PowerPoint Presentation

Kalpeshkumar L GuptaAssistant Professor of LawIndian Partnership Act, 1932April 9, 2015

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OutlineNature of PartnershipRelation of PartnersDissolution of FirmTaxation in Partnership Firms3

OutlineNature of PartnershipRelation of PartnersDissolution of FirmTaxation in Partnership Firms4

IntroductionIndian Partnership Act, 1932 which came into force on October 1, 1932Prior to this act, it was embodied in Chapter XI of the Indian Contract Act, 18725

Definition of PartnershipPartnership 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 (Sec. 4)

Persons who have entered into partnership with one another are called individually partners and collectively a firm.6

Essential Characteristics of Partnership1. Association of two or more persons. no should not exceed in banking business and in other 20 .The term person as used in Sec 4 does not include a firm (Duli Chand v/s. Comm. Of IT, AIR, 1956 SC 354) This is because a firm is not a separate legal entity.

2. Agreement

3. Business

4. Sharing of Profits

5. Mutual Agency A partner is both an agent (in the sense that he can bind by his acts the other partners) and the principal (in the sense that he can be bound by the act of the other partners)7

Formation of PartnershipA partnership is based on an agreement. Some points should be noted in this connection.

1. Minor partner A minor may be admitted to the benefits of partnership with the consent of all the other persons.

2. Consideration As no consideration is required to create an agency, no consideration is required to create partnership

3. Partnership DeedMay be oral or writing. It is in the interest of the partners that the agreement must be in writing. Duly stamped.8

Partners, Firm, Firm NamePersons who have entered into partnership with one another are called individually partners and collectively a firm and the name under which the business is carried on is called the firm name

The law safeguards the trade names and goodwill of other persons who are already in existence. The mere fact that a firm already been doing business under a certain name does not prevent a new firm from adopting it.

But if the name is used with a fraudulent intention, the law will intervene. The firm may be restrained from the adoption of such name by injunction.9

Legal Status of firmA firm is not distinct legal entity apart from the partners constituting it (Malabar Fisheries Co. v/s. Comm. Of IT, Kerala, AIR 1980 SC 176). Unlike a company which is a corporate body, it is not regarded as a person in the eyes of the law.

Firm is abridged name for the individuals who compose it (Munshi Ram v/s. Chhehrata Municipality, AIR 1979 SC 1250)

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Test of PartnershipIn order to determine the existence of partnership between a group of persons, the in Sec 4 is used as test i.e. one must look to the agreement between them. If the agreement is to share the profits of a business and business is carried by all or any of them acting for all, there is partnership otherwise not.

But when there is specific agreement constituting partnership among the partners or the agreement is such as does not specifically speak of partnership, we have to refer Sec. 6 which embodies the rule laid down.

.Sec 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 together11

Test of PartnershipCases where no partnership relation

1. Joint owners sharing gross returns .joint owners of property sharing profits or gross returns arising from the property do not become partners.

2. Sharing of profitsThe sharing of profits is prima facie a strong evidence of partnership but the fact that there is sharing of profits between some persons will not automatically make them partners.

e.g. where a person has sold his business alongwith its goodwill and receives a portion of the profits in consideration of the sale. 12

Partnership & Co-ownershipCo-ownership means joint ownership of some property which does not necessarily result in partnership. In partnership the partners are necessarily co-owners of the property of the firm, but in co-ownership the co-owners are not necessarily partners.

Points of difference

Mode of creationBusinessTransfer of interestNumber of members etc.

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Duration of Partnership1. Partnership for a fixed term

where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, and so far as they may be consistent with the incidents of partnership-at-will; (Section 17(b))

2. Partnership at will (Section 7)

Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is "partnership-at-will".

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Registration of FirmsThe Act does not provide for the compulsory registration of firms.

Firm to be registered in office of Registrar of Firms

But indirectly, by creating certain disabilities from which an unregistered firms suffers, it has made the registration of firms compulsory.

Section 69 deals with such disabilities.

1. Suits between partners and firm2. Claim of set off3. Suits between firm and third partiesA plaint filed by an unregistered firm is void (Abani Kant Pal, AIR 1986 Cal. 143)

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AlterationFor following alteration intimation to be sent to Registrar of Firms.

Change in the name of the firm or in location of the principal place of business of the registered firm (Sec. 60)Closing and opening of branches (Sec. 61)Change in names and addresses of partners (Sec. 62)Change in constitution of the firm and its dissolution or election of a minor partner on attaining the majority to continue as partner or sever his connection (Sec. 63)16

OutlineNature of PartnershipRelation of PartnersDissolution of FirmTaxation in Partnership Firms17

Rights of a partnerRight to take part in business.Right to be consulted.Right to access to accountRight to share to profitsRight to interest in capitalRight to interest on advancesRight to be indemnifiedRight to use partnership propertyRight to partner s agent of the firmNo new partner to be introduced etc..

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Duties of a partnerTo carry on business to the greatest common advantageTo observe faithTo indemnify for fraudTo attend diligentlyTo hold an use property of the firm exclusively for the firmTo account for personal profitsTo act within authorityTo be liable jointly and severally Not to assign his rightsTo share losses etc.

