We know that when one or more person want to start a business , eighter he starts his business separately at his own individual capacity or he he carry on his business with other person. When a person entered into a contact with other person to carry on business and also agrees to share profit then this concept is known as partnership. For example A and B entered into an agreement to run a hotel business and after that they share profit what they earn from that business. Therefore A and B entered into partenership, and association of A & B is known as Partnership Firm.

Earlier contract of partnership is dealt under Indian Contract Act 1872, but now in 1932 the Indian Partnership Act 1932 repeal the provision of ICA 1872.

Why The Need For Determining Partnership?
We enter into partnership agreements on a regular basis, and there may be circumstances that appear to be a partnership agreement but are not. Some people invest and divide profits yet they are not in a partnership.

Mode of determination of partnership is the concept which deals with that whether the partnership contract is exist or not that is existence of contract of partnership is known as determination of partnership.

Where does the partnership exist and where does it not? Section 6 of the Indian Partnership Act of 1932 provides an answer to the following question.

Mode Of Determining The Existence Of Partnership
In determining the partnership's existence, the relationship between the parties must be scrutinized with all the related evidence judged together which ultimately decides whether a group of individuals is or not a partnership

Explanation 1 to the Section clarifies that two or more parties who jointly own a property or have a shared interest in a specific property do not become partners simply by sharing the income or gross returns produced by such property.

Similarly, Explanation 2 of the Section includes a list of individuals who receive a share of a company's income or fees based on the profits received by a business but are not partners in the business.

An individual who loans money to a business partner or company might be given a share of the income instead of or in addition to the money lent. He would not, though, become a shareholder because of such a benefit split.

In addition to or in lieu of his normal remuneration, a servant or employee of a company might be given a part of the business's income. But it does not make him a partner in the association.

Under this head we will learn the mode and test of partnership. But first we have to know what is contract of partnership under the provision of Indian Partnership Act.

Scetion 4 of Indian Partnership Act is defined partnership.

Section 4. Definition of "partnership", "partner", "firm" and "firm name".

"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

Persons who have entered into partnership with one another are called individually "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm name".

Entire partnership is based on the concept of Delectus personae which means to select the parner of own choice for carrying on business for a position involving trust and confidence. This conccept (Delectus Personae )is given by Lawrenes Jenkins.

Essential Elements Of Partnership U/S. 4

1. There must be a relationship between persons that is made from a contract.
2. There must be two or more partners.
3. There must be an agreement to share the profit.
4. The partners must carry on a business.
5. The business must be carried on by all or any of them acting for all.

1. Relationship between persons:
   • The first test of partnership is the relationship between partners. As per Section 5 of this Act, the contract of partnership is made by contract, not by status. For example, a family business carried on by members of a joint Hindu family is covered under status, meaning members of a joint Hindu family are not partners at all.
   • Case: Pratibha Rani v. Suraj Kumar 1985 (SC):
     • In this case, the wife gave her stridhan to her husband to start a business. The husband's business was making a profit. The question arose whether the wife could be considered a partner.
     • The Court held that the wife is not considered a partner and not liable for any loss because, as per S.5, partnership is created by contract, not by status.
   • Case: Nanchand Ganga Ram v. M.M. Sadalge 19197 (SC):
     • The question arose whether members of two HUFs, where the kartas of both families are partners, are considered partners.
     • The Supreme Court held that if a karta or any member of an HUF joins a partnership, he does so in an individual capacity. His rights and obligations with respect to the other partners are determined by the Partnership Act, not by Hindu law. The karta alone, in the eyes of the law, is the partner, not the family members.
   • Case: Abdul Badshah Saheb v. Century Wood Industry 1954:
     • Two brothers living together inherited property upon their father's death. Instead of dividing it, they sold a garden for Rs.5000 and invested it in a timber business without a formal agreement but intended to share the profit. When the business failed and a liability arose, they filed a suit for recovery of money against a third party. The defendant contended that they were not partners, so they could not file a suit.
     • The Court held that if two or more people pool money to purchase and sell property for profit for their common benefit, they are considered partners. There is no need for a written agreement.
2. Person:
   • The question is whether a partnership firm has a separate legal entity and whether two or more partnership firms can enter into a partnership.
   • According to para 2 of S.4, persons who have entered into partnership with one another are called individually "partners" and collectively "a firm," and the name under which their business is carried on is called the "firm name."
   • Cases: Dhuli Chand Laxmi Narain v. C.I.T 1956 (SC), Malabar Fisheries Co. v. C.I.T 1980: The Supreme Court observed that a firm is not a legal entity separate from its partners, so they cannot enter into a partnership.
3. Agreed to Share Profit:
   • The definition of partnership under S.4 does not mention the sharing of losses. If the business does not flourish and losses occur, the partnership still exists. Sharing profits implies sharing losses.
   • Net Profit = Gross Profit - Advances and Costs
4. Carried on Business:
   • According to S.4, the term "business carried on" implies that the business must exist to determine partnership.
   • Case: Sodan Singh v. New Delhi Municipal Committee 1989 (SC): The Court distinguished between business, trade, occupation, and profession.
5. Concept of Mutual Agency: (acting by all or any of them acting for all):
   • The concept of mutual agency is the real test to determine the existence of partnership. It means that the business must be carried on either by all or any of them but act of any of them is considered act of all and if any liability is caused all the partner are held liable irrespective of status whether the are acting partner or dormant partner or sleeping partner.
   • Explanation 2 of S.6: The real relationship between partners is mutual agency.

