CA Foundation Business Law

Chapter 4 The Indian Partnership Act, 1932

Unit 1: General Nature Of Partnership

Question 1 (Study Material)

Mr. XU and Mr. YU are partners in a partnership firm. Mr. XU introduced
MU (an employee) as his partner to ZU. MU remained silent. ZU, a trader
believing MU as partner supplied 50 Laptops to the firm on credit. After
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expiry of credit period, ZU did not get amount of Laptop sold to the
partnership firm. ZU filed a suit against XU and MU for the recovery of
price. Does MU is liable for such purpose?

Answer: Provision: As per Section 28 of Indian Partnership Act, 1932,

Partnership by holding out is also known as partnership by estoppel. Where a man
holds himself out as a partner, or allows others to do it, he is then stopped from
denying the character he has assumed and upon the faith of which creditors may
be presumed to have acted. A person may himself, by his words or conduct have
induced others to believe that he is a partner or he may have allowed others to
represent him as a partner. The result in both the cases is identical.
Conclusion: In the given case, MU (the Manager) is also liable for the price
because he becomes a partner by holding out as per Section 28 of Indian
Partnership Act, 1932.

Question 2 (Study Material, Mtp1 Nov 2022)

Ms. Lucy while drafting partnership deed taken care of few important points.
What are those points? She wants to know the list of information which must
be part of partnership deed drafted by her. Also, give list of information to
be included in partnership deed? (4 Marks)

Answer: Ms. Lucy while drafting partnership deed must take care of following
important points: • No particular formalities are required for an agreement of
partnership.
• Partnership deed may be in writing or formed verbally. The document in writing
containing the various terms and conditions as to the relationship of the partners
to each other is called the ‘partnership deed’.
• Partnership deed should be drafted with care and be stamped according to the
provisions of the Stamp Act, 1899.
• If partnership comprises immovable property, the instrument of partnership
must be in writing, stamped and registered under the Registration Act.

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List of information included in Partnership Deed while drafting Partnership

Deed by Ms. Lucy:
1. Name of the partnership firm.
2. Names of all the partners.
3. Nature and place of the business of the firm.
4. Date of commencement of partnership.
5. Duration of the partnership firm.
6. Capital contribution of each partner. 136
7. Profit Sharing ratio of the partners.
8. Admission and Retirement of a partner.
9. Rates of interest on Capital, Drawings and loans.
10. Provisions for settlement of accounts in the case of dissolution of the firm.
11. Provisions for Salaries or commissions, payable to the partners, if any.
12.Provisions for expulsion of a partner in case of gross breach of duty or
fraud.
Note: Ms. Lucy may add or delete any provision according to the needs of the
partnership firm.

Question 3 (Past Paper May 2018)

What is the conclusive evidence of partnership? State the circumstances
when partnership is not considered between two or more parties. (4 Marks)

Answer: Conclusive evidence of partnership: Existence of Mutual Agency which

is the cardinal principle of partnership law is very much helpful in reaching a
conclusion with respect to determination of existence of partnership. Each
partner carrying on the business is the principal as well as an agent of other
partners. So, the act of one partner done on behalf of firm, binds all the partners.
If the element of mutual agency relationship exists between the parties
constituting a group formed with a view to earn profits by running a business, a
partnership may be deemed to exist.

Circumstances when partnership is not considered between two or more

parties: Various judicial pronouncements have laid to the following factors
leading to no partnership between the parties:
(i) Parties have not retained any record of terms and conditions of partnership.
(ii) Partnership business has maintained no accounts of its own, which would be
open to inspection by both parties
(iii) No account of the partnership was opened with any bank
(iv) No written intimation was conveyed to the Deputy Director of Procurement
with respect to the newly created partnership.

