DAMODARAM SANJIVAYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM

NAME: Nikhila Katupalli

SUBJECT: Contracts II
SEMESTER: 3rd
ROLL NUMBER: 2018LLB057

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ACKNOWLEGEMENT:
I take this opportunity to express my deepest gratitude to my lecturer, Prof. Jogi Naidu sir
for the constant support in the completion of this project titled, section 6 of the Indian
partnership act, 1932. I would like extend my gratitude to the e-resources, books and other
necessary facilities provided by DSNLU for the successful completion of my project.

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TABLE OF CONTENTS:
Historical background…………………………………………………………………...……4
What is partnership…………………………………………………………………………...4
Scope…………………………………………………………………………………………4
Definition…………………………………………………………………………………….5
Essentials of a partnership…………………………………………………………………...5
Section 6- determining the existence of partnership………………………………………...5
Illustrations………………………………………………………………………………….6
Case 1: Mollwo, march and co. vs court of wards 1872 LR 4 PC 419…………………….9
Case 2: Abdul Latiff vs Gopeswar Chattoraj AIR 1933 Cal 204…………………………..15
Case 3: Commissioner of Income Tax Vs. Shankar Cottons (1997)137CTR(Mad)583…...17
Case 4: Debi Parshad Vs. Jai Ram Dass and anr AIR 1952 P&H 284……………………..19
Case 5: Commissioner of Income-tax Vs. Ravi Constructions and Uma Constructions
1987 169 ITR 662(AP)……………………………………………………………………..21
Bibliography………………………………………………………………………………..25

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THE INDIAN PARTNERSHIP ACT, 1932:
Historical :
The Indian Partnership Act was enacted in 1932 and it came into force on 1st day of October,
1932. The present Act superseded the earlier law relating to Partnership, which was
contained in Chapter XI of the Indian Contract Act,1872. The Act is not exhaustive. It
purports to define and amend the law relating to Partnership.

A Partnership arises from a contract, and therefore , such a contract is governed not only by
the provisions of the Partnership Act in that regard, but also by the general law of contract in
such matters, where the Partnership Act does not specifically make any provision. It has been
expressly provided in the Partnership Act that un repealed provisions of the Indian Contract
Act , 1872 , save in so far as they are inconsistent with the express provisions of this act ,
shall continue to apply. Thus, the rules relating to offer and acceptance , consideration , free
consent , legality of object ,etc, as contained in the Indian Contract Act are applicable to a
contract of Partnership also. On the other hand , regarding the position of minor , since there
is specific provision contained in Section 30 of the Indian Partnership Act , the minor’s
position is governed by the provision of the Partnership Act.
What Is The Nature Of Partnership?
Partnership is a form of business organization, where two or more persons join together for
jointly carrying on some business. It is an improvement over the ‘Sole –trade business, where
one single individual with his own resources, skill and effort carries on his own business. Due
to the limitation of resources of only a single person being involved in the sole-trade
business, a larger business requiring more investments and resources than available to a sole-
trader, cannot be thought of in such a form of business organisation. In partnership, on the
other hand, a number of persons could pool their resources and efforts and could start a much
larger business, than could be afforded by any of these partners individually. In case of loss
the burden gets divided amongst various partners in a Partnership.

Scope:
The scope of a partnership is primarily a question of the intention of the partners. There is no
restriction on the exercise of such powers as it chooses at any time to exercise, except such

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prohibitions on illegal, immoral or fraudulent conduct as apply equally to individuals.
1- A partnership may itself be a member of another firm if the partners of the constituent firm
consent thereto.
2- If it appears that all the partners have either authorized or ratified the contract, no further
question as to its validity ordinarily remains. The cases where the question of the validity of
partnership contract arises is where one partner has made the contract without specific
authority from his co-partners. As to their implied scope partnerships may he divided into the
classes of the non-trading and the trading. Some powers can be exercised by partners in
partnership of either type. Thus a partner may retain an attorney protect the interests of the
firm.

Definition Of Partnership:
Section 4 of the Indian Partnership Act ,1932 defines ‘Partnership’ as under 6 :
‘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 ’
Essentials Of Partnership :
According to Section 4, the following essentials are necessary to constitute a ‘Partnership’.
1. There should be an agreement between the persons who wants to be partners.
2. The purpose of creating partnership should be carrying on of business
3. The motive for the creation partnership should be earning and sharing profits.
4. The business of the firm should be carried on by all of them or any of them acting for all,
i.e., in mutual agency
When all the above elements are present in certain relationship that is known as ‘partnership’.
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’.
S. 6. 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.

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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.
Determining existence of partnership.— In Ross v Parkyns1 Jessel, MR, stated the law
as follows: It is said (and about that there is no doubt) that the mere participation in profits
inter se affords cogent evidence of partnership. But it is now settled by the cases of Cox v.
Hickman2, Buller v. Sharp3 , 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 circumstance is not conclusive.” The
law as stated above has been restated in this section. The section also indicates the manner in
which the general principle is to be applied to particular circumstances. The question whether
the relation of partnership does or does not exist, “must depend on the real intention and
contract of the parties.
Explanation 1
The mere fact that a person is entitled to a share in the profits does not make him a partner,
because the real relationship may be one of debtor and creditor.

