Q.1. Define Partnership. Enumerate the essential elements of
partnership. (Delhi 1987, 92, 93, 97)
Answer: In India, Partnership firm is governed by the Indian
Partnership Act 1932. Section 4 of this act defines partnership
" The relationship between persons, who have agreed
to share the profits of a business carried on by all or any one
of them acting for all."
According to Prof. Haney, partnership is "the
relation between persons competent to make contract who agree
to carry on a lawful business in common with a view to private
Partnership in this way is an agreement, between two or more persons
to carry on legal business with profit motive, carried on by all
or any one of them acting for all. In this way, partnership has
the following characteristics:
(i) Contract: Partnership is the result of contract between
the partners and their relation of partnership arises from contract
and not from status. The relationship between the members of a Joint
Hindu Family (governed by the Mitakshara School of Hindu Law) is
determined by birth and not by agreement. Therefore, a Joint Hindu
Family firm is not a partnership under the act.
(ii) Number of Persons: In a partnership firm there must
be at least two person to form the business. Partnership Act 1932,
does not specifies the maximum numbers of persons, but the Indian
Company Act 1956, restricts the number of Partners to 10 for a partnership
carrying on banking business and 20 in case of other kinds of business.
(iii) Business: Business must be carried on by all or any
one of them acting for all. This is the cardinal principle of the
working of the partnership firms. An act of one partner in the course
of the business of the firm is in fact an act of all the partners.
Each partner carrying on the business is the principle as well as
the agent for all the other partners.
(iv) Motive: For a partnership firm there must be motive
to earn profit. A partnership firm cannot be formed with service
(v) Legality of the Business: The business to be carried
on by the partners must be legal. There should be lawful consideration
and the business should not be illegal in the eyes of law.
Q.2. What is a partnership deed? State the main contents of
the partnership deed.
Ans. A partnership is formed by an agreement. This agreement
may be oral or in writing. Though the law does not expressly require
that the partnership agreement should be in writing, it is desirable
to have it in writing. A document, which contains the terms of partnership,
as agreed to by the partners is called ĎPartnership Deed.í
Contents of the Deed:
- Name of the firm and its permanent address.
- Names and addresses of the partners.
- Nature of Business.
- Methods of evaluating of assets and liabilities.
- Date of commencement of partnership.
- Amount of capital to be contributed by each partner.
- Interest of Capital: According to section 13 of Partnership
Act 1932, a partner is not entitled to interest on capital as
a matter of right, but if there is an agreement that partner would
receive interest on capital, it is paid at the agreed rate but
such interest is payable only out of profits.
- Drawings by the partners.
- Interest on Drawings: The partnership deed must specifically
mention whether interest on drawings will be charged, or not.
If the interest is to be charged, rate of interest should also
- Accounting Period of the Firm: -The period after which the final
accounts of the firm are to be prepared. Whether yearly or half-yearly
and the date on which accounts are to be closed every year.
- Profit and loss sharing ratio: Partners must agree as to the
ratio in which they will be distributing profit or loss. In the
absence of any agreed ratio profit or loss will be shared equally
- Partnerís salary: If any partner is allowed salary, it should
be mentioned in the partnership deed and the amount of salary
should also be specified.
- Duration of partnership: The period for which the partnership
has established and the mode of dissolution of partnership.
- Valuation of goodwill: Method of valuation of goodwill in case
of admission or retirement of a partner should also be mentioned.
- Auditing: Whether the firmís books will be audited or not? If
so, the mode of auditorís appointment.
- Operation of Bank Account: -The deed should mention the name
of partner or partners, authorised to operate Bank Account, i.e.,
who is authorised to sign on cheque.
- Application of the Decision of Garner vs. Murray: -The partnership
deed should specify whether accounts will be closed as per the
decision of Garner Vs. Murray in case of dissolution of the firm
caused by the insolvency of the partners.
- Settlement of Disputes:-In case of dispute among the partners,
how the dispute will be solved.