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Question 4 (Past Paper May 2019)

Whether a group of persons is or is not a firm, or whether a person is or
not a partner in a firm." Explain the mode of determining existence of
partnership as per the Indian Partnership Act, 1932? (4 Marks)

Answer: Mode of determining existence of partnership (Section 6 of the

Indian Partnership Act, 1932): 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. 137
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.
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 are not partners in such business.
Sharing of Profit: 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 person’s 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.
Agency: Existence of Mutual Agency which is the cardinal principle of
partnership law, is very much helpful in reaching a conclusion in this regard. Each
partner carrying on the business is the principal as well as an agent of other
partners. So, the act of one partner done on behalf of firm, binds all the partners.
If the elements of mutual agency relationship exist between the parties
constituting a group formed with a view to earn profits by running a business, a
partnership may be deemed to exist.

Question 5 (Past Paper Nov 2018)

Mr. M, Mr. N and Mr. P were partners in a firm, which was dealing in
refrigerators. On 1st October, 2018, Mr. P retired from partnership, but
failed to give public notice of his retirement. After his retirement, Mr. M,
Mr. N and Mr. P visited a trade fair and enquired about some refrigerators
with latest techniques. Mr. X, who was exhibiting his refrigerators with the
new techniques was impressed with the interactions of Mr. P and requested
for the visiting card of the firm. The visiting card also included the name of

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Mr. P as a partner even though he had already retired. Mr. X. supplied some
refrigerators to the firm and could not recover his dues from the firm. Now,
Mr. X wants to recover the dues not only from the firm, but also from Mr.
P. Analyse the above case in terms of the provisions of the Indian Partnership
Act, 1932 and decide whether Mr. P is liable in this situation. (3 Marks)

Answer: A retiring partner continues to be liable to third party for acts of the
firm after his retirement until public notice of his retirement has been given 138
either by himself or by any other partner. But the retired partner will not be
liable to any third party if the latter deals with the firm without knowing that
the former was partner.
Also, if the partnership is at will, the partner by giving notice in writing to all the
other partners of his intention to retire will be deemed to be relieved as a
partner without giving a public notice to this effect.
Also, as per section 28 of the Indian Partnership Act, 1932, where a man holds
himself out as a partner, or allows others to do it, he is then stopped from denying
the character he has assumed and upon the faith of which creditors may be
presumed to have acted.
In the light of the provisions of the Act and facts of the case, Mr. P is also liable
to Mr. X.

Question 6 (Mtp May 2018, Rtp Nov 2018, Mtp2 Nov 2018)
What is Partnership Deed? What are the particulars that the partnership
deed may contain? (4 Marks)

Answer: Partnership Deed: Partnership is the result of an agreement. No

particular formalities are required for an agreement of partnership. It may be in
writing or formed verbally. But it is desirable to have the partnership agreement
in writing to avoid future disputes. The document in writing containing the various
terms and conditions as to the relationship of the
partners to each other are called the ‘partnership deed’. It should be drafted
with care and be stamped according to the provisions of the Stamp Act, 1899.
Where the partnership comprises immovable property, the instrument of
partnership must be in writing, stamped and registered under the Registration
Act.
Partnership deed may contain the following information:
1. Name of the partnership firm.
2. Names of all the partners.
3. Nature and place of the business of the firm.
4. Date of commencement of partnership.
5. Duration of the partnership firm.

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6. Capital contribution of each partner.

7. Profit Sharing ratio of the partners.
8. Admission and Retirement of a partner.
9. Rates of interest on Capital, Drawings and loans.
10. Provisions for settlement of accounts in the case of dissolution of the firm.
11. Provisions for Salaries or commissions, payable to the partners, if any.
12. Provisions for expulsion of a partner in case of gross breach of duty or fraud.
A partnership firm may add or delete any provision according to the needs of the
firm.
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Question 7 (Past Paper Nov 2020, Past Paper Jan 2021, Mtp1 Nov 2022)
Explain the following kinds of partnership under the Indian Partnership Act,
1932:
(i) Partnership at will
(ii) Particular partnership. (2 Marks)