Illustrations:
(1) A Rajah entered into a contract with a partnership firm as follows. The Rajah was to

1
Ross v Parkyns, (1875) LR 20 Eq 331, 335.
2
Cox v Hickman, (1860) 8 HLC 268.
3
Buller v Sharp, (1865) LR 1 CP 86, Ex Ch.

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receive in consideration of advances a commission on the net profits of the partnership
business. Large powers of control over the business were given to him for his protection, but
no power to direct transactions. It was held that the contract was not of partnership but of
loan and security between a debtor and a creditor.
(2) A does in his own name the business of loading and unloading wagons for a limited
company. A appoints B to manage the business. It is agreed between them that B shall get a
12 annas share out of the net profits as remuneration, and that A shall get a 4 annas share but
shall not be liable for any loss. A was to take contract of loading and unloading in his own
name and was to have a voice in determining what work was to be undertaken or when the
work was to be stopped or whether the Contract with the company was to be renewed or not
on the expiry of its period. On this the Court held that the relationship is not of partnership
but is of principal and agent as A was entitled in his own name to deal with the company.
The legal existence of a partnership has to be determined from all the facts. A statement in a
document that nothing therein contained is to constitute the relationship of partners will not
necessarily prevent the parties from being partners in the eyes of the law. So too, a mere
statement that the parties are to be partners will not necessarily constitute them partners in
law. Further, although a person may hold himself out to be a partner and be liable to third
parties accordingly, yet it does not necessarily follow that he is partner in law.
In Mollwo, March & Co v Court of Wards their Lordships said:
If cases should occur where any persons, under the guise of such an arrangement (i.e.
apparently a debtor and creditor arrangement), 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 responsibility on the parties according to their true
and real characters.
Illustrations:
(1) A and B enter into a partnership for a fixed term. It is agreed that if either of them dies
before the end of the term his representatives shall during the rest of the term receive the
share of the profits he would have been entitled to if living. A dies, and his share of the
profits is paid to his executors as provided by the agreement. The executors are not partners.4

4
Holme v Hammond, (1872) LR 7 Ex 218

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(2) A, B and C enter into an agreement in writing reciting that A and B have agreed to be
partners, and have requested C to lend Rs 1,00,000 to be invested in their firm. The
agreement declares that the money is advanced by C to A and B by way of loan and such
advance shall not be considered to make C a partner. By other clauses of the agreement C is
entitled to inspect the books, to receive a copy of the annual account, to share profits in a
fixed proportion, and has the option to dissolve the partnership and conduct the liquidation of
the business in certain events. C’s capital is not to be withdrawn till the termination of the
partnership. Under such an agreement C is a partner with A and B.5
(3) A purports to enter into a partnership agreement with B and agrees to make advances for
use in business. According to the terms of the agreement, A is to receive 12% interest on his
advances as the share of his profits. By other clauses of the agreement, A was authorised to
receive payments of bills due to B on account of the contracts executed by him and to give
receipts in his own name as the agent of B. It was held that A and B are not partners, for A
was to receive interest whether there was a profit or not. 6
(4) A and B, both of them attorneys-at-law, came to the following agreement, B “agreed to
admit A as a partner” in his (B’s) firm. It was agreed that the partnership was to be for one
year; that in lieu of his share of profits A was to receive Rs 500 per month and was not to be
responsible for any losses or liabilities of the firm: and on its termination he was to cease to
have any interest in the firm and its property. The clients of the firm were informed by a
general notice that A was “admitted into partnership.” A and B are partners although A is
entitled only to a fixed salary. S. 6. Mode of determining existence of partnership.7
Referring to the facts of the above case and the argument that the above agreement did not
constitute a partnership in law, because they did not agree to share the profits between them,
Marten, CJ, said as follows: Partners can agree to share those profits in any way they like.
They may agree to share them equally. They may also agree, in my opinion, 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. In other words the defendant (i.e., A) thus became a salaried partner
which is an expression we are quite familiar with not only in England but also in Bombay. In

5
Ex parte Delhasse, (1877) 7 ChD 511.
6
Karnidan Sarda v Sailaja Kanta, AIR 1940 Pat 683 : (1940) 19 Pat 715.
7
Raghunandan Nanu v Hormasjee Benzoojee, AIR 1927 Bom 187 : (1927) 51 Bom 342 : 29 Bom LR 207 : 100
IC 1025

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Girdharbhai v. Saiyed Mohd. Kadri the Supreme Court observed that Section 6 reiterates that
in determining partnership regard shall be had to real relation between parties as shown by all
the relevant facts taken together. So where a partner brought in as his asset tenancy in the
premises in which partnership business was to be carried on, the fact that he was to share
profits only and was to get a fixed percentage of the profits and that he was not to operate
bank account. On this the Supreme Court concluded that it could not be said that no genuine
partnership had come into existence.

CASE LAWS:

1. Mollwo, march and co. vs court of wards 1872 LR 4 PC 419

FACTS:
The Plaintiffs/Appellants, merchants of London, brought an action against the late Rajah
Pertab Chunder Singh, to recover a balance of nearly three lacs of rupees claimed to be due to
them from the firm of W.N. Watson & Co. of Calcutta. The Rajah having died during the
pendency of the suit, the defence was continued by the Respondent, the Court of Wards, on
behalf of his minor heir. The plaint alleged that the firm of W. N. Watson & Co.
consisted of W.N. Watson, T.O. Watson, and the Rajah, liable as a partner in it. The two
Watsons commenced business in partnership, as merchants at Calcutta, in 1862, under the
firm of W.N. Watson & Co. Their transaction consisted principally in making
consignments of goods to merchants in England, and receiving consignments from them.

