The Indian Partnership Act.docx

7/27/2019 The Indian Partnership Act.docx

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The Indian Partnership Act, 1932

The Indian Partnership Act, 1932 is an act enacted by theParliament of Indiato regulate

partnership firms in India. It received the assent of the Governor-General on 8 April 1932 and

came into force on 1 October 1932. Before the enactment of this act, partnerships weregoverned by the provisions of theIndian Contract Act. The act is administered through the

Ministry of Corporate Affairs. The act is not applicable toLimited Liability Partnerships,

since they are governed bythe Limited liability Partnership Act, 2008.

Definition

Section 2 of the act defines,

(a) an "act of a firm" means any act or omission by all the partners, or by any partner or agent

of the firm which gives rise to a right enforceable by or against the firm;

(b) "business" includes every trade, occupation and profession;

(c) "prescribed" means prescribed by rules made under this Act; (c-1) "Registrar" means the

Registrar of Firms appointed under sub-section (1) of section 57 and includes the Deputy

Registrar of Firms and Assistant Registrar of Firms appointed under sub-section (2) of that

section;

(d) "third party" used in relation to a firm or to a partner therein means any person who is not

a partner in the firm; and

(e) expressions used but not defined in this Act and defined in the Indian Contract Act, 1872,

shall have the meanings assigned to them in that Act.

Partnership refers to an agreement between persons to share their profits or losses arising on

account of actions carried by all or one of them acting on behalf of all. The persons who have

entered such an agreement are called partners and give their collective business a name,

which is necessarily their firm-name. This relation between partners arises out of a contract

or an agreement, which means a husband and wife carrying on a business or members of a

Hindu undivided family re not into partnership. The share of profits received by any

individual from the firm, money received by a lender of money, salary received by a worker

or a servant, annuity received by a widow or a child of a deceased partner, does not makethem a partner of the firm.

DEFINITION1. According to Section 4 of 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."2. According to Mr. Kent"A contract of two or more competent persons to place their money, efforts, labour and skills,some or all of them, in a lawful commerce or business and to divide the profits and bear thelosses in certain proportion."Structural Diagram:Association
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Profit & LossMoney, LabourPARTNERSHIPAnd Other SkillsLawful BusinessCHARACTERISTICSThe main characteristics of partnership may be narrated as under:1. AgreementAgreement is necessary for partnership. Partnership agreement may be written or oral. It isbetter that the agreement is in written form to settle the disputes.2. AuditIf partnership is not registered, it has no legal entity. So there is no restriction for the audit ofaccounts.3. AgentIn partnership every partner acts as an agent of another partner.4. BusinessPartnership is a business unit and a business is always for profit. It must not include club or

charitable trusts, set up for welfare.5. CooperationIn partnership mutual cooperation and mutual confidence is an important factor. Partnershipcannot take place with cooperation.6. DissolutionPartnership is a temporary form of business.It is dissolved if a partner leaves, dies ordeclared bankrupt.7. Legal EntityIf partnership is not registered, it has no legal entity. Moreover, partnership has no separate legal entity from its members and vice versa.8. Management

In partnership all the partners can take part or participate in the activities of businessmanagement. Sometimes, only a few persons are allowed to manage the business affairs.9. Number of PartnersIn partnership there should be at least two partners. But in ordinary business the partnersmust not exceed 20 and in case of banking business it should not exceed 10.10. ObjectOnly that business is considered as partnership, which is established to earn profit.11. Partnership ActIn Pakistan, all partnership businesses are running under Partnership Act, 1932.12. Payment of TaxIn partnership, every partner pays the tax on his share of profit, personally or individually.13. Profit and Loss Distribution

The distribution of profit and loss among the partners is done according to their agreement.14. RegistrationMany problems are created in case of unregistered firm.So, to avoid these problemspartnership firm must be registered.15. RelationshipPartnership business can be carried on by all partners or any of them can do the businessforall.16. Share in CapitalAccording to the agreement, every partner contributes his share of capital. Some partnersprovide only skills and ability to become a partner of business and earn profit. 17. Transfer of RightsIn partnership no partner can transfer his shares or rights to another person, without the


