Test of Partnership

Introduction

Section 6 of the Indian Partnership Act, 1932 provides the test to determine whether a partnership exists. The law focuses on the real relationship between parties rather than just formal agreements. This helps courts identify true partnerships based on facts.

Meaning / Definition

Test of partnership refers to the method used to determine whether a group of persons is a partnership. According to Section 6, the real relation between parties must be judged based on all relevant facts taken together.

Modes or Types

Real Relationship Test

The existence of partnership depends on the actual relationship between parties:

• If there is an express agreement → terms of the contract are examined
• If no express agreement → conduct, accounts, and surrounding facts are considered

Mutual Agency Test (True Test)

The most important test is mutual agency:

• Each partner must be able to act on behalf of others
• Each partner must be bound by acts of others

Without mutual agency, there is no partnership.

Sharing of Profits (Not Conclusive)

• Sharing profits is only a prima facie evidence (initial proof)
• It is not a final or conclusive test
• Partnership may exist without profit sharing, and vice versa

Cases Where Partnership Does Not Exist

Co-ownership (Explanation I)

Joint owners sharing income are not partners if:

• There is no mutual agency

Persons Sharing Profits without Partnership (Explanation II)

• Money lender receiving share of profits
• Widow or child receiving share after death of partner
• Servant or agent receiving profit share as salary
• Seller of goodwill receiving share of profits

In all these cases, there is no partnership due to absence of mutual agency.

Who are Not Partners

• Members of Hindu Undivided Family (HUF) running family business
• Husband and wife in certain customary systems (like Burmese Buddhist law)

When Partnership is Presumed

Partnership is presumed when:

• There is agreement to share profits
• Business is carried on by all or any acting for all

Even if one partner controls business, partnership may still exist.

Important Case Law

Cox v. Hickman

Mutual agency is the true test of partnership, not profit sharing alone.

Govind Nair v. Maga

Co-owners sharing income without mutual agency are not partners.

Holme v. Hammond

Sharing profits does not make executors of a deceased partner into partners.

Mallow Mantle & Co. v. Court of Wards

Money lender receiving profits is not a partner.

Munshi Abdul Latif v. Gopeshwar

Servant receiving profit share is not a partner.

Rawlinson v. Clarke

Seller of goodwill receiving profits is not a partner.

K.D. Kamath & Co. v. Commissioner of Income Tax

Even if control is with one person, partnership can exist if mutual agency is present.

Distinction / Comparison

Profit Sharing vs Mutual Agency

• Profit sharing → only an indicator (not final proof)
• Mutual agency → essential and decisive test

Partnership vs Co-ownership

• Partnership requires mutual agency
• Co-ownership does not involve agency relationship

Practical Example

A and B jointly own a building and share rent:

• Not a partnership (no mutual agency)

A gives loan to a business and gets profit share:

• Not a partnership

A and B run a shop where both can bind each other:

• Partnership exists

Summary

• Section 6 focuses on real relationship between parties
• Mutual agency is the true and final test of partnership
• Profit sharing is only initial evidence, not conclusive
• Co-ownership and profit sharing alone do not create partnership
• Certain persons (lenders, servants, widow) are not partners despite profit share
• Partnership exists when business is carried on by all or any acting for all