The Watsons had little or no capital. The Rajah supported them, and in 1862 and 1863, he
made large advances to enable them to carry on their business, partly in cash, but chiefly by
accepting bills, which the Rajah met at maturity. In the middle of 1863, the total amount of
these advances was considerable and the Rajah desired to have security for his debt and for
any future advances he might make and also wished to obtain some control over the business
by which he might check what he considered to be the excessive trading of the Watsons.
Accordingly, an agreement was entered into on the 27th of August, 1863, between the Rajah
of the one part, and “Messrs. W.N. Watson & Co.” on the other part, by which, in
consideration of money already advanced and which might be thereafter advanced by the
Rajah to them, the Watsons agreed to carry on their business subject to the control of the
Rajah in several important particulars.

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Under the agreement, whilst the advances made by the Rajah remained unpaid, the Watsons
bound themselves not to make shipments, or order consignments, or sell goods, without his
consent. No money was to be drawn from the firm without his sanction, and he was to be
consulted with regard to the office business of the firm, and he might direct a reduction or
enlargement of the establishment. It was also agreed that the shipping documents should be at
his disposal, and should not be sold or hypothecated, or the proceeds applied, without his
consent; and that all the proceeds of the business should be handed to him, for the purpose of
extinguishing his debt. They further agreed to, and in fact did, hand over to the Rajah “as
security” the title deeds of certain tea plantations, and they also agreed, that “as further
security” all their other property including landed or otherwise including their stock in trade,
should be answerable for the debt due to him. This agreement was not signed by the Rajah,
but he was undoubtedly an assenting party to it. Subsequent to the agreement, the Rajah made
further advances, and the amount due to him ultimately exceeded three lacs of rupees. In
1864 and 1865, the firm of W.N. Watson & Co. fell into difficulties.
An arrangement was then made under which the Rajah upon the Watsons executing to him a
formal mortgage of the tea plantations, to secure the amount of his advances, released to
them, by a deed bearing date the 3rd of March, 1865 all right to commission and interest
under the agreement of August, 1863, and all other claims against them. In point of fact, the
Rajah up to this time, had never received possession of any of the properties or moneys of the
firm, nor any of the proceeds of the business; and did not in fact receive any commission. A
sum of Rs. 27,000 on this account was, indeed, on the 30th of September 1863 placed to his
credit in the books of the firm in a separate account opened in his name, but the sum so
credited was never paid to him and was subsequently “written back” by the Watsons. Some
evidence was given as to the extent of the interference of the Rajah in the control of the
business. It seems the Rajah knew little of its details for it was conceded that the Rajah
availed himself only in a slight degree of the powers of control conferred upon him by the
agreement; in fact, that he did no more, but much less, than he might have done under it.

ISSUES:
Whether the Raja be made liable for the debts of the Watson and co. as one of the partners of
the firm?
Whether the Raja can be called as a partner of the firm and be made liable for the creditors?

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JUDGEMENT:
The exact amount is a question in dispute in the appeal, that a large balance became due from
the firm to the Plaintiffs during the time when it is contended that the Rajah was in
partnership with the two Watsons.
The question in the appeal depend, on the construction and effect of a written agreement
entered into between Watsons and the Raja. The subsequent acts of the Rajah do not in any
way add or enlarge his liability. No liability can in this case be fastened upon the Rajah on
the ground that he was an ostensible partner. It is admitted that he did not so hold himself out;
and that a statement made by one of the Watsons to the Plaintiffs to the effect that he might
be in law a partner, by reason of his right to commission on profits, was not authorized by the
Rajah. The liability, therefore, of the Rajah for the debts contracted by Watsons & Co.
must depend on his real relations to that firm under the agreement.

It was contended, for the Appellants, that he was so liable:

1stly, because he became by the agreement, at least as regards third persons, a partner with
the Watsons; and
2ndly, because, if not “a true partner”, the Watsons were the agents of the Rajah in carrying
on the business and the debt to the Plaintiffs was contracted within the scope of their agency.
In the absence of any law or well established custom existing in India on the subject, English
law may properly be resorted to in mercantile affairs for principles and rules to guide the
Courts in that country to a right decision. But while this is so, it should be observed that in
applying them, the usages of trade and habits of business of the people of India, so far as they
may be peculiar, and differ from those in England, ought to be borne in mind. The agreement,
on the face of it, is an arrangement between the Rajah, as creditor, and the firm consisting of
the two Watsons as debtors, by which the Rajah obtained security for his past advances. And
in consideration of forbearance, and as an inducement to him to support the Watsons by
future advances, it was agreed that he should receive from them a commission of 20 % on
profits, and should be invested with the powers of supervision and control above referred to.

