Topics : Definition, Key Features, Partnership deed and Legal Provisions in the Absence of partnership deed (as per the Indian Partnership Act, 1932)
Section 4 of the Indian Partnership Act, 1932 defines the term “partnership” and lays the foundation for the concept of partnership in India. It states:
Definition of Partnership:
“Partnership” is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Key Elements of Section 4:
- Agreement:
Partnership arises out of an agreement between two or more persons. It cannot be imposed by law. - Sharing of Profits:
The primary purpose of forming a partnership is to share the profits (or losses) of the business. Sharing of profits is essential, but it is not the sole determinant of a partnership. - Business Activity:
There must be a lawful business or trade, which can include manufacturing, services, or any other commercial activity. A non-business activity (e.g., charitable activities) does not constitute a partnership. - Mutual Agency:
The business must be carried on by all partners or any one partner acting as an agent on behalf of the others. This concept of mutual agency means that each partner can bind the firm and other partners through their actions.
The conditions of partnership as per the Indian Partnership Act, 1932, are fundamental requirements that must be fulfilled for a partnership to exist. These conditions ensure the legal validity of a partnership. Below are the key conditions:
1. Agreement Between Partners
- Partnership is based on an agreement, not by status or inheritance. This agreement can be oral or written.
- The agreement defines the rights, duties, profit-sharing ratio, and other terms.
2. Existence of a Lawful Business
- The partnership must be formed to carry out a lawful business (e.g., trade, profession, or occupation).
- Illegal activities like smuggling or gambling cannot be the object of a partnership.
3. Sharing of Profits
- There must be an agreement to share the profits (or losses) of the business among partners.
- The ratio of profit-sharing must be mutually agreed upon.
4. Mutual Agency
- A key feature of partnership is mutual agency, meaning:
- Every partner is an agent of the firm and can bind the firm by their actions.
- Every partner is also a principal and is bound by the actions of other partners.
5. Number of Partners
- A partnership must have at least two partners.
- The maximum number of partners:
- 10 in the case of a banking business.
- 20 in any other business (as per the Companies Act).
6. Business Conducted in Common
- The business must be carried on by all the partners, or any one of them acting on behalf of the others.
- There must be joint participation in the management or agreement on management delegation.
7. Voluntary Relationship
- The partnership is formed voluntarily and cannot be imposed on anyone.
8. Registration (Optional but Beneficial)
- While registration of a partnership firm is not mandatory under the Act, it is highly recommended for legal benefits, such as the right to sue other partners or third parties.
A partnership deed is a written legal document that outlines the terms and conditions agreed upon by all partners in a partnership firm. It serves as the foundation of the partnership, detailing the rights, responsibilities, and obligations of each partner. While it is not mandatory to have a partnership deed (as partnerships can be oral), a written deed is highly recommended to avoid disputes and misunderstandings.
Key Features of a Partnership Deed
- Written Agreement:
It is a formal document that provides legal clarity. - Legal Enforceability:
It can be presented in court if there are disagreements among partners. - Customizable:
Partners can customize the terms according to their needs, as long as they adhere to the law.
Contents of a Partnership Deed
A well-drafted partnership deed typically includes the following details:
- General Information:
- Name and address of the partnership firm.
- Names, addresses, and occupations of all partners.
- Nature of the business.
- Date of commencement of the partnership.
- Capital Contribution:
- Amount of capital contributed by each partner.
- Provisions for additional capital, if required.
- Profit and Loss Sharing:
- Ratio for sharing profits and losses among partners.
- Provisions for salary, commissions, or bonuses (if any) to partners.
- Roles and Responsibilities:
- Duties and responsibilities of each partner.
- Management roles (if applicable).
- Interest on Capital and Loans:
- Rate of interest on capital contributed by partners.
- Rate of interest on loans advanced by partners to the firm.
- Drawings:
- Limits on partner withdrawals from the firm.
- Admission and Retirement of Partners:
- Procedure for admitting new partners.
- Provisions for the retirement or resignation of partners.
- Settlement of dues in case of retirement or death.
- Dispute Resolution:
- Mechanism for resolving disputes (e.g., arbitration).
- Duration of Partnership:
- Whether the partnership is for a fixed period, specific project, or at will.
- Dissolution of Partnership:
- Terms and conditions for dissolving the partnership.
Importance of a Partnership Deed
- Prevents Disputes:
It clearly defines the roles, responsibilities, and profit-sharing ratios, minimizing conflicts. - Legal Clarity:
A written deed provides a strong legal basis to resolve issues. - Transparency:
All partners are aware of the terms, ensuring fairness and accountability. - Required for Registration:
If the firm is to be registered under the Indian Partnership Act, 1932, a partnership deed is required.
According to partnership Act 1932 (the NCERT Class 12 Business Studies textbook)
If there is no written partnership deed, the following rules apply based on the Indian Partnership Act, 1932:
1. Equal Sharing of Profits and Losses
- All partners will share the profits and losses of the business equally, no matter how much capital they have contributed.
2. No Interest on Capital
- Partners will not get any interest on the money they have invested as capital in the firm
3. No Salary or Remuneration
- Partners will not get any salary or payment for the work they do for the firm if not written in deed
4. Interest on Loans by Partners
If a partner gives a loan to the firm, they will receive 6% interest per year on the loan amount. However, if the firm gives a loan to a partner, the partner does not have to pay any interest on the loan. A partner enjoys benefits on both sides.
