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Partnership

Partnership

A partnership firm is a creation of a contract between persons called “partners” and each partner can represent the other partners and the firm as their agent. There is “mutual agency” between partners in the sense that each partner is both a principal and an agent at the same time. A partner has rights and interests in the partnership property in his own right, subject only to the sharing of the same with the other partners. Mutual legal relationships between partners are governed by the provisions of the Indian Partnership Act, 1932.[1]

The Indian Partnership Act was passed in 1932 to define and amend the law relating to partnership. Indian Partnership Act is one of very old mercantile law. Partnership is one of the special types of Contract. Initially, this was part of Indian Contract Act itself (Chapter IX – sections 239 to 266), but later converted into separate Act in 1932.

      The Indian law of partnership in India is based on the provisions of the English law of partnership. Until the English Partnership Act of 1890 was passed, the law of partnership even in England was largely based on legal decisions and custom. There were very few acts of parliament relating directly to partnership.

The Indian Partnership Act of 1932 (Partnership Act) was the result of a Report of a Special Committee consisting of Shri Brojender Lal Mitter, Sir Dinshaw Mulla, Sir Alladi Krishnaswami Iyer and Sir Arthur Eggar. Prior to the enactment of the Partnership Act, the law relating to partnership was contained in Chapter XI (sections 239 to 266) of the Indian Contract Act, 1872 (Contract Act). These provisions contained in the Contract Act were not found adequate. As a result, Chapter XI of the Contract Act was repealed and replaced by the Partnership Act of 1932.

The Partnership Act is a comprehensive framework for contractual relationships amongst partners, and the basis for a most popular form of organisation for small businesses.

 

It is interesting to note that the Partnership Act has not been subject to any significant amendment since its enactment. Most of the organisations and individuals, who made presentations before the Committee did not have any major complaint about the existing regulatory regime, except for certain administrative aspects of the functioning of the offices of the Registrar of Firms in different States.

The Committee also felt that the Partnership Act did not require any major change. However, some minor modifications to the law seem necessary to enable the partnership form of organisation to keep pace with the changing business environment The Indian Partnership Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of partnership also. Basic requirements of contract i.e. legally enforceable agreement, mutual consent, parties competent to contract, free consent, lawful object, consideration etc. apply to partnership contract also.[2] “Partnership” is the relation between persons who have agreed to share the profits of business carried on by all or any to them acting for all. – Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”.[3]

The law dealing with the capability of a minor to be a part of a partnership is an exception to Section 11 of the Indian Contract Act and the case of Mohribibi v. Dharamdas Ghosh[4]. These lay down the incapacity of the minor to enter into a contract. There is no justification in the law of partnership for departing from this principle. Thus we find that while in general, minors are not eligible to participate in any contractual relationships, the Law of partnership appears as the only exception to this general rule.[5]A minor is, under the Contract Act, incompetent to contract. A contract of partnership cannot be entered into with a minor. The Act provides that a minor can be admitted to the benefits of an existing firm. Sec. 30(1) provides that a person who is a minor may not be a partner in a firm but, with the consent of all the partners, may be admitted to the benefits of partnership. His rights and liabilities before attaining majority include right to share profits, right of access to accounts and right to sue for accounts or share of profits.

On attaining majority, a minor is given the option to become or not to become a partner by giving a public notice within six months of attaining majority or his coming to know that he had been admitted to the benefits of partnership, whichever date is la ter. If he fails to give notice, he shall be deemed to have become a partner in the firm on the expiry of six months.[6] The details of his participation in the partnership are laid down under various sub-clauses of Section no. 30.

 ENGLISH LAW

      The Indian law of partnership in India is based on the provisions of the English law of partnership. Until the English Partnership Act of 1890 was passed, the law of partnership even in England was largely based on legal decisions and custom. There were very few acts of parliament relating directly to partnership.[7]

      Nothing to preclude an infant from entering into a contract of partnership, though generally speaking, while he is an infant, he incurs no liability and is not responsible for debts etc. when he becomes of age, and ever before, he may disaffirm past transactions. This was seen in the cases of Lowel v. Beauchamp[8] and Goode v. Harrison[9].