The primary object was to give security to the Rajah as a creditor of the firm. It was
contended at the Bar that, whatever may have been intention, a participation in the net profits

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of the business was in contemplation of law such cogent evidence of partnership that
presumption arose sufficient to establish, as regards 3rd parties, that relation unless rebutted
by other circumstances. The rule of construction involved in this contention is too artificial. It
takes one term only of the contract and at once raises a presumption upon it. The whole scope
of the agreement, and all its terms, ought to be looked at before any presumption of intention
can be made properly at all. It was established as a positive rule of law, that participation in
the net profits of a business made the participant liable as a partner to third persons. Upon the
principle that, by taking a part of the profits, he takes from the creditors a part of that fund
which is the proper security to them for the payment of their debts. The rule was evidently an
arbitrary one, and subsequent discussion had let to the rejection of the reason for it as
unsound. Whilst it was supposed to prevail, much hardship arose from its application, and a
distinction, equally arbitrary was established between a right to participate in profits
generally “as such” and a right to payment by way of salary or commission “in proportion”
“to a given quantum of the profits”. “Nor does it appear to make any difference whether the
money is received by way of interest on money lent, or wages, or salary as agent, or
commission on sales.”
The present case appears to fall within this distinction. The Rajah was not entitled to a share
of the profits “as such”, he had no specific property or interest in them qua profits for, subject
to the power given to the Rajah by way of security, the Watsons might have appropriated or
assigned the whole profits without any breach of the agreement. The Rajah was entitled only
to commission, or a payment equal in proportion to one-fifth of their amount. This distinction
has always been admitted to be thin, but it may be observed that the supposed rule itself was
arbitrary in the sense of being imposed by law and of being founded on an assumption
opposed in many cases to the real relation of the parties; and when the law thus creates a rule
of liability and a distinction both equally arbitrary, the distinction which protects from
liability is entitled to as much weight as the rule which imposes it. In the Judgment of Cox v.
Hickman had certainly the effect of dissolving the rule of law which had been supposed to
exist, and laid down principles of decision by which the determination of cases, of this kind is
made to depend, not on arbitrary presumptions. Profits of trade 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 that whether that relation does or does not exist must
depend on the real intention and contract of the parties. It is certainly difficult to understand

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the principle on which a man who is neither a real nor ostensible partner can be held liable to
a creditor of the firm. The reason given in Grace v. Smith, that by taking part of the profits he
takes part of the fund which is the proper security of the creditors, is now admitted to be
unsound and insufficient to supports it;
For of course the same consequences might follow in a far greater degree from the mortgage
of the common property of the firm, which certainly would not of itself make the mortgagee a
partner. Where a man holds himself out as a partner, or allows others to do it, the case is
wholly different. He is then properly estopped from denying the character he has assumed,
and upon the faith of which creditors may be presumed to have acted. A man so acting may
be rightly held liable as a partner by estoppel. Again, wherever the agreement between parties
creates a relation which is in substance a partnership, no mere words or declarations to the
contrary will prevent, as regards third persons, the consequences flowing from the real
contract.
It was strongly urged that the large powers of control and the provision for empowering the
Rajah to take possession of the consignments and their proceeds, in addition to the
commission on net profits, amounted to an agreement of this kind, and that the Rajah was
constituted, in fact, the managing partner argument from the appellant.
Arguments: The contract undoubtedly confers on the Rajah large power of control. Whilst his
advances remained unpaid, the Watsons bound themselves not to make shipments, or order
consignments, or sell goods, without his consent. No money was to be drawn from the firm
without his sanction, and he was to be consulted with regard to the office business of the
firm, and he might direct a reduction or enlargement of the establishment. It was also agreed
that the shipping documents should be at his disposal, and should not be sold or,
hypothecated, or the proceeds applied, without his consent, and that all the proceeds of the
business should be handed to him, for the purpose of extinguishing his debt. On the other
hand, the Rajah had no initiative power, he could not direct what shipments should be made
or consignments ordered, or what should be the course of trade. He could not require the
Watsons to continue to trade, or even to remain in partnership; his powers, however large,
were powers of control only. No doubt he might have laid his hands on the proceeds of the
business, and not only so but it was agreed that all their property, landed and otherwise
should be answerable to him as security for his debt.
Their Lordships are of opinion that by these agreements the parties did not intend to create a

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Partnership, and that their true relation to each other under the agreement was that of
creditors and debtors. The Watsons evidently wished to induce the Rajah to continue his
advances, and for that purpose were willing to give him the largest security they could offer,
but a partnership was not contemplated and the agreement is really founded on the
assumption, not of community of benefit, but of opposition of interests. It may well be that
where there is an agreement to share the profits of a trade, and no more, a contract of
partnership may be inferred, because there is nothing to show that any other was
contemplated, but that is not the present case, where another and different contract is shown
to have been intended, viz., that of loan and security. It was strongly insisted for the
Appellants that if “a true partnership” had not been created under agreement, the Watsons
were constituted by it the agents of the Rajah to carry on the business, and that the debt of the
Plaintiffs was contracted within the scope of their agency. Of course, if there was no
partnership, the implied agency which flows from that relation cannot arise, and the relation
of principal and agent must on some other ground be shown to exist.
It is clear that this relation was not expressly created, and was not intended to be created by
the agreement, and that if it exists it must arise by implication. It is said that it ought to be
implied from the fact of the commission on profits, and the powers of control given to Rajah.
But this is again an attempt to create, by operation of law, a relation opposed to the real
agreement and intention of the parties, exactly in the same manner as that of partners was
sought to be established, and on the same facts and presumptions.
Their Lordships have already stated that reasons which have led them to the conclusion that
the trade was not agreed to be carried on for the common benefit of the Watsons and the
Rajah so as to create a partnership, and they think there is no sufficient ground for holding
that it was carried on for the Rajah as principal, in any other character. He was not, in any
sense, the owner of the business, and had no power to deal with it as owner.
None of the ordinary attributes of principal belonged to him. The Watsons were to carry on
this business, he could neither direct them to make contracts, nor to trade in the manner
which he might desire, his powers were confined to those of control and security, and subject
to those powers, the Watsons Remained owners of business and of the common property of
the firm.
The agreement in terms and, as their Lordships think, in substance, is founded on the relation
of creditor and debtors, and establishes no other.