5. Equal Rights in Business Decisions
- All partners have an equal say in the management of the business, irrespective of their capital or effort.
6. Admission of a New Partner
- A new partner can only join the firm if all the existing partners agree. For example, if a firm has 40 members and 39 of them agree to admit a new partner, but 1 partner disagrees, then the new partner will not be allowed to join the firm.
Case Study on Issues in the Absence of a Partnership Deed
Amar, Akbar, and Anthony are partners in a firm. However, they do not have a Partnership Deed. The following issues have arisen among the partners:
- Interest on Capital:
Amar, having invested more capital than the other partners, demands interest on capital at 10% per annum. However, Akbar and Anthony do not agree with his demand. - Salary to a Partner:
Akbar devotes more time and effort to managing the business and demands a monthly salary of ₹5,000 for his contribution. However, Amar and Anthony do not agree to this proposal. - Interest on Loan:
Anthony has provided a loan of ₹50,000 to the firm and demands interest on the loan at the rate of 10% per annum. - Interest on Drawings:
Amar has withdrawn ₹10,000 from the firm for his personal use. Akbar and Anthony demand that interest on drawings be charged from him at 10% per annum. - Profit Distribution:
The firm has earned a profit of ₹50,000 during the year before considering the above claims. Amar demands that the profits should be distributed in the ratio of their capital contribution. - Introduction of a New Partner:
Akbar proposes to introduce his Brother , Amit as a partner in the firm. However, Anthony objects to this proposal.
Resolution of Issues:
In the absence of a Partnership Deed, the provisions of the Indian Partnership Act, 1932, shall be applicable:
- No interest on capital shall be allowed unless agreed upon by all partners (Section 13).
- No partner shall be entitled to a salary unless there is an agreement to that effect (Section 13).
- Interest on a partner’s loan shall be allowed at the rate of 6% per annum (Section 13).
- Interest on drawings is not charged unless there is an agreement between the partners.
- Profits and losses are to be shared equally among all partners, irrespective of their capital contribution (Section 13).
- A new partner cannot be admitted into the firm without the unanimous consent of all existing partners (Section 31).
By applying the provisions of the Indian Partnership Act, 1932, the above issues can be resolved.
Case Study on Partnership Dispute
Question
Amar and Akbar are partners in a firm since 1st April 2022. No partnership agreement has been executed between them. Amar contributed ₹4,00,000 and Akbar contributed ₹1,00,000 as their capitals. Additionally, Amar provided a loan of ₹1,00,000 to the firm on 1st October 2022. Due to a prolonged illness, Amar could not participate in the business from 1st August 2022 to 30th September 2022. The profit for the year ended 31st March 2023 was ₹1,80,000.
The following disputes have arisen between Amar and Akbar:
- Amar’s Claims:
i. He should be allowed interest on capital and loan at 10% per annum.
ii. Profits should be distributed in the ratio of their capital contributions. - Akbar’s Claims:
i. Profits should be distributed equally.
ii. He should be allowed a remuneration of ₹2,000 per month for managing the business during Amar’s absence.
iii. Interest on capital and loan should be allowed at 6% per annum.
Solution
In the absence of a partnership agreement, the provisions of the Indian Partnership Act, 1932 will apply to resolve the disputes:
- Interest on Capital: No interest on capital shall be allowed unless there is an express agreement between the partners (Section 13). Hence, neither Amar nor Akbar is entitled to interest on their capital.
- Interest on Loan: Interest on any loan advanced by a partner to the firm shall be allowed at the rate of 6% per annum (Section 13). Therefore, Amar will receive interest on his loan at 6% p.a. instead of 10%p.a
- Profit-Sharing Ratio: Profits and losses are to be shared equally among the partners unless otherwise agreed (Section 13). Therefore, the profit will be shared equally between Amar and Akbar.
- Remuneration to Partners: No partner is entitled to remuneration for managing the business unless there is an agreement to that effect (Section 13). Hence, Akbar’s claim for remuneration is not admissible.
Profit and Loss Appropriation Account working note for the year ended 31st 2023
Working Notes
- Interest on Loan: Amar’s loan of ₹1,00,000 was provided on 1st October 2022. Interest is calculated for 6 months (October to March) at the rate of 6% per annum:
₹1,00,000×6%×612=₹3,000₹1,00,000 \times 6\% \times \frac{6}{12} = ₹3,000₹1,00,000×6%×126=₹3,000 - Profit Sharing: After deducting the interest on the loan (₹3,000) from the net profit (₹1,80,000), the remaining profit of ₹1,77,000 is distributed equally between Amar and Akbar:
₹1,77,000÷2=₹88,500₹1,77,000 \div 2 = ₹88,500₹1,77,000÷2=₹88,500
By applying the provisions of the Indian Partnership Act, 1932, the disputes are resolved, and the profit is distributed equitably between Amar and Akbar.
Based on these provisions, the claims are settled as follows:
- Amar will be allowed interest on the loan at 6% per annum.
- No interest on capital will be allowed to Amar or Akbar.
- Profits will be shared equally between Amar and Akbar.
- Akbar claim for remuneration is not admissible.