      Since the initial principles are different between the English and the Indian Law on partnership, English cases do not become the proper authority in Indian courts.[10]

 

INDIAN LAW

      The intent of the legislature with respect to the position of minors in a partnership was looked into in the case of Commissioner of Income Tax, Vizag v. M/S Oriental Mahtime[11]. The provisions examined here were the Sections 184 and 185 of the Income Tax Act, 1922 and the Section 30 of the Indian Partnership Act, 1932.

      The former contemplate a partnership deed which is valid as on the date the deed was executed.[12] The latter makes the provision that a minor has to be admitted in a partnership, he should be admitted for the purpose of profit only.[13]

      An illustration of this is the Hindu Minor’s Ancestral Trade: a Hindu Minor, on whose behalf an ancestral trade is carried out by his guardian, is an example of a minor being admitted by agreement into a partnership business. The minor is not personally liable for the debts of the trade but his share therein is alone liable. Instances of such Hindu minors were found in cases of Joykisto v. Nityanund[14], Rampartab v. Foolibai[15], Khetra Mohan v. Nishi Kumar[16], Narayan Das v. Ralli Bros.[17], Sanyasi Charan Mandal v. Ashutosh Ghosh[18].

 

SCOPE OF THE SECTION

     It is intended to remedy the defects that the Indian Contract Act had left in relation to the law of partnership. It does not apply to those minors who are admitted to benefits but who attained majority after the commencement of the Act. This is seen from the judgment in the case of Md. Ali v. Karji Khondo[19]. Beyond that period of minority, Section 28 becomes applicable on the person. This is reaffirmed under the judgment in the case of Meenakshi Achi v. Subramaniam Chettiar[20].

      Another question arose – whether the minor can get the rights via agreement. Some courts said that when a deed deems a minor to be the ‘full’ partner, it means giving the minor the rights as laid down by the act. This was laid down in cases like Jakka Davaya v. CIT (Mad.)[21] and Vincent v. CIT (Mad.)[22]. But this was disapproved in the case of CIT v. Dwarkadas Khetan[23].

 

APPLICATION

      The basic test applied to check the applicability of the section is the Insolvency Test that was laid down in the case of Shivaguda Patil v. Chandrakant Sadalge[24]. This laid down that a minor cannot become partner but he can be admitted to the benefits of the partnership. He can be entitled to have a right to share the property and profits to the extent agreed upon but he has no personal liability for the acts of the firm. So, the testing point is that the minor is not insolvent even if the firm is since he is not a partner.

      However, upon majority, and choice or default, he will be liable for debts and can be adjudicated as insolvent for the acts of the acts of the partners,[25]

 

STATUS: Sub-clause (1)

      It makes it clear that a minor cannot be a partner but can only be admitted to the benefits of a partnership. A firm position can only be given to the minor by express consent of the partners and cannot be thrust upon them. This is because he is a potential partner and his introduction should be subject to the consent of all other partners.

      Thus, the default capacity of a minor as a partner is one in which he is only admitted to the benefits of the partnership. The Income Tax Act, 1922, under section 2 (6-B) defines the word “partner” as including any person who, being a minor, has been admitted to the benefits of partnership. Hence where a minor is admitted as a full partner with equal rights and obligations with adults, the deed is invalid. This was laid down in the case of Hardutt Ray Gajadhar Ram v. CIT[26].[27]

      Any partnership deed in which the minor is described as a full partner cannot even be accepted for registration. This was laid down in the cases of Commissioner of Income Tax, Bombay v. D. Khetan and Co.[28] and Bankamal Lajja Ram v. CIT[29]. He can only behave as a dormant partner and enjoy the benefits of the partnership. It thus follows that the minor’s income in the partnership business, as a partner, would not be considered as earned income for tax purposes.[30]

      The issue that arises then is that there is the chance that the omission to treat income of the minor as earned income might be considered as a mistake under section 35 of the Income Tax Act. Section 35 talks about a ‘mistake apparent from record’. But, such mistake need not be displayed by the final order of assessment since ‘record’ would include the entire proceedings of assessment.  In some cases, like Income Tax Officer v. S.K. Habibullah[31], the omission had been treated as a mistake apparent from record.