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Conclusion: Their Lordships opinion in this case is founded on their belief that the contract
is
really and in substance what if professes to be viz., one of loan and security between debtors
and their creditor. If cases should occur where any persons, under the guise of such an
arrangement, 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 arrangement, and
fasten responsibility on the parties according to their true and real character. For the above
reasons their Lordships think that the Judges of the HC, in holding that Rajah was not liable
for the debts of the firm of Watson & Co., took a correct view of the case, and they will,
therefore, humbly advise Her Majesty to affirm their judgement, and to dismiss this appeal
with costs.

2. Abdul Latiff vs Gopeswar Chattoraj AIR 1933 Cal 204

FACTS:
The plaintiff had worked as a contractor for loading and unloading wagons for the Indian Iron
& Steel Co. Ltd., 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 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 worked
under this arrangement from 1st November 1919, till 15th April 1921.
During this period the defendant was negligent in the performance of the work he was
entrusted with and was also guilty of misfeasance and malfeasance, and did not render
accounts. Consequently, on 15th April 1921, the plaintiff wrote to the company withdrawing

15
the powers which he had conferred on the defendant to receive payments and do other acts on
his behalf, and since then all connexion of the defendant with the plaintiff and with the
business ceased. The defendant had paid to the plaintiff in all Rs. 1,200. The prayers in the
plaint were that it might be held that the defendant was bound to render account to the
plaintiff for the period from 1st November 1919 to 15th April 1921, that he might be ordered
to render such account, and that a decree might be passed against him for such amount as
might be found due as the result of accounting and also for a sum of Rupees 4,376-3-0 which
the company had deducted from the plaintiffs bills, after the defendant had ceased to work,
on account of demurrage, back charges and store charges, for work which the defendant had
done during the aforesaid period. The defendant took various pleas: it was averred that the
suit was not maintainable in the form in which it was laid, because the relationship between
the plaintiff and the defendant was not that of principal and agent, but that it was agreed
between the plaintiff and the defendant’s son Madan Gopal that the plaintiff would renew the
contract with the company in his own name, that Madan Gopal would allow the plaintiff’s
name to stand in the office of the company and would carry out the works relating to the
contract with his own men and money and keep the accounts, but that the defendant only
managed the business for his son and had no liability to account.
The terms, according to the defence, were that out of the net profits the plaintiff would get
four annas and the defendant 12 annas, but it was admitted that the plaintiff was not to be
liable for loss if any. It was denied that any amount had been deducted from the plaintiff’s
bills as alleged in the plaint. Charges of negligence, misfeasance and malfeasance were
repudiated, and on the other hand it was contended that the business, which at the inception
of that partnership was in ruins, attained a flourishing state during the defendant’s Abdul
Latiff vs Gopeswar Chattoraj on 11 May, 1932. Limitation was pleaded, it being said that the
defendant worked till 5th April 1921, on which date he was removed by the plaintiff. It was
also asserted that the plaintiff had received not Rs. 1,200 only but in all Rs. 2,517.
ISSUES:
Whether the defendant is a partner with the plaintiff solely for advancing money and bearing
losses?
JUDGEMENT:
Held that the defendant was not liable and not in a partnership with the plaintiff as the
business was exclusively in the name of the plaintiff and the defendant was only managing

16
the sharing of profits and losses, and was merely acting as an agent to the business.
Judged by the tests laid down in the propositions quoted above the terms of the agreement,
such as they have been alleged on behalf of the parties in this case, would be equally
consistent with a partnership as with an agency. But a more certain test is to find out whether
not only was there a common business but a common interest of all the parties in it, or
whether the common business was to be carried on by the defendant on behalf of the plaintiff
so that the plaintiff could be regarded as the principal. On this point there is not, nor indeed
could there be any, direct evidence, so long as the terms were not put into writing.
But there are the following facts, viz., the plaintiff was to take the contract in his own name,
and there is no evidence that he was under any obligation to disclose the name of the
defendant to the company; the work was to stand in his own name so far as the company was
concerned and there is nothing to suggest that the company was going to hold anybody else
liable for any loss that might be caused. There is no evidence suggesting that anybody else
than the plaintiff was to have a voice in determining what work was or was not to be
undertaken or when the work was to be stopped or whether the contract with the company
was or was not to be renewed on the expiry of its period or other matters of that description.
By themselves these two circumstances may not be enough, but taken along with
participation in profits and non-liability for the loss, they may not unreasonably in our
judgment, be regarded as taking the case beyond the pale of a partnership contract.

