for ejection under rent control laws, two elements got to be accompanied firstly, parting with possession of residence or a part of it by a resident in commendation of a third party with privilege of possession, and second, that such parting with possession was kept away from the acquiescence of owner and in place of remuneration or rent. 
  2. Inducting a member or members within an organisation or affirmation by a resident by itself doesn’t quantity to renting. However, if the motive of such partnership is apparent and a deed of firm is drawn to hide the $64000 dealings of subletting, the court might tear veil of organisation to search out the $64000 nature of dealings entered into by a inhabitant. 
  3. The presence of partnership deed between tenant and the person who leases property from tenant i.e. sub-tenant or seeming group actions in other type would nor prevent the owner from delivery on record material and situations, by argument proof or by suggest that of interrogatory, creating out a case of subletting or parting with possession in residence site by the resident in esteem of another individual.  
  4. If a Lessee is ardently related to the partnership business and keep the authority over the occupancy premises with him, could also be along-side partner, the resident might not be aforesaid to possess compound with ownership. 
  5. Primary freight of providing sub-letting is on the owner however once he’s able to establish that a third party is in absolute possession of the property and therefore the tenant has no legal possession of an inhabitant property, the burden shifts to the person(resident) to prove the character of profession of the third party which the tenant continues to carry legal possession in residency premises. 
  6. In alternative words, initial burden lying on shoulders of owner would perch excreted by argument clear proof of the actual fact that a celebration aside from the resident was in exclusive possession of the property, audacity of subletting could then be raised and will result to proof unless denied. 

PARTNERSHIP AND SERVICE

Most of the times it’s challenging to draw the road between the partnership and a remittance of pay by a share of profit. It looks not possible to mention that a salaried person, is or isn’t a, a partner within the true sense of the term. 

Conclusion

In my belief, section 6 i.e. determining existence of partnership has played a very important and vital role and is considered as an essential art of it. We enter into a partnership agreement frequently and there may be cases arising which may seem to be partnership firm, but in reality it is not. With the assistance of the varied case laws and also the things that arose throughout the time, it’s thus over that mutual agency is the conclusive part of determining existence of partnership. 

Thus, we are able to conclude by proving that section 6 has done an excellent job of protecting the interest of the involved parties. 

 

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