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consent of all partners.18. Unlimited LiabilityIn partnership the liability of each partner is unlimited. In case of loss, the private property ofthe partners is also used up to pay the business debts.ADVANTAGES AND DISADVANTAGES OF PARTNERSHIPADVANTAGES OF PARTNERSHIPFollowing are the advantages of partnership:1. Simplicity in FormationThis type of business of organization can be formed easily without any complex legalformalities. Two or more persons can start the business at any time. Its registration is alsovery easy.2. Simplicity in DissolutionPartnership Business can be dissolved at any time because of no legal restrictions.Itsdissolution is easy as compared to Joint Stock Company.3. Sufficient CapitalPartnership can collect more capital in the business by the joint efforts of the partners as

compared to sole proprietorship.4. Skilled WorkersAs there is sufficient capital so a firm is in a better position to hire the services of qualifiedandskilled workers.5. Sense of ResponsibilityAs there is unlimited liability in case of partnership, so every partner performs his dutyhonestly.6. Satisfaction of PartnersIn this type of business organization each partner is satisfied with the business because hecan take part in the management of the business. 7. Secrecy

In partnership it is not compulsory to publish the accounts. So, the business secrecy remainswithin partners. This factor is very helpful for successful operation of the business.8. Social BenefitTwo or more partners with their resources can build a strong business. This factor is veryhelpful in solving social problems like unemployment.9. Expansion of BusinessIn this type of business organization, it is very easy to expand business volume by admitting new partners and can borrow money easily.10. FlexibilityIt is flexible business and partners can change their business policies with the mutualconsultation at any time.11. Tax Facility

Every partner pays tax individually. So, a firm is in a better position as compared to JointStock Company.12. Public FactorPublic shows more confidence in partnership as compared to sole proprietorship. If a firm isregistered, people feel no risk in creating relations with such business.13. Prime Credit StandingThe liabilities of partners are unlimited, so the banks and other financial institutions providethem credit easily.14. Minority ProtectionIn partnership all policy matters are decided with consent of each partner.This givesprotection to minority partners.15. Moral PromotionPartnership is the best business for small investors. It promotes moral courage of partners.


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16. Distribution of WorkThere is distribution of work among the partners according to their ability and experience.Thisincreases the efficiency of a firm.17. Combined AbilitiesEvery partner possesses different ability, which helps in running the business effectively,whencombined together.18. Absence of FraudIn partnership each partner can look after the business activities. He can check theaccounts.So, there is no risk of fraud.DISADVANTAGES OF PARTNERSHIPThe disadvantages of partnership are enumerated one by one as under: 1. Unlimited LiabilityIt is the main disadvantage of partnership. It means in case of loss, personal property of thepartners can be sold to pay off the firm's debts.

2. Limited Life of FirmThe life of this type of business organization is very limited. It may come to an end if anypartner dies or new partner enters into business.3. Limited CapitalNo doubt, in partnership, capital, is greater as compared to sole proprietorship, but it is smallas compared to Joint Stock Company. So, a business cannot be expanded on a large scale. 4. Limited AbilitiesAs financial resources of partnership are limited as compared to Joint Stock Company, so itisnot possible to engage the services of higher technical and qualified persons. This causesthefailure of business, sooner or later.