Explanation II : The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment:

1. by a lender of money to persons engaged or about to engage in any business
2. by a servant or agent as remuneration
3. by the widow or child of a deceased partner, as annuity, or
4. by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business.

Holmes V. Hammons, 1872:
In this case A B C D are four partners. After some time a died and the representative of A, is. W (widow of A). Zis the creditor of the firm and want to sue. The question whether w is liable to Z , along with B C D. The court held that W is not liable to Z because she is not the partner of firm.

Cox V. Hickman 1860:
Facts- Benjamin Smith and Josiah Timmis Smith carried on business as iron specialists and corn vendors under the name of B Smith & Son. They were obligated to pay a lot of money to the creditors as they had taken loan earlier. So, a meeting took place, amongst whom were Cox and Wheatcroft. An arrangement deed was executed by more than six-sevenths in number and value of the creditors. The trusts were identified and the rent was fixed at 21 years. They were to carry on business under the name of "The Stanton Iron Company". The deed likewise contained a condition which kept them from suing the Smiths for existing obligations. Cox never went about as trustee, and Wheatcroft surrendered following a month and a half after which no trustee was appointed.

Issue: Now the issue was whether or not the defendants (creditors) including Cox and Wheatcroft are liable to the Hickman?

Judgement: It was held by the House of Lords that there exists no partnership and hence Cox was not liable. Lord Cranworth stated that- "Participation in profits is not the decisive test of a partnership". The court also said that the deed was just to pay the creditors out of the existing profits and the profits that the business would earn in future. Thus, this relationship is not enough to constitute a principle- agency relationship. Every partner is agent of other partners and his rights duty power and obligation to other partner.

Every partner is principle of other partner.

M P Devis v Commissioner of agriculture income tax 1959 & Newstead v Frost 1980 ,

It was held at the agreement must be construed as a whole and the mere fact that the parties describe themselves as partner is not conclusive.

In the case of Grace v Smith 1775, CJ Gray Held that sharing a profit is a soul test of determining whether there exist partnership or not. But however, Cox v Hickman, the emphasis was on real intention or relation of parties.

Therefore , the court held at the real test is mutual agency test.

In the case of KD Kamath v/s C I T 1971(Sc),

Issue: the Supreme Court of India addressed the question of whether mutual agency existed in the context of a business relationship to determine if it qualified as a partnership. The ruling highlighted the centrality of mutual agency in defining a partnership.

It was held that there are two essentials condition for a partnership:

1. There should be an agreement to share the profit of business.
2. The business must be carried on by all or any of them acting for all.

Conclusion
In my opinion, a partnership is very important and the role of Section 6 i.e. that is determining the existence of a partnership is an integral part of it. We enter into partnership agreements frequently and there may be cases arising which may appear to be a partnership agreement but in reality, it isn't. With the help of the various case laws and the situations that arose during the time, it is therefore concluded that mutual agency is the decisive part of determining the existence of partnerships.

Books referred to:

• Avtar Singh, Introduction to the Law of Partnership: A Study of the Partnership Act, 1932 (2000)
• Frederick Pollock, Dinshah Fardunji Mulla & R. K. Abichandani, Pollock & Mulla on the Indian Partnership Act (1987)

Journals referred to:

• Partnership. What Constitutes the Relation, (1913)
• J. H. D., The Passing of the Partnership by Operation of Law, 22 Michigan Law Review 588 (1924)

Written By: Abhinath Gupta, Student Of Faculty Of Law, Banaras Hindu University.