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Property of the Firm (Section 14)It is open to partners to determine by agreement amongst them as to what shall be the property of the firm, if there is no express agreement, the source from which the property was obtained, the purpose for which it was acquired and the mode in which it had been dealt with are important in determining as to whether the property is or is not the property of the firm.

..Sec. 14 further provides that, unless the contrary intention appears, property an rights and interest in property acquired with money belonging to the firm deemed to have been acquired for the form.

e.g. A & B are partners in a business. A buys some land in his own name out of the profits of the partnership business. The land is partnership property.

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Agreement between partners in restraint of tradeSection 27 of Indian Contract Act agreement restraint of trade or business is voidbut partners of the firm may agree that a partner shall not carry on any business other than that of firm while he is a partner (Sec. 11(2))

Exception to the general rule that an agreement in restraint of trade is void under the Partnership Act.

1. A partner shall not carry on business other than that of the firm while he is a partner.

2. An outgoing partner may agree with his partners not to carry on a business similar to that of the firm within a specified period or within specified local limits.etc.21

Types of PartnersActual or ostensible partnerSleeping partnerNominal PartnerPartner by estoppel or holding outSometimes a person who is not a partner in a firm may, under certain circumstances, be liable for its debts as if he were a partner. Such partner is called a partner by estoppel or holding out.

e.g. A retired businessman of some repute assumed the honorary presidentship of the business of certain persons who requested him for the same. Held he was liable for the debt of the firm to those who gave credit to the firm in the bonafide that he was a partner (Lake v/s. Duke of Argyll. 1844)

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Minor PartnerWith the consent of all the partners for the time being, a minor may be admitted to the benefits of partnership (Sec. 30(1)).

This provision is based on the rule that a minor cannot be a promisor, but he can be a promisee or a beneficiary.

There cannot be partnership of minors among themselves as they are incapable of entering into a contract (Shriram v/s. Gourishankar, AIR 1961 Bom 136)

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Minor PartnerPosition of minor partner

1. Before attaining majority.

Rights

Share of property and of profitAccess to and inspect and copy of accountsCan sue when profit is not given. When he wants to sever from firm.

Liabilities

Confined only to the extent of his share in profits and property of the firmCannot be declared insolventCont

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Minor PartnerPosition of minor partner

2. Position on attaining majority

On attaining the majority the minor partner has to decide within 6 months whether he shall continue in the firm or lave it.

If he fails to give a public notice, he is deemed to have become a partner in the firm on the expiry of the said six months.Cont

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Reconstitution of FirmIntroduction of a partner (Sec. 31)Retirement of a partner (Sec. 32)Expulsion of a partner (Sec. 33)Insolvency of a partner (Sec. 34)Death of a partner (Sec. 35 & 42 (c))Transfer of a partners interest (Sec. 29)

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OutlineNature of PartnershipRelation of PartnersDissolution of FirmTaxation in Partnership Firms27

Dissolution of FirmDissolution of Firm means complete breakdown or extinction of the relationship of partnership between all the partners of the firm.

If this breakdown or severance of partnership relation is between a few and not all the partners (and business is carried on), this amounts to Dissolution of Partnership and not of the firm

e.g. If there is a partnership between A, B and C, C retires. The partnership between A, B and C comes to end and partnership between A and B comes into being.Cont28

Dissolution of FirmContCont29

Dissolution without order of court (Sec. 40 to 43)1. Dissolution by agreement (Sec. 40)2. Compulsory dissolution (Sec. 41) e.g. insolvency3. Contingencies (Sec. 42) e.g. expiry of term, death of partner etc.4. Notice of Partnership a will (Sec. 43) Notice by any partner giving notice to all partners.ContCont30

Dissolution by court (Sec. 44)1. Insanity of partner2. Permanent incapacity3. MisconductFraud, persistent refusal or neglect by a partner to attend business etc.ContCont31

Liability of a partner on dissolution (Sec. 45)In order to absolve partners of the liability for any act done after the dissolution of the firm, a public notice must be given of the dissolution. If it is not done, the partners continue to be liable as such to third parties for any act done by any of them after dissolution.

Further in such case the act of a partner done after the dissolution is deemed to be an act done before the dissolution.Cont32

OutlineNature of PartnershipRelation of PartnersDissolution of FirmTaxation in Partnership Firms33

Taxation in firms & LLPsFlat rate of 30% on the total income after deduction of interest and remuneration to partners/Designated Partners at the specified rates + Surcharge of 10% if Total Income exceeds 1 Crore and will be further increased by education cess secondary and higher education cess @ 3% on Income-tax.

Interest to partner not exceeding 12%.

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Taxation in firmsFrom A.Y. 2010-11, deduction for payment of remuneration to working partners for both Business as well as professional firms has changed as under:

Book Profit/Loss% of amount of deduction

Book Profit/Loss % of amount of deduction

(i) loss or profit upto Rs. 3,00,000 ---- Rs. 1,50,000/- or 90% of Book Profit whichever is more

(ii) on the balance 60% of book profit ---- 60% of book profitCont

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