Properties of Firm | Indian Partnership Act, 1932

Properties of firm are covered under Section 14 of the Indian Partnership Act, 1932. Various aspects like goodwill and the rights and interest held in properties are considered as properties of the firm. The essential is an express or implied agreement among the partners. Rest, the property can be acquired also.

I. Introduction

A firm is just a collective name used for the partners who have collaborated to carry on the business together.[1] Hence, when the business, that was the most important activity for the partnership to exist, is continuing it becomes very important to know what all the constituent parts are and components of the material the firm would own to carry on that business.

Basically it stands for the property which the firm would own and thus would become able to carry on the business. The provisions of the law have clearly laid down the components in the law itself. The present article would examine the same and illustrate the specific properties that are vested in the firm.

II. Meaning

Property of a firm can stand to mean the assets, joint-stock, common stock or joint estate which the partners are entitled collectively.[2] The assets can be of many types. Some illustrations of the same- benefits arising out of a contract, benefit of lease or renewal of lease, benefit of license or quota, renewal of lease, benefit of license or quota, lands and buildings etc.[3]

Statutory Exposition

Statutorily speaking, the properties of a firm would include-

1. All property
2. Rights and interests in that property[4]

The mode of acquisition of such property is also provided in the law that can be by-

1. Buying it into the stock of the firm
2. Purchase by the firm or otherwise, for the purpose or in the course of business
3. Goodwill of the business[5]

Goodwill is specifically provided for in the types of properties that can be a part of the ‘properties of the firm’. Unless the contrary intention appears, the asset of a firm has a tangible aspect only and would not include goodwill. Hence, though it is included in the list of “properties of the firm”, it would not automatically become the asset of the firm.[6]

The definition holds good only to the extent of absence of contract among the parties as per the provisions of section 14 of the Indian Partnership Act, 1932. Thus, if there is a contract that exists among the partners which include or excludes certain assets or properties from the list of the properties of the firm, the properties would be considered accordingly.[7]

There are certain deemed situations also where the property acquired would be considered as the property of the firm. For example, in the case of a property acquired by using money of the firm would be deemed to be known as the property of the firm.[8]

III. History

In the earlier exposition of the Contract law, where the provisions of the Partnership law were included, the aspect of goodwill was not present.[9] It is with reference to section 253 of the Indian Contract Act, 1872 with which the present section 14 of the Indian Partnership Act resembles.

But in the present act, there is a specific addition of goodwill.[10] The earlier law even defined what would constitute a partner’s share but the same is being omitted in the present law.[11]

IV. Acquisition of Property

As is mentioned above, property can be acquired through a variety of ways as provided in the section 14 of the Indian Partnership Act, 1932. Such methods are the components of the subsequent acquisition for which no written document is required.[12] When it is categorical from the intention of the parties that the properties to be used would be partnership properties, they are treated so.[13]

Ownership of the Partnership

The properties of the firm are vested in its interest. But who owns them? Is it the managing director? Or is it the nominated person by all the directors?

Law has provided the categorical and clear answer. It is the partners who collectively own the assets of the firm. So long as the partnership continues, each and every partner is considered the owner of the firm to the extent of the share of the respective partner in the firm.[14]

V. Nature of the Properties of the firm

Whenever the term “properties” is being referred to, it is being referred to generally. It means that the property is such that all the partners have a joint or common interest.[15] Such a property would be, therefore, used for the purposes of the firm. There is no unity or community of interest between partners, their interest in the property is several.[16]

Test for the properties of the firm

The nature of the business carried by the partnership firm is a material consideration for adjudging whether a particular property is partnership property. It happens in a case where a partner’s share is in the land and business is taken as undivided and whole in the subsequent dealings with the partner.[17]

In case the partnership agreement does not exist, it is the admission of the parties and other materials which are available on record that have to be considered so as to know whether a property is a partnership property or not.[18]

In the absence of an express agreement, courts have found various variables that can be paid attention to when it faced with a question in a dispute, whether a particular property is a property of the firm. These variables are-

• Source from where property came
• Purpose for which it was acquired
• Mode in which it has been dealt with[19]