Answer: Partnership at will: According to Section 7 of the Indian Partnership

Act, 1932, partnership at will is a partnership when:
1. no fixed period has been agreed upon for the duration of the partnership; and
2. there is no provision made as to the determination of the partnership.
These two conditions must be satisfied before a partnership can be regarded as
a partnership at will. But, where there is an agreement between the partners
either for the duration of the partnership or for the determination of the
partnership, the partnership is not partnership at will.
Where a partnership entered into for a fixed term is continued after the expiry
of such term, it is to be treated as having become a partnership at will.
A partnership at will may be dissolved by any partner by giving notice in writing
to all the other partners of his intention to dissolve the same.

(ii) Particular partnership: A partnership may be organized for the prosecution

of a single adventure as well as for the conduct of a continuous business. Where
a person becomes a partner with another person in any particular adventure or
undertaking the partnership is called ‘particular partnership’.
A partnership, constituted for a single adventure or undertaking is, subject to
any agreement, dissolved by the completion of the adventure or undertaking.

Question 8 (Past Paper Jan 2021)

Who is a nominal partner under the Indian Partnership Act, 1932? What are
his liabilities? (3 Marks)

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Answer: Nominal Partner: A person who lends his name to the firm, without
having any real interest in it, is called a nominal partner.
Liabilities: He is not entitled to share the profits of the firm. Neither he invests
in the firm nor takes part in the conduct of the business. He is, however liable to
third parties for all acts of the firm.

Question 9 (Past Paper Jan 2021)

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"Business carried on by all or any of them acting for all." Discuss the
statement under the Indian Partnership Act, 1932. (4 Marks)

Answer: 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. 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. If the
element of mutual agency is absent, then there will be no partnership.
In KD Kamath & Co., the Supreme Court has held that the two essential
conditions to be satisfied are that:
(1) there should be an agreement to share the profits as well as the losses of
business; and (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.

Question 10 (Past Paper Dec 2021, Mtp1 Nov 2022, Mtp2 Nov 2022, Mtp2
June 2023)
Define partnership and name the essential elements for the existence of a
partnership as per the Indian Partnership Act, 1932. Explain any two such
elements in detail. (6 Marks)

Answer: (i) Definition of Partnership: '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. (Section 4 of the Indian Partnership Act, 1932).

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The definition of the partnership contains the following five elements which
must coexist before a partnership can come into existence:
1. Association of two or more persons
2. Agreement
3. Business
4. Agreement to share Profits
5. Business carried on by all or any of them acting for all

(ii) Elements Of Partnership

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The definition of the partnership contains the following five elements which must
coexist before a partnership can come into existence:
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 read with the relevant Rules has now put a limit
of 50 partners in any association / partnership firm.
2. Agreement: It may be observed that partnership must be the result of an
agreement between two or more persons. There must be an agreement entered
into by all the persons concerned. This element relates to voluntary contractual
nature of partnership. Thus, the nature of the partnership is voluntary and
contractual. An agreement from which relationship of Partnership arises may be
express. It may also be implied from the act done by partners and from a
consistent course of conduct being followed, showing mutual understanding
between them. It may be oral or in writing.
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.

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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 142
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.

Question 11 (Past Paper Dec 2021)

State whether the following are partnerships:
(i) A and B jointly own a car which they used personally on Sundays and
holidays and let it on hire as taxi on other days and equally divide the
earnings.
(ii) Two firms each having 12 partners combine by an agreement into one
firm.
(iii) A and B, co-owners, agree to conduct the business in common for profit.
(iv) Some individuals form an association to which each individual contributes
₹500 annually. The objective of the association is to produce clothes and
distribute the clothes free to the war widows.
(v) A and B, co-owners share between themselves the rent derived from a
piece of land.
(vi) A and B buy commodity X and agree to sell the commodity with sharing
the profits equally. (6 Marks)

Answer: (i) No, this is not a case of partnership because the sharing of profits
or of gross returns accruing from property holding joint or common interest in
the property would not by itself make such person’s partners.
Alternatively, this part can also be answered as below:
Yes, this is a case of partnership, as the car is used personally only on Sundays
and holidays and used for most of the days as a Taxi. Hence, it is inferred that
the main purpose of owning the car is to let it for business purpose. Also, there
is an agreement for equally dividing the earnings.
(ii) Yes, this is a case of partnership because there is an agreement between two
firms to combine into one firm.
(iii) Yes, this is a case of partnership because A & B, co-owners, have agreed to
conduct a business in common for profit.

