Test Of Partnership

According to the Partnership Act, the liability of partners is joint and several. It means that the creditors of a firm can realise their dues from any partner of the firm. It is quite possible that a person, in order to escape his liability, may deny the fact of his being a partner in the firm. In such a situation, it becomes necessary for the creditors to prove that the person concerned is a partner in the firm.




To determine whether or not a group of persons constitutes partnership and whether a particular person is or is not a partner in the firm, we have to ascertain the real relationship amongst the parties. If the parties have drawn an express contract, their real relation may be known from the terms of partnership contract. But, if they have not drawn an express contract, their real relationship is to be gathered from other relevant factors such as conduct of parties, circumstances under which the contract took place, books of account, statement of employees, etc. Section 6 of the Act clearly states that in determining whether a group of persons is or is not a firm, regard shall be had to the real relation between the parties as shown by all relevant facts taken together.

When all the facts taken together show that all essential elements of partnership as outlined earlier are present, the group shall be regarded as partnership. It needs to be emphasised that sharing of profits is important evidence of partnership. In other words, if a person has been sharing profits of a business he is normally regarded as a partner. But it is not true in all cases. There may be persons who are in receipt of a share in profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, but are not partners. Such persons are:

i) Creditors of the firm who, on having lent money to the firm, may agree to take a share in profits;

ii) the widow or child of a deceased partner who receives share of profits of business as annuity;

iii) a person receiving a share of profit in consideration of sale of business or goodwill of the business that he has sold to the firm, and

iv) a servant or an agent receiving share in the profits of the business in consideration of his association with the firm.

Examples

1. A and B who are partners in a firm, borrow money from C who lends it on the condition that he will take 10% share in profits and have the right to inspect the books of accounts. Despite these factors C cannot be regarded as a partner because there was no intention to associate C as a partner.

2. B, a contractor, appointed one of his servants to manage his business of loading and unloading railway wagons. The servant was to receive 50% of the profits of this business and also bear the losses, if any. The servant was simply an agent of B, and not a partner,

Similarly, two persons who jointly own a house let it out on a rent of Rs. 16,000 per annum and share the rental income equally, are not regarded as partners. They are simply co-owners of the property. As per explanation 1 to Section 6, the joint owners of some property sharing profits or gross returns arising from the property do not become partners.

While there can be no partnership without sharing of profits of the business, sharing of profits alone does not constitute partnership. The true test of partnership lies in the existence of mutual agency relationship i.e., the capacity of a partner to bind other partners by his acts done in firm’s name and be bound by the acts of other partners. This relationship of principal and agent distinguishes a partnership from co-ownership and the simple agreements for sharing profit. It should also be noted that the following persons are not deemed to be partners:

i) The members of a Joint Hindu Family carrying on family business.

ii) A Burmese Buddhist husband and wife carrying on a business.

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