Legal IQ

Quick Referencer for Judicial Service

Law of Partnership

Q. ‘A’ and ‘B’ purchase a tea shop and incur additional expense for purchasing utensils etc. each contributing part of the total expense, and the shop is leased out on a daily rent which is divided between them both. Does this arrangement constitute a partnership between ‘A’ and ‘B’? Give reasons.

Civil services (I.A.S.) Exam. 1966
West Bengal Judicial Service Exam. 2003
West Bengal Judicial Service Exam. 1998 (similar problem)
U.P. Civil Services Exam. 1992 (similar problem)
State Bank Law Officer Exam. 2006 (Based on memory).

Ans: No, ‘A’ and ‘B’ do not constitute a partnership—Section 6 (Mode of determining existence of partnership) and Govind Nair v. Maga, (1948) 1 Mad 343.

Reasons: Section 6 deals with ‘Mode of determining the existence of partnership’. Explanation 1 of Section 6 makes it clear that the sharing of profits or gross returns arising from property by persons holding a joint or common interest in that property does not of itself made such persons partners.

Section 6 of Indian Partnership Act based on famous case of Cox v. Hickman in which held that sharing of profit is a not a conclusive evidence of existence of partnership but ‘Mutual agency’ is the real test of partnership.

Facts of this problem have been taken from the famous case of Govind Nair v. Maga referred above. In this case Madras High Court held that joint owners of a property who share the profits or gross returns arising out of the property are not partners because joint ownership is not a business. In this case court further held that here nothing more has been done by the parties than utilising the common property and obtain a return for such use by making lease of the property for rent. Investment of parties make them only co-owners or joint owners and not partners because they never carried on any business.
On the basis of above discussions it can be said that in the given problem arrangement between ‘A’ and ‘B’ does not constitute a partnership.

Note: (1) In West Bengal Judicial Service Exam. 1998, a similar problem was given in the following words—“’X’ and ‘Y’ purchase an icecream factory and incur additional exprenses for addition and alternation of the factory, each contributing half of the total expenses and the shop is leased out on a monthly rent which is divided between them. Does this agreement constitute a partnership between ‘X’ and ‘Y’?”

(2) In U.P. Civil Services (Main Exam. 1992) a similar problem was asked in following words—“’A’ and ‘B’ jointly purchased a restaurant. They jointly incurred expenses for furnishing and utensils. Later, the restaurant was leased out to ‘C’ and the rent was equally shared between ‘A’ and ‘E’. Discuss the nature of the venture entered into by ‘A’ and ‘B’”.

Source: Kishor Prasad, Problems & solutions on Civil Law

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