      The legal position is made clear from the cases of Sanyasi Charan Mandal v. Krishnadhan Banerji[32] and Bindraban v. Atmaram[33]. It is said that since a minor cannot be a partner by contract, he cant be the part of a firm. The share he has is nothing more than a right to participate in the property of the firm, after its obligations have been satisfied.[34]

      Moreover, the partnership that he is included into for benefits, according to the ruling in the cases of Lachmi Narayan v. Beni Ram[35] and A.A. Khan v. Ameer Khan[36], must already be subsisting. So he cannot initiate any partnership.

                                                    

EXTENT OF SHARE: Sub-clause (2)

      A minor admitted to the benefits of partnership, as specified in Section 30 (1) of the Act, has a right to such share of the property and profits of the firm as may be agreed upon at the time the deed is made. This law is in accordance with the ratios of the cases Sanyasu v. Krishnadhan[37] and Tulsidas v. Gangaram[38].[39]

 

 

 

LIABILITY: Sub-clause (3)

      The law since 1866 was that the minor was held personally responsible for the obligations of the firm if he didn’t repudiate the partnership within reasonable time after attaining majority. The position of law today is that any minor admitted to the benefits of partnership is not personally liable for the acts of the firm except in some cases like Abdul Razzak v. Rauf Ahmad[40], Harmohan v. Sudarshan[41], Kanchachumma v. Chalaipuram Bank[42].

      Sub section (3) draws a distinction between personal liability and liability limited to the share held by a minor in the firm assets. The ‘personal liability’ is more or less conceived as limited to the assets that exclude the assets of the partnership i.e. a debt would be satisfied with the application of general assets.

      In the case of Ranganayakulu v. Narsimha Rao & Co.[43] it was argued that this meaning of ‘personal liability’ should be applied to adult partners as well. However, it would be erroneous to give it such an interpretation because in relation to minors, personal liability can never be deduced as liability to be arrested for recovery of a debt, while in adults it is very much a possibility hence the same interpretation cannot be applied.[44]

      The share of a minor in the firm’s property is subject to the firm’s debts. Ordinarily, each partner is liable as if a decretal debt is his personal liability. But, in relation to the minor, his liability is limited to assets as part of the partnership only. This was specified in the cases of Sahai Bros. v. CIT [45]and Ranganayakullu v. Narsimharao[46].

 

CAPACITY TO SUE: Sub-clause (4)

      This clause lays down that a minor admitted to the benefits of a partnership may not sue the partners for an account or payment of his share of the property or profits of the firm except when he is severing his connection with the firm. Then, in such a situation, the amount of his share is determined by a valuation which is made as far as possible in accordance with the rules given under section 48.

 

Section 48 lays down that –

Mode of settlement of accounts between partners –

In settling the accounts of a firm after dissolution, the following rules shall, subject to agreement by the partners, be observed-

(a)                  losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits;

(b)                 the assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order-

(i)         in paying the debts of the firm to third parties;

(ii)    in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital;

(iii)                        in paying to each partner rateably what is due to him on account of capital; and

(iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits.[47]

The proviso specifies that in case of dissolution, the amount of the share of the minor shall be determined along with the shares of the partners.[48]

 

ATTAINMENT OF MAJORITY: Sub-clause (5)

      According to this clause, any minor admitted to the benefits of partnership at any time within 6 months of his attaining majority, or obtaining knowledge that he had been admitted to the partnership, whichever is later, may give a public notice that he has elected to become or not to become a partner in the firm. Such notice shall decide his position in the firm. The proviso says that if he fails to give such notice, then he shall become a partner in the firm after the expiry of the said 6 months, by default.[49]

 

ROLE OF GUARDIAN

      Such partnerships shall be valid till the minor is not regarded as a full partner since the guardian has the power to purport the contract on behalf of the minor, as long as the purpose is governed by section 30. In the true nature of the benefits, the guardian is entitled to even refuse them or to choose to accept them. The knowledge of the minor is not a necessary factor. The case law in support of this is CIT (Mys.) v. Shah Mohandas Sadhuram[50].