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(iv) No, this is not a case of partnership as no charitable association can be

floated in partnership.
(v) No, this is not a case of partnership as they are co-owners and not the
partners. Further, there exist no business.
(vi) Yes, this is a case of partnership as there exist the element of doing business
and sharing of profits equally.

Question 12 (Past Paper Dec 2021)

“Sharing in the profits is not conclusive evidence in the creation of
partnership”. Comment. (4 Marks) 143

Answer: “Sharing in the profits is not conclusive evidence in the creation of

partnership” 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
person’s 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.
But the task becomes difficult when either there is no specific agreement or the
agreement is such as does not specifically speak of partnership. In such a case
for testing the existence or otherwise of partnership relation, Section 6 has to
be referred.
According to Section 6, regard must be had to the real relation between the
parties as shown by all relevant facts taken together. The rule is easily stated
and is clear but its application is difficult. Cumulative effect of all relevant facts
such as written or verbal agreement, real intention and conduct of the parties,
other surrounding circumstances etc., are to be considered while deciding the
relationship between the parties and ascertaining the existence of partnership.
Hence, the statement is true / correct that mere sharing in the profits is not
conclusive evidence.

Question 13 (Past Paper May 2022)

(i) What do you mean by 'Partnership for a fixed period' as per the Indian
Partnership Act, 1932?

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(ii) Can a minor become a partner in a partnership firm? Justify your answer
and also explain the rights of a minor in a partnership firm. (2 Marks)

Answer: (i) Partnership for a fixed period (Indian Partnership Act, 1932):
Where a provision is made by a contract for the duration of the partnership, the
partnership is called ‘partnership for a fixed period’. It is a partnership created
for a particular period of time. Such a partnership comes to an end on the expiry
of the fixed period. 144

(ii) Minor as a partner: A minor is not competent to contract. Hence, 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 partnership.
Rights of a minor in a partnership firm:
(i) A minor partner has a right to his agreed share of the profits and of the firm.
(ii) He can have access to, inspect and copy the accounts of the firm.
(iii) He can sue the partners for accounts or for payment of his share but only
when severing his connection with the firm, and not otherwise.
(iv) On attaining majority, he may within 6 months elect to become a partner or
not to become a partner. If he elects to become a partner, then he is entitled to
the share to which he was entitled as a minor. If he does not, then his share is
not liable for any acts of the firm after the date of the public notice served to
that effect.

Question 14 (Rtp May 2018)

State the differences between Partnership and Hindu Undivided Family.

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

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Karta, the governing male member or

female member of the family

Authority Every partner can, by his act, bind The Karta or the manager, has the
to bind the firm. authority to contract for the family
business and the other members in the
family.
Liability In a partnership, the liability of a In a Hindu undivided family, only the
partner is unlimited. liability of the Karta is unlimited, and 145
the other co-partners are liable only
to the extent of their share in the
profits of the family business.
Calling for A partner can bring a suit against On the separation of the joint family,
accounts on the firm for accounts, provided a member is not entitled to ask for
closure he also seeks the dissolution of account of the family business.
the firm.
Governing A partnership is governed by the A Joint Hindu Family business is
Law Indian Partnership Act, 1932. governed by the Hindu Law.

Minor’s In a partnership, a minor cannot In Hindu undivided family business, a

capacity become a partner, though he can minor becomes a member of the
be admitted to the benefits of ancestral business by the incidence of
partnership, only with the birth. He does not have to wait for
consent of all the partners. attaining majority.
Continuity A firm subject to a contract A Joint Hindu family has the
between the partners gets continuity till it is divided. The status
dissolved by death or insolvency of Joint Hindu family is not thereby
of a partner. affected by the death of a member.
Number of In case of Partnership number of Members of HUF who carry on a
Members members should not exceed 50 business may be unlimited in number
Share in In a partnership each partner has In a HUF, no coparceners has a
the a defined share by virtue of an definite share. His interest is a
business agreement between the partners. fluctuating one. It is capable of being
enlarged by deaths in the family
diminished by births in the family

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Question 15 (Rtp Nov 2022)

Mohan, Sohan and Rohan are partners in the firm M/s Mosoro & Company.
They admitted Bohan as nominal partner and on agreement between all the
partners, Bohan is not entitled to share profit in the firm. After some time,
a creditor Karan filed a suit to Bohan for recovery of his debt. Bohan denied
for same as he is just a nominal partner and he is not liable for the debts
of the firm and Karan should claim his dues from the other partners. Taking
into account the provisions of the Indian Partnership Act, 1932 146
(a) Whether Bohan is liable for the dues of Karan against the firm.
(b) In case, Karan has filed the suit against firm, whether Bohan would be
liable?

Answer: Nominal Partner is a partner only in name. The person’s name is used as
if he were a partner of the firm, though actually he is not. He is not entitled to
share the profits of the firm but is liable for all acts of the firm as if he were a
real partner. A nominal partner must give public notice of his retirement and his
insanity is not a ground for dissolving the firm. In the instant case, Bohan was
admitted as nominal partner in the firm.
A creditor of the firm, Karan has claimed his dues from Bohan as he is the partner
in the firm. Bohan has denied for the claim by replying that he is merely a nominal
partner.
(a) Bohan is a nominal partner. Even he is not entitled to share the profits of the
firm but is liable for all acts of the firm as if he were a real partner. Therefore,
he is liable to Karan like other partners.
(b) In case, Karan has filed the suit against firm, answer would remain same.

Question 16 (Rtp June 2023)

Mr. Ram and Mr. Raheem are working as teachers in Ishwarchan Vidya Sagar
Higher Secondary School and also are very good friends. They jointly
purchased a flat which was given on rent to Mr. John. It was decided between
landlords and tenants that the rent would be ₹10,000 per month inclusive of
electricity bill. It means the electricity bill will be paid by landlords. The
landlords, by mistake, did not pay the electricity bill for the month of March
2021. Due to this, the electricity department cut the connection. Mr. John
has to pay the electricity bill of ₹2800 and ₹200 as penalty to resume the
electricity connection. Mr. John claimed ₹3000 from Mr. Ram but Mr. Ram
replied that he is liable only for ₹1500. Mr. John said that Mr. Ram and
Mr. Raheem are partners therefore he can claim the full amount from any
of the partners. Explain, whether under the provision of Indian Partnership
Act, 1932, Mr. Ram is liable to pay the whole amount of ₹3000 to Mr. John?

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Answer: Provision: According to Section 4 of the Indian Partnership Act, 1932,

"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. Therefore,
for determining the existence of partnership, it must be proved.
1. There must be an agreement between all the persons concerned;
2. The agreement must be to carry on some business;
3. The agreement must be to share the profits of a business and
4. The business was carried on by all or any of them acting for all.
Fact of the case: On the basis of above provisions and facts provided in the
question, Mr. Ram and Mr. Raheem cannot be said to be under partnership as they 147
are teachers in a school and just purchased a flat jointly. By merely giving the
flat on rent, they are not doing business. They are just earning the income from
the property under their co-ownership. Hence, there is no partnership between
them.
Conclusion: Therefore, Mr. Ram is liable to pay his share only i.e., ₹1500. Mr. John
has to claim the rest ₹1500 from Mr. Raheem.

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