Whether sharing of profit is a sole criteria of partnership? Explain the mode of determing the existence of partnership ?
Ans. In fact, it is true that sharing of profit of a business is essential but this does not mean that “everyone who participates in the profits of a business is a partner. (Determination of the Mode of Existence of Partnership—)S. 6 says that in determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts takes together, for Examples –
(i) The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.
(ii) The receipt by a person of a share of the profits of a business or a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment –
(a) By a lender of money to persons engaged or about to engage in any business,
(b) By a servant or agent as remuneration,
(c) By the widow or child of a deceased partner as annuity, or
(d) By a previous owner or part owner of the business, as consideration “for the sale of the goodwill or share thereof, does not itself make, the receiver a partner with the persons carrying on the business.” It was held in Badley Vs. Consolidated Back, 1888, that “it is quite plain now ever since Cox Vs. Hickman, 1860 that what we have to get at is the real agreement between the parties. It is no longer right to infer either partnership or agency from the merefact that one person shares the profits of another,” In this field the intention of the parties is supreme. The existence of a partnership depends upon their intention as shown by their agreement or conduct or both put together. Again, S.6 gives two explanations which provide the list of persons who might be interested in the profits of a business but who do not by that reason afone become partners.
Who Are Not Partners ? On the basis of the test laid dowu U/S. 6 it can be said that the following persons are not partners —
1. Joint Owners Sharing Gross Returns—
The joint owners of property woo share the profits or gross returns arising out of the property do not become partners. Joint ownership is not a business. For Example; in Govind Nair Vs. Maga (1948), A and B jointly purchased a tea shop and incurred additional expenses for purchasing pottery and utensils for the job. Each of them contributed a half of the total expense. The shop was then leased out on rent which was shared equally by them. It as held by Madras High Court,.”Nothing more is done by the parties than utilising the common property and obtain a return for such use by leasing the property for rent.” Their investment made them only co-owners and not partners. They never carried on any business. On the other hand it may be noted that if co-owners start a business and share the income thereof, they may become partners.
For Example-, in Chettyar Firm Vs. Chettyar Firm, A.I.R. 1933, it appeared that A and S ware two joint owners of a land. They jointly raised a crop. Some money required for cultivation was borrowed by them jointly. They jointly controlled the working of the whole land, jointly engaged coolies and both took active steps in raising the crop; With reference to the crop thus produced they were held to be partners.
2. Lender of Money Receiving Profits—
A person who has lent money to a person or firm engaged in business and has agreed to take in addition to, or in place of his interest, a portion of the profits of the business, he does not by that reason become a partner in the business.
For Example; in Badley Vs. Consolidated Bank (1888), a money lender advanced money to a contractor to enable him to carry out a contract with a railway company. The contractor assigned to the lender all his machinery and plant, etc. to secure the repayment of the debt. The lender was to receive 10% interest and 10% profits; he had the power to enter upon work in case of the contractor’s insolvency and also to sell the property in default. The contractor was allowed £ 1,000 for his services.
3. Servant or Agent Receiving Prodis –
It may be noted that sometimes it happens that a servant or agent of a business is allowed in addition to or in place of his regular remuneration a portion of profits of the business, but that does not make him a partner in the business.
For Example; in Munshi Abdul Latif Vs. Gopeshwar Chattoraji, A.1JR. 1933, a person undertook a contract of loading and unloading railway wagons and appointed a servant to manage it. The servant was to receive 75% of the profits and was to bear all losses, if any. Even so it was held that the servant was the agent of the contractor and not his partner. But on the other hand where four sons contributed money to start a business and while the three of them were to receive all. profits and the fourth to receive a fixed monthly pay and 10% commission on profits, it was held that the latter was also a partner in the firm.
4. Widow or Child of Deceased Partner—
lt was held in I.T. Commissioner Vs. Keshar Mal Keshard, A.I.R. 1968 that on the death of a partner the surviving partners agree to give a share in the profits to the widow or the child of the deceased partner. Such a widow or child `does not of itself become a partner in the firm. Thus, an agreement to pay annuity out of profits to the widow of deceased partner was held to be not sufficient to make her a partner in the firm.
5. Seller of Goodwill –
It is to be noted further that a person who sells his business along wih the goodwill is sometimes given a share in the profits of the business he has sold, but such a person does not of itself become a partner in the business.
For Example; in Raw//son Vs. Clarke 1846 A sold to B his interest in the profession and practice of a surgeon and druggist. It was agreed that A would continue to attend his old profession and to the utmost of his power introduced B to his patients and to do every reasonable act for promoting the interest of the concern. B allowed A a share of the clear profits of the concern. It was held that the parties were not thereby constituted partners in the trade.