 

MINOR’S PARTICIPATION IN BUSINESS:

      A minor admitted to the benefit of a partnership cannot actively become engaged in conduct of business within Section 2 (6AA) (b) of the Income Tax Act, 1922,.

      In the case of A. Rajachanna Visweswara Rao v. Commissioner of Income tax (AP)[51] it was laid down by the court that no partner can actively engage himself in conduct of business unless he is a partner who is competent to enter into a contract. It said that section 30 of the Indian Partnership Act admits minors to the benefits of the partnership. This pre-supposes that there exists a partnership apart from the minor as well, since he cannot contract with another to form a partnership. Thus, he was allowed to be admitted to the benefits of a partnership when there are at least 2 major partners who constitute a partnership already. This reaffirmed that a minor does not become a full fledged partner in the sense of conducting the business according to law.

      The business involves a series of contracts and agreements which a minor partner cannot certainly enter into. This stands in accordance with the section 11 of the Indian Contract Act which prohibits a minor from entering into any contract. A partnership is a relation resulting from an agreement or contract. A person can become a partner only by an act of consent on his part and others. But a minor is incapable of giving such consent. Hence, he cannot become a full fledged partner and stays restricted to the benefits of the partnership alone.[52]

 

CONCLUSION

     “The relation of partnership arises from contract…” A minor is incompetent to contract and therefore, a contract of partnership cannot be entered into with a minor.[53] There cannot be a partnership consisting of all minors or of one adult and all other minors.[54] According to a decision of the Supreme Court, a minor cannot even become a full-fledged partner in an existing firm.[55] The only concession that Section 30 gives is that a minor may be admitted to the benefits of an existing firm. This can be done only with the consent of all the partners. A partnership deed that attempt to make a minor a full-fledged partner is invalid to that extent.[56]

      When a minor is admitted to the benefits of a firm, the question arises what are his rights and liabilities.

      Firstly, the minor has the right to receive his agreed share of the property and of the profits of the firm. For the purpose of finding out his share, and even otherwise, he may have access to and inspect and copy any of the accounts of the firm. But as long as he remains in the firm he does not have the right to sue the partners for an account or payment of his share of the property or profits.

 


[1] “Mutual agency among partners”, Saturday, Dec 20, 2008, The Hindu.

[2] http://www.dateyvs.com/gener04.htm

[3]http://www.manupatra.com/downloads/Report%20of%20the%20Committee%20on%20Regulation%20of%20Private%20Companies%20and%20Partnership%20(Naresh%20Chandra%20Committee-II)/Ch%20IV%20The%20Indian%20Partnership%20Act%201932.htm

[4] Mohribibi v. Dharamdas Ghosh (1903) L.R. 30 I.A. 114

[5] P.S. Narayana, “The law of Partnership”, 2nd ed. 2001, p. 183.

[6] Akshey Kumar, “A concept check”, Monday, April 17, 2000, Business Line, The Hindu.

[7]http://www.manupatra.com/downloads/Report%20of%20the%20Committee%20on%20Regulation%20of%20Private%20Companies%20and%20Partnership%20(Naresh%20Chandra%20Committee-II)/Ch%20IV%20The%20Indian%20Partnership%20Act%201932.htm

[8] Lowel v. Beauchamp (1984) A.C. 607

[9] Goode v. Harrison (1821) 5 B and Ald 147

[10] Pollock and Mulla, “The Indian Partnership Act”, 7th. ed. 2007, p. 163.

[11] Commissioner of Income Tax, Vizag v. M/S Oriental Mahtime 1997 (2) An.W.R. 182.

[12] P.S. Narayana, “The Law of Partnership”, 2nd ed. 2001, p. 197.

[13] P.S. Narayana, “The Law of Partnership”, 2nd ed. 2001, p. 197.

[14] Joykisto v. Nityanund (1878) 3 Cal 738.

