BRF 2010 (Solved)

Partnership arises from contract not from status 
Partnership is the form of business organization, where two or more persons can join together or jointly carrying on some business. It is an improvement over the 'sole-trade business', where one single individual with his own resources, skill and effort carries on his own business. In a partnership, a number of persons could pool their resources and efforts and could start a much larger business. In case of loss also, the burden gets divided amongst various partners in a partnership.
According to Sec.4 of the Indian Partnership act, 1932 “Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” Generally a partnership consists of three essential elements:
a)      There must be agreement between partners.
b)      The agreement must be to share the profits of the business.
c)       The business must be carried on by all or any of them acting for all.
In order to determine the existence of partnership between a group of persons, agreement between persons must be taken into consideration. If the agreement is to share the profits of a business, and the business is carried on by all or any of them acting for all, there is partnership otherwise not. Partnership is the result of agreement. Agreement here means a contract. It arises from an agreement between two or more people. It cannot arise from status. The presence of agreement is a must. It indicates the voluntary contractual relationship of partnership.
According to Sec 5. Of the Partnership act,” The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying business as such, are not partners in such business.”
But if there is no agreement or the agreement is such as it does not specifically speak of partnership, the real relation between the parties should be taken as base in determining the existence of partnership (sec.6).
The real relation between the parties is to be determined from all the relevant facts, i.e., the written or verbal agreement, surrounding circumstances at the time when the contract was entered into, conduct of the parties and other relevant facts, e.g., books of accounts, correspondence, evidence of employees, etc. These facts are to be considered collectively not individually. In effect it is the substance of the facts, not the form that has to be looked into in determining the real relation between the parties. There may be cases where the parties expressly state in a document that they are not partners but they may turn out to be partners in the eyes of law, when all the facts are taken into account. Again, a statement by the parties in a document that they are partners may not necessarily constitute them partners in law.