3. Commissioner of Income Tax Vs. Shankar Cottons (1997)137CTR(Mad)583

FACTS:
The assessee is a partnership-firm, called Shankar Cottons, Coimbatore. The assessee filed an
application for registration of the firm for the asst. yr. 1975-76. The partnership was
constituted under a deed, dt. 21st April, 1974, to carry on the business in partnership as
brokers and agents for textile mills and such other business as agreed upon between them
mutually. The partnership firm consists of two partners, viz., P. S. Ramachandran and S. N.
Ramachandran, each having 12-1/2 per cent share in profit and 50 per cent in loss. Miss Gita,
Master Ramani and Master Shankar were admitted to the benefits of the partnership with 25
per cent of share in profit for each of the minors. Miss A. Gita is aged about 21 years. She has
been treated as a minor because she was deaf and dumb person. Since a minor alone can be
admitted to the benefits of the partnership, the ITO came to the conclusion that the

17
partnership is invalid and, accordingly, he refused to grant registration and assessed the entity
as an AOP.
ISSUES:
Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding
that the admission of one Miss A. Gita, major, to the benefits of partnership would not make
the partnership as illegal' or invalid' and, hence, the assessee’s claim for
registration of the firm cannot be denied by the ITO
JUDGEMENT:
The point for consideration is as to whether a major can be admitted to the benefits of the
partnership. In the present case, one of the daughters of one Mr. Aghoram Iyer, Miss A. Gita,
aged about 21 years, was admitted to the benefits of the partnership since she happens to be a
deaf and dumb person. A deaf and dumb person cannot be admitted to the benefits of the
partnership as per the provisions of s. 30 of the Indian Partnership Act, 1932. Sec. 6 of the
Indian Partnership Act, 1932, determines the mode of existence of the partnership. Expln. 2
to s. 6 of the Indian Partnership Act states, who are all the persons who can receive a share in
the profit of the partnership business without making them as partners. Sec. 30 of the Indian
Partnership Act states that a person who is a minor according to the law to which he is subject
may not be a partner in a firm, but, with the consent of all the partners for the time being, he
may be admitted to the benefits of the partnership. Therefore, s. 30 of the Indian Partnership
Act provides that a minor cannot be a partner in a firm, but a minor can be admitted to the
benefits of the partnership with the consent of all the partners.
According to the facts arising in the case, the Tribunal was of the view that there is no
provision in the Partnership Act, which makes a partnership illegal or invalid, when a major
is admitted to the benefits of the partnership. A partnership becomes illegal when its object is
forbidden by law or is immoral or opposed to public policy or if permitted it would defeat the
provisions of any law. None of these features existed when the major was admitted to the
benefits of partnership. So, the partnership could not be said to be illegal or invalid.
But it remains to be seen that under the provisions of s. 30 of the Indian Partnership Act,
1932, a minor alone can be admitted to the benefits of partnership, with the consent of all the
partners. If a minor is admitted to the benefits of partnership, he would not be saddled with
the losses of the firm. Sec. 6 of the Indian Partnership Act, 1932, particularly, Expln. 2 to s. 6
of the Partnership Act says that the receipt by a person of a share of the profits of a business,

18
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 along with the persons carrying on the
business. It would mean that a major cannot be admitted to the benefits of partnership.
Admitting a major as a partner to the benefits of partnership was impliedly prohibited under
s. 30 of the Indian Partnership Act, 1932. In view of the abovesaid legal position, we are
unable to subscribe to the view taken by the Tribunal in holding that the assessee-firm herein
is also entitled to registration under s. 184 of the IT Act, 1961, even though a major was
admitted to the benefits of partnership.

4. Debi Parshad Vs. Jai Ram Dass and anr AIR 1952 P&; H 284
FACTS:
On the 29th of April, 1948, Jairam Das instituted civil suit No. 324 of 1948 for dissolution of
partnership and rendition of accounts pleading that he was partner with Debi Parshad
defendant No. 1 and Balkishan 1/13 Das defendant No. 2 in the firm, the Ambala Flour Mills,
Ambala City, the shares of the plaintiff, Debi Parshad and Balkishan Das being annas four,
annas ten and annas two in a rupee respectively. The case of the plaintiff was that the period
of partnership was two years, but if there was an extension of the lease of the Mills by the
exercise of option given to the lessee under the lease deed, Exhibit D. 1, the partnership was
to continue for the period of the lease. In the plaint it was said that Madan Lal son of the
plaintiff, Baikunth Nath attorney of Debi Parshad and Balkishan Das defendant No. 2 were to
work in the firm on salary fixed between the parties and that on the capital investments the
partners were to be paid interest at six per cent, per annum.
ISSUES:
(1) Whether the plaintiff is a partner with the defendants and on what terms?
(2) Whether the leasehold rights in question were the partnership property?

JUDGEMENT:
In order to establish partnership it has to be proved that there was an agreement entered into
by all the partners concerned, that the agreement was to share the profits of business and that
the business was carried on by all or any of the persons concerned acting for all. In this
connection, section 4 of the Indian Partnership Act may be seen. In the present case Debi
Parshad admitted in the written statement that there was an agreement entered into by the

19
plaintiff and the defendants to share the profits of the business, the shares of the plaintiff,
defendant No. 1 and defendant No. 2 being annas four, annas ten and annas two in a rupee
respectively. Mr. S. K. Daphtary points out that the judgment under appeal proceeds upon the
basis that if it is shown that there was an agreement between the parties to share the profits, in
the absence of other circumstances, partnership should be held to be established whereas
Section 6 of the Indian Partnership Act, 1932, hereinafter referred to as the Act, enacts that
receipt by a person of a share of profits of a business does not of itself make him a partner
with the persons carrying on that business.
In the judgment, the objection raised has force. Explanation II occurring in Section 6 of the
Act provides interalia that the receipt by a person of a share of the profits of a business
does not of itself make him a partner with the persons carrying on the business. Clearly, the
Act does not provide for the initial presumption in favour of existence of partnership in case
of receipt by a person of share of profits of business. On the other hand Section 2(3), English
Partnership Act, 1890, does provide for such a presumption. Section 2(3) of the English Act
reads: Receipt by a person of share of the profits of a business is prima facie evidence that
he is a partner in the business. That being the situation of matters, we have to determine the
question covered by issue No. 1, regard being had to the real relation between the parties as
shown by all relevant acts taken together.
Indisputably participation in profits is strong evidence of partnership. But it was said that
mutual agency between the parties has not been established and there is evidence to show that
there was no partnership. I do not accede to the objection raised. On the 3rd of October, 1945,
Jairam Das acting for the firm applied under the Punjab Agricultural Produce 5/13 Markets
Act, 1939, for a license showing in that application Debi Parshad, Jairam Das and Balkishan
Das to be the partners of the firm. Again, acting for the firm Jairam Das applied under the
Punjab Foodgrains Control Order, 1944, for authority to purchase, sell or store for sale in
wholesale quantities all kinds of foodgrains and wheat products throughout the territory of
the Punjab. License, Exhibit P. 4, was granted on that application and all these years the
Ambala Flour Mills, Ambala City, has been working on the basis of the license.
Giving the matter my anxious consideration, I find that though no presumption arose from the
receipt by Jairam Das of a share of the profits of the business in favour of existence of
partnership the evidence on the record proves beyond doubt that Jairam Das, Debit Parshad
and Balkishan Das were partners in the firm.

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5. Commissioner of Income-tax Vs. Ravi Constructions and Uma Constructions
1987 169 ITR 662(AP)
FACTS:
A partnership firm, M/s. Y. Seetayya and P. R. Rao constituted on October 1, 1971, had
obtained and was engaged in executing certain contracts for the construction of port-
monoliths for the dry dock and for the supply of building material at Visakhapatnam. The
partnership consisted of two partners, namely, Sri Y. Seetayya and P R. Rao, each having a
50% share. After the contracts were executed in part, Sri. P. R. Rao got himself released from
the partnership with the result that only Y. Seetayya remained in charge and responsible for
the contracts. 3. A new partnership, called Ravi Constructions, Visakhapatnam’, was
constituted on May 2, 1972. This partnership, according to the partnership deed, consisted of
9 partners. The names of the partners and their shares in profits and losses are mentioned in
clause 8.
Indeed, for a proper appreciation of the question at issue, it is necessary to set out clauses 7
and 8 in full, and refer to some other clauses of the partnership. Clauses 7 and 8 read as
follows : The first partner, Sri Y. Seetayya, shall act and function as consultant and shall be
paid 1% (one per cent.) of the payments received from the Department or persons awarding
the contracts for his advice and guidance and the said 1% shall be deposited in the bank
account of Sri Y. Seetayya and he shall not be liable for any losses of this firm and partners
Nos. 2 to 9 shall jointly and severally indemnify the 1st partner, Sri Y. Seetayya, in the event
of any loss arising to him by reason of the Department or any person proceeding against him
to enforce any liability or action or claim or whatsoever relating to this firm including any
liability or action or claim that might have accrued or arisen or may accrue or arise in the
execution of the works for which this partnership is formed. 8. The accrued profits or losses
shall be shared by the second, third, fourth, fifth, sixth, seventh, eighth and ninth partners in
the following 2/15 ratio : Profit LossPartner 1 Y. Seetayya. Shankar Rao
5% 5%Partner. Yesodha 5% 5%Partner K. Srinivasa Rao 15% 15%Partner K. S.
Shanti 15% 15%Partner K. S. Yamuna Devi 15% 15%Partner K. S. Prabhakar Rao 15%
15%Partner P. Jayaratnam 15% 15%Partner Dr. M. R. Gandhi 15% 15% Clause 9
provided that Sri Y. Seetayya (first partner) should continue to remain in the firm till the
work of the subsisting contracts was completed; thereafter, he had no concern with or claim

21
upon the firm.
Clause 10 provided that apart from the Mercantile Bank and the Bank of India, which were
the bankers of the firm, any other bank may be chosen by the partners. Clause 12 stipulated
that no partner shall be entitled to alienate his or her interest in the firm so as to make the
transferee a partner. Clause 17 provided that the partners, by majority, may take in a new
partner on such terms as they thought fit. Clause 18 contemplated the firm being converted
into a private limited company, if the majority of the partners so decided. The accounting
year of the firm was to be the financial year. 4. For the assessment year 1973-74, the
assessee-firm, M/s. Ravi Constructions, filed Form No. 11, along with the partnership deed,
requesting grant of registration for the said assessment year. In Form No. 11, in column No.
5, against the name of Sri Y. Seetayya, it was first mentioned that 1% of the payment
received in lieu of profit thereof was his share. This was, however, struck off and, by placing
an asterisk mark at the bottom it was stated that his share was 1% of the payments received
from the Department.
When this was pointed out by the Income-tax Officer to the authorised representative of the
assessee, the auditor of the assessee-firm filed a letter dated April 22, 1076, explaining that
the striking off of the words in column No. 5 should be treated as a mistake and that the entry
originally made should be treated as the correct entry.The Income-tax Officer refused
registration to the firm and treated it as an unregistered firm for the following reasons : (i) In
this case, there is no agreement to share the profits of the business which is an 3/15 essential
condition of the partnership. A perusal of the deposition of Sri Y. Seetayya recorded on
January 27, 1975, clearly proves that he was getting only commission and not profit; that he
was not at all concerned with the business of the firm, notwithstanding the statement in clause
7; and that Sri Y. Seetayya was shown as a partner in the partnership deed only for the sake
of continuity.
Inasmuch as the transfer or assignment of the contract was likely to entail its termination, Sri
Y. Seetayya was shown as a partner; thus the inclusion of his name in the partnership deed
was only a make-believe and the 1% of the gross receipts paid to him is nothing but a
nominal fee for lending his name in the continuation of the contracts in the hands of the
assessee; and (ii) the facts mentioned in point No. 1 also go to show that Sri Y. Seetayya was
not at all responsible for carrying on the business, nor was the business carried on by all or
any one of them acting for all. Thus, the second essential ingredient of partnership is also

22
missing in this case.
ISSUES:
Whether on the facts and in the circumstances of the case, the assessee was a partner and
entitled to registration?
JUDGEMENT:
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. The two Explanations, appended to section 6, are equally
relevant and may be reproduced :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 6/15 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.
Section 9 provides that partners are bound to carry on the business of the firm to the greatest
common advantage, to be just and faithful to each other, and to render true accounts and full
information of all things affection the firm to any partner or his legal representative. Section
11 provides that subject to the provisions of the said Act, the mutual rights and duties of the
partners of a firm may be determined by contract between the partners, and that such contract
may be expressed or may by implied by a course of dealing. Sections 12 and 13 make it clear
that the conduct of the business of the firm and mutual rights and liabilities of the partners is
a matter of contract between the parties; but, subject to any such contract, each partner has a
right to participate in the conduct of the business and is bound to attend diligently to his
duties in the conduct of the business; he has also a right to have access to, and to inspect and
take copies of the books of the firm. A partner is not entitled to receive any remuneration for
taking part in the conduct of the business.
Section 6 says that, in determining whether a firm exists or not, or whether a person is a

23
partner of the firm or not, regard shall be had to the real relation between the parties as
shown by all relevant facts taken together. Explanation 1 to section 6 illustrates the said rule
by saying that mere sharing of profits or gross returns arising from property by persons
holding a joint or common interest in that property does not by itself make such persons
partners. Explanation 2 in particular says that the receipt by a person of a share of the profits
of a business does not by itself make him a partner, and that, in particular, the receipt of such
share by or payment to a previous owner or part owner of a 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. We are of the opinion that the test prescribed by section 6
was unfortunately not kept in mind by both the appellate authorities in deciding the question
at issue. They have approached the issue in hyper-technical manner; they took each aspect
separately into consideration and held that it by itself does not militate against the existence
of a genuine partnership; but they failed to consider the cumulative effect of all the facts and
circumstances taken together; nor did they make any attempt to find out what was the real
nature of relationship between Y. Seetayya on the one hand and the other partners on the
other.
According to the contention of learned standing counsel for the Revenue, this was a case of a
mere assignment of the business relation to contracts by Y. Seetayya in favour of eight other
persons, for which the consideration was determined a 1% of the payments received from the
Department and that Sri Y. Seetayya had no concern with the business thereafter or with its
profits or losses whatsoever. On the other hand, the contention of learned counsel for the
assessee is that it was a valid and genuine partnership and that the stipulation to 8/15 pay 1%
of the payments received from the Department towards Y. Seetayya’s share was only one
mode of describing his share in the profits. It is emphasised that, according to clause 7, Sri Y.
Seetayya was to provide advice and guidance to the other partners in the conduct of the firm’s
business.
While the above review of the decisions discloses the various angles from which the issue
was examined, one thing appears clear from the decisions of the Supreme Court and the Full
Bench decision of this court, viz., that either from the partnership deed or other material, it
should be possible to ascertain the shares of the partners both in profits as well as losses. In
this case, even if it is held that Seetayya’s share in profits is ascertainable, his share in the
losses is not. Indeed, he had no share in the losses and this is certainly a strong indication

24
against the assessee’s case.
Be that as it may, it is not any single aspect or factor that should be taken as conclusive one
way or the other, as observed by us hereinbefore, but all the relevant facts and circumstances
should be taken together and the real intention of the parties and the real nature of the
relationship between them determined, as directed in section 6 of the Partnership Act. We
have pointed out hereinbefore that the approach of the appellate authorities in this case has
been totally different, which has vitiated their findings and conclusion, and that the
conclusion arrived at by the Income-tax Appellate Tribunal is unsustainable in law and the
facts of this case. For the above reasons, the question referred are answered in the negative,
i.e., in favour of the Revenue and against the assessees.

BIBLIOGRAPHY:

-Mulla The Sale of Goods Act & The Indian Partnership Act, 11th ed
-Indian kanoon
-https://lexspeak.in/2017/09/all-about-law-of-partnership-in-india/

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