[15] Rampartab v. Foolibai (1826) 20 Bom 767

[16] Khetra Mohan v. Nishi Kumar (1917) 35 Mad. 692.

[17] Narayan Das v. Ralli Bros. (1915) Punj. Rec. No. 61, p. 270.

[18] Sanyasi Charan Mandal v. Ashutosh Ghosh (1915) 42 Cal 225.

[19] Md. Ali v. Karji Khondo AIR 1945 Pat. 286.

[20] Meenakshi Achi v. Subramaniam Chettiar AIR 1957 Mad 8 (DB)

[21] Davaya v. CIT (Mad.)AIR 1953 Mad 315

[22] Vincent v. CIT (Mad.)AIR 1953 Mad. 336.

[23] CIT v. Dwarkadas Khetan AIR 1961 SC 680.

[24] Shivaguda Patil v. Chandrakant Sadalge AIR 1965 SC 212

[25] Pollock and Mulla, “The Indian Partnership Act”, 7th. ed. 2007, p.158.

[26] Hardutt Ray Gajadhar Ram v. CIT (1950) 18 ITR 106 (All)

[27] P.S. Narayana, “The Law of Partnership”, 2nd ed. 2001, pp. 184-190.

[28] Commissioner of Income Tax, Bombay v. D. Khetan and Co. AIR 1961 SC 680

[29] Bankamal Lajja Ram v. CIT AIR 1953 Punj 270

[30] P.S. Narayana, “The Law of Partnership”, 2nd ed. 2001, p. 194.

[31] Income Tax Officer v. S.K. Habibullah

[32] Sanyasi Charan Mandal v. Krishnadhan Banerji AIR 1922 PC 237

[33] Bindraban v. Atmaram AIR 1984 NOC 305 (Del)             

[34] Pollock and Mulla, “The Indian Partnership Act”, 7th. ed. 2007, p.160.

[35] Lachmi Narayan v. Beni Ram AIR 1931 All 327

[36] A.A. Khan v. Ameer Khan AIR 1952 Mys 131

[37] Sanyasi v. Krishnadhan AIR 1922 PC 237

[38] Tulsidas v. Gangaram AIR 1925 Sind 272

[39] P.S. Narayana, “The Law of Partnership”, 2nd ed. 2001, p. 191.

[40] Abdul Razzak v. Rauf Ahmad AIR 1936 Oudh 245

[41] Harmohan v. Sudarshan AIR 1921 Cal 538

[42] Kanchachumma v. Chalaipuram Bank AIR 1958 Ker 318

[43] Ranganayakulu v. Narsimha Rao & Co

[44] P.S. Narayana, “The Law of Partnership”, 2nd ed. 2001, p. 191.

[45] Sahai Bros. v. CIT AIR 1958 Pat. 177.

[46] Ranganayakullu v. Narsimharao AIR 1971 AP 58.

[47] Indian Partnership Act, 1932, Section 48.

[48] P.S. Narayana, “The Law of Partnership”, 2nd ed. 2001, p. 193.

[49] P.S. Narayana, “The Law of Partnership”, 2nd ed. 2001, p. 193.

[50] CIT (Mys.) v. Shah Mohandas Sadhuram AIR 1966 SC 15

[51] A. Rajachanna Visweswara Rao v. Commissioner of Income tax (AP) AIR 1965 AP 1.

[52] P.S. Narayana, “The Law of Partnership”, 2nd ed. 2001, pp. 193-194.

[53] Lachmi Narayan v. Beni Ram AIR 1931 All 327.

[54] Shivram v. Gaurishankar AIR 1961 Bom 136.

[55] CIT v. Dwarkadas Khetan & Co. AIR 1961 SC 680

[56] CIT v. Shah Mohandas AIR 1966 SC 15


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VIREN VASA
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on minor choosing to become a partner when attains the major status, ir it compulsory to enter into a new part.agree.? Stamp duty on form – F , what enclosures are required to file with ROF ? needs to be Notorised ? how to inform to bankers / Itax / Vat authorities with what Documents ? within how much time ? Does it need other partners Sign. too ?

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