5. Limited number of PartnersIn partnership, the number of partners is limited, so the resources are also limited. That iswhybusiness cannot expand on large scale.6. Legal DefectsThere are no effective rules and regulations to control the partnership activities. So, it cannothandle large-scale production.7. Lack of InterestPartners do not take interest in the business activities due to limited share in profit andlimitedchances of growth of business.8. Lack of Public Confidence

As there is no need by law to publish accounts in partnership, so people lose confidence andavoid dealing and entering into contract with such firm.9. Lack of Prompt DecisionIn partnership all decisions are made by mutual consultation. Sometimes, delay in decisions becomes the cause of loss.10. Lack of SecrecyIn case of misunderstandings and disputes among the partners, business secrets can berevealed.11. Chances of Dispute among PartnersIn partnership there are much chances of dispute among the partners because all thepartnersare not of equal mind.12. Expansion ProblemPartnership business may not be expanded due to limited number of partners, limited capital


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and unlimited liability.13. Frozen InvestmentIt is easy to invest money in partnership but very difficult to withdraw it.14. Risk of LossThere is a risk of loss due to less qualified and less experienced people. 15. Transfer of RightsIn partnership no partner can transfer his share without the consent of all other partners.CONCLUSIONFrom the above-mentioned findings, we come to this point that despite the abovedisadvantages, partnership is an important from of business organization. This is because itsformation is very easy and due to unlimited liabilities, partners take great interest inbusiness,because in case of loss they are personally responsible.

Complete information on the procedure of

registering a Partnership firm in IndiaThe entrepreneurs willing to start up partnership firm may or may not go for registering the

business as the registration of the partnership firms in India is not compulsory. Even prior to

the passing of the Indian Partnership Act, 1932, there was 10 provisions for registration of

firms in India.

Though registration of the firm is optional at the discretion of the partners, an unregistered

firm suffers from certain disabilities. These disabilities have indirectly made some sort of

compulsion on the part of the firms to be registered. In case of unregistered firm, payment of

salary, commission, interest on borrowings or drawings are not considered as allowable

expenses for determination of total income for payment of tax.

1. Procedure of Registration

Entrepreneurs desirous of setting a partnership firm may apply in the prescribed form to be

submitted to the Registrar of Firms of the State in which the business of the firm is situated or

proposed to be situated. The prescribed registration fee also need to be deposited Along with

the application. The application must be signed by all the partners or their authorise agents.

The application or the statement must contain the following particulars:

The name of the firm.

The place or principal, place of business of the firm.

The names of other places where the firm carries on business.

The different dates on which partners joined the firm.

The full names and permanent addresses of the partners.

The duration of the firm.

When the Registrar is satisfied that the above provisions have been duly complied with, he

shall record an entry of the statement in the register of firms and file the statement. The

Registrar shall then issue a certificate of registration.

Effects of Non-Registration:


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An unregistered firm and its partners suffer from the following disabilities:

i. An unregistered firm cannot file a suit against a third party to enforce a right arising from a

contract. (For example, for the recovery of the price of goods supplied)

ii. A partner cannot file a suit against the firm or co-partners to enforce his rights under thePartnership Deed.

iii. An unregistered firm cannot claim a set-off against a third party to enforce right arising

from a contract exceeding Rs.100 in value.

Exception: The non-registration of a firm, however, does not affect the follow rights:

i. The rights of third parties to sue the firm or any partner.

ii. The rights of a partner to sue for dissolution of the firm, accounts after dissolution and

realisation of property after dissolution.

iii. The rights of firm or partners of firm having no place of business in India.

iv. The right to sue or claim a set-off of value not exceeding Rs. 100.

v. The powers of an Official Assignee or Receiver or the Court to realise the prop of an

insolvent partner.

Advantages / Benefits of Registration:

The effects of non-registration or disabilities of an unregistered firm have been pointed

above. Considering the same, the advantages or benefits of registration can be as follows :

i. The firm can sue third parties to enforce its claim.

ii. A partner can enforce his claim against third parties or against his co-partner.

iii. The interest of third parties is safeguarded against fraud of partners because statement

submitted to the Registrar is a conclusive proof of the existence partnership and the

composition of partners.

iv. An incoming partner is empowered to enforce his dues against the other co-partners

otherwise he would have to rely on their honesty.

v. A retired or expelled partner is exempted from liabilities of the firm incurred after his

retirement or expulsion by giving a public notice and effecting the necessary changes in the

register of firms.

vi. It can avail tax benefits as per IT Act - 1962.

Documents

The Indian Partnership Act.docx