VI. Usage for Business

Now, the usage for the purposes of partnership is not an essential feature for any property to become the property of the firm. It means that it is not necessary for the firm to use its own property or the property of its partners. It can very well use the property of others too.[20]

To become a property for the firm, an agreement, whether in express form or implied form, is required that the respective property would be treated as property of the firm. Property belonging to the partners or to one of them would not automatically become the property of the firm. An agreement is must.[21]

Merely because a property is used for the business of the partnership, it does not automatically become the property of the firm. A person, with some property of his own, when enters into a partnership without any agreement to the contrary, the property belonging to him or her would not become the property of the firm.[22]

Partner’s Property

The individual properties of a person at the time of incorporation of the partnership do not automatically become the property of the firm.[23] As mentioned earlier, an agreement is an essential requirement for any property to be called a partnership property.[24]

Any right a partner has over any property, other than the property of the partnership, would remain an individual asset.[25]Even if other members use the property of a single partner, it does not become the property of the firm.[26] The agreement would be proof of the intention of the partners of a firm.

But there can be situations in which a partner’s property can also become the partnership property. Hon’ble Madras High Court[27] has laid down certain general principles to guide as to when such a scenario can occur-

1. The property of the partner should be put into the stock of partnership. This does not require any formal document.
2. A Partner has to specifically intend that his property is to be used as the partnership property. It is then the Contract law and Partnership law applies and the individual properties become the property of the firm

Interest of Partners

The partners, since there is no community of interest, are considered tenants- in- common and not joint tenants.[28] It means they all are having right over the property as per their share in the partnership. It is the bottom line in the jurisprudence concerning partnership that the firm’s property belongs to all partners constituting the firm and there is no one particular owner.[29]

The property of the firm remains distinct from the properties belonging to the partners individually. It is because the former is a “joint estate” of the partners and the latter is the case of “separate estate” of the partners. If the composition of the firm changes by virtue of the change in the membership of the firm, through death or retirement, the property of the firm remains the same, but the properties of the partners would change accordingly.

Examples

In one case of manufacturing, when the business was being carried out in a partnership, value of the mill and the plant was being credited in the account of the firm, for the owner of the mill to use as capital. Both the mill and the subsequent additions made to the site and the plant were considered by the court as the properties of the firm.[30]

Similarly, in a suit of recovery of assets of a firm after they have converted into money, the court has held that where partners contributed to the capital of the firm for the undertaking an electricity business, it would be considered as the property of the firm.[31]

Though there was no express license assignment in the name of the partnership firm and it was happening in the name of an individual partner, it will not be considered an individual asset rather a common asset of the firm.[32]

Transfer of Property

A partner may contribute to the corpus of the partnership. Similarly, a firm can also transfer some properties to an individual partner. It has to be understood in what situation would it constitute a transfer and later become the property of the firm accordingly.

When a partner contributes intentionally his or her personal rights in the firm’s property, he or she loses the exclusive right existing upon the property.[33] It now becomes an abridged right since after becoming a firm’s property, it can be utilised by any partner and it is not limited to one partner alone.[34] The intention of the partners has to be conclusively understood before coming to such a conclusion.[35]

Hon’ble Supreme Court had mulled over the question of such a capital contribution to the firm’s property as a transfer or not. It is categorically held that the contribution to the corpus of the partnership by an individual partner amounts to a transfer of capital asset.[36]

In case of retirement of a partner, dissolution of the partnership firm and settlement of interest among the partners, it is a settled position that there is no act of conveyance or transfer of interest that has taken place.[37]

But the act of transferring property to one of the partners during the subsistence of the partnership would amount to a transfer. This proposition of law has been confirmed by the Hon’ble Supreme Court in the landmark case of BT Patil & Sons v. Commissioner of Gift Tax.[38] In this case, there was a transfer of machinery to each of the five partners wherein it was held to become the asset of each partner thereof.

Goodwill

So far as the goodwill exists and has exchangeable value[39], it is considered as an asset of the firm.[40] Question arises as to what all the goodwill holds. It is considered very easy to describe but very difficult to define.[41] Courts have held that it constitutes a a variety of items like-

“Location of the firm, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other surrounding factors.”[42]

It is not only the probability of having old customers but a much wider term, that is the whole advantage that can be acquired in connection with reputation of the firm.[43] It has varying amounts of importance depending upon the nature of the business.

For example in the case of solicitors, good will holds little value.[44] But in businesses which depend upon personal or confidential relations, the importance of goodwill arises.[45] If the business itself is a losing business, goodwill is considered to have no real value.[46]

Conclusion

Properties of the firm are the most important element through which the business would be carried out. To prevent disputes and future litigation, there should be a clear agreement between the partners as to what constitutes the property of the firm and whatnot.

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[1] Indian Partnership Act, 1932 § 4, No. 9, Acts of Imperial Legislature, 1932 (India).

[2] Devashish Bharuka, Pollock & Mulla: The Indian Partnership Act 145 (Lexis Nexis 2014).

[3] Id.

[4] Id. at § 14.

[5] Id.

[6] Shri Chemical Corporation v. Miraben Prafulbhai Contractor, AIR 2001 Guj 171.

[7] A. Ahammed Koya v. United Bank of India, 2013 SCC OnLine Ker 15898.

[8] Controller of Estate Duty v. Mrudula Nareshchandra, 1986 (Supp) SCC 357.

[9] Indian Contract Act, 1872, § 253 (1), Acts of Imperial Legislature, 1872 (India).

[10] Indian Partnership Act, 1932 § 14, No. 9, Acts of Imperial Legislature, 1932 (India).

[11] Id.

[12] CR Ramachandra Gowder v. CP Nanjappa, AIR 1973 Mad 179.

[13] Addanki Narayanappa v. Bhaskara Krishnappa, AIR 1966 SC 1300.

[14] N Khadervali Saheb v. N Gudu Sahib, (2003) 3 SCC 229.

[15] Malabar Fisheries v. CIT, (1979) 4 SCC 766.

[16] Sardar Rajinder Singh v. Sardar Vajinder Singh, 2014 SCC OnLine Bom 2667.

[17] Lachhman Das v. Gulab Devi, (1936) 162 IC 143

[18] Shreedhar Govind Kamerkar v. Yesahwant Govind Kamerkar, (2006) 13 SCC 481.

[19] Nathaniel Lindley, A Treatise on the Law of Partnership 496 (Sweet & Maxwell 1924).

[20] Sujan Suresh Sawant v. Kamlakant Shantaram Desa, AIR 2004 Bom 446.

[21] Vraj Kuwar Bai v. Kunjbiharilal Krishnachandra, AIR 1971 MP 109.

[22] Arjun Kanoji Tankar v. Sataram Kanoji Tankar, 102.

[23] Viswanathan v. Subramanian, 2018 SCC OnLine Ker 3440.

[24] Jai Narayan Misra v. Hashmathunnisa Begum, AIR 2002 AP 389.

[25] Chandan Pharmaceuticals Corporation v. RK Jalan, 2018 SCC OnLine Mad 493.

[26] Arjun Kanoji Tankar v. Santaram Kanoji Tankar, (1969) 3 SCC 555.

[27] Khaja Mohideen v. M Mohammed Saliha, 2013 SCC OnLine Mad 1897.

[28] Sardar Rajinder Singh v. Sardar Vajinder Singh, 2014 SCC OnLine Bom 2667.

[29] CIT v. Jadavji Narsinhdas & Co, AIR 1963 SC 1997.

[30] Robinson v. Ashton, (1875) LR 20 Eq 25.

[31] Ramagya Prasad Gupta v. Murli Prasad, (1974) 2 SCC 256.

[32] Id.

[33] Sunil Siddarthabhai v. CIT, (1985) 4 SCC 519.

[34] Special Officer, Tamil Nadu Handloom Wavers’ Cooperative Society v MVM Chellamuthu Pillai, 2010 SCC OnLine Mad 4548.

[35] Shah Chatrabhuj Narshi v. Nensibhai Shavanjibhai Gohil, 21 Guj LR 377.

[36] CIT, West Bengal v. Juggilal, AIR 1967 SC 401.

[37] D Balan v. Inspