ICAI Notes- Unit 1: General Nature of Partnership | Business Laws for CA Foundation PDF Download

 Page 1


 
 
 
LEARNING OUTCOMES 
 
 THE INDIAN PARTNERSHIP 
 ACT, 1932  
UNIT -1: GENERAL NATURE OF PARTNERSHIP 
 
After studying this unit, you would be able to understand- 
? The concept of partnerships and be clear about its essentials. 
? The ‘principal - agent relationship’ among the partners. 
?
Points of difference between partnership and other various forms of 
organization.
 
? Types of Partners 
 
 
 
General Nature of Partnership
What is 
Partnership
Essential 
elements
True test of 
partnership
Distinction with 
other forms of 
organisation
Vs. 
Joint Stock 
Company
Vs. Club Vs. HUF
Vs. Co-
ownership
Vs. 
Association
Type of 
Partners
CHAPTER 
4
   
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
Page 2


 
 
 
LEARNING OUTCOMES 
 
 THE INDIAN PARTNERSHIP 
 ACT, 1932  
UNIT -1: GENERAL NATURE OF PARTNERSHIP 
 
After studying this unit, you would be able to understand- 
? The concept of partnerships and be clear about its essentials. 
? The ‘principal - agent relationship’ among the partners. 
?
Points of difference between partnership and other various forms of 
organization.
 
? Types of Partners 
 
 
 
General Nature of Partnership
What is 
Partnership
Essential 
elements
True test of 
partnership
Distinction with 
other forms of 
organisation
Vs. 
Joint Stock 
Company
Vs. Club Vs. HUF
Vs. Co-
ownership
Vs. 
Association
Type of 
Partners
CHAPTER 
4
   
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
 4.2 
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 
Partnership is an 
association of two or 
more persons. 
The partnership must be 
a result of an agreement 
entered into by all 
persons concerned. 
Partnership is organised 
to carry on some 
business 
The agreement must be 
to share the profits of 
the business. 
The business must be 
carried on by all or any 
of them acting for all. 
© The Institute of Chartered Accountants of India
Page 3


 
 
 
LEARNING OUTCOMES 
 
 THE INDIAN PARTNERSHIP 
 ACT, 1932  
UNIT -1: GENERAL NATURE OF PARTNERSHIP 
 
After studying this unit, you would be able to understand- 
? The concept of partnerships and be clear about its essentials. 
? The ‘principal - agent relationship’ among the partners. 
?
Points of difference between partnership and other various forms of 
organization.
 
? Types of Partners 
 
 
 
General Nature of Partnership
What is 
Partnership
Essential 
elements
True test of 
partnership
Distinction with 
other forms of 
organisation
Vs. 
Joint Stock 
Company
Vs. Club Vs. HUF
Vs. Co-
ownership
Vs. 
Association
Type of 
Partners
CHAPTER 
4
   
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
 4.2 
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 
Partnership is an 
association of two or 
more persons. 
The partnership must be 
a result of an agreement 
entered into by all 
persons concerned. 
Partnership is organised 
to carry on some 
business 
The agreement must be 
to share the profits of 
the business. 
The business must be 
carried on by all or any 
of them acting for all. 
© The Institute of Chartered Accountants of India
 
    
 
4.3 THE INDIAN PARTNERSHIP ACT, 1932 
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. 
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.  
 
Existence of 
business
Acquisition of 
gains
© The Institute of Chartered Accountants of India
Page 4


 
 
 
LEARNING OUTCOMES 
 
 THE INDIAN PARTNERSHIP 
 ACT, 1932  
UNIT -1: GENERAL NATURE OF PARTNERSHIP 
 
After studying this unit, you would be able to understand- 
? The concept of partnerships and be clear about its essentials. 
? The ‘principal - agent relationship’ among the partners. 
?
Points of difference between partnership and other various forms of 
organization.
 
? Types of Partners 
 
 
 
General Nature of Partnership
What is 
Partnership
Essential 
elements
True test of 
partnership
Distinction with 
other forms of 
organisation
Vs. 
Joint Stock 
Company
Vs. Club Vs. HUF
Vs. Co-
ownership
Vs. 
Association
Type of 
Partners
CHAPTER 
4
   
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
 4.2 
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 
Partnership is an 
association of two or 
more persons. 
The partnership must be 
a result of an agreement 
entered into by all 
persons concerned. 
Partnership is organised 
to carry on some 
business 
The agreement must be 
to share the profits of 
the business. 
The business must be 
carried on by all or any 
of them acting for all. 
© The Institute of Chartered Accountants of India
 
    
 
4.3 THE INDIAN PARTNERSHIP ACT, 1932 
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. 
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.  
 
Existence of 
business
Acquisition of 
gains
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
 4.4
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. 
Example 4: A, B and C are partners in ABC Associates, a partnership firm. If A made 
certain purchases for the purpose of business from Mr. K, then Mr. K can recover the 
money from A, B or C as all partners are liable for any act done on behalf of firm. 
 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  
 (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. 
© The Institute of Chartered Accountants of India
Page 5


 
 
 
LEARNING OUTCOMES 
 
 THE INDIAN PARTNERSHIP 
 ACT, 1932  
UNIT -1: GENERAL NATURE OF PARTNERSHIP 
 
After studying this unit, you would be able to understand- 
? The concept of partnerships and be clear about its essentials. 
? The ‘principal - agent relationship’ among the partners. 
?
Points of difference between partnership and other various forms of 
organization.
 
? Types of Partners 
 
 
 
General Nature of Partnership
What is 
Partnership
Essential 
elements
True test of 
partnership
Distinction with 
other forms of 
organisation
Vs. 
Joint Stock 
Company
Vs. Club Vs. HUF
Vs. Co-
ownership
Vs. 
Association
Type of 
Partners
CHAPTER 
4
   
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
 4.2 
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 
Partnership is an 
association of two or 
more persons. 
The partnership must be 
a result of an agreement 
entered into by all 
persons concerned. 
Partnership is organised 
to carry on some 
business 
The agreement must be 
to share the profits of 
the business. 
The business must be 
carried on by all or any 
of them acting for all. 
© The Institute of Chartered Accountants of India
 
    
 
4.3 THE INDIAN PARTNERSHIP ACT, 1932 
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. 
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.  
 
Existence of 
business
Acquisition of 
gains
© The Institute of Chartered Accountants of India
  BUSINESS LAWS 
 4.4
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. 
Example 4: A, B and C are partners in ABC Associates, a partnership firm. If A made 
certain purchases for the purpose of business from Mr. K, then Mr. K can recover the 
money from A, B or C as all partners are liable for any act done on behalf of firm. 
 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  
 (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. 
© The Institute of Chartered Accountants of India
 
    
 
4.5 THE INDIAN PARTNERSHIP ACT, 1932 
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. 
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. 
  
© The Institute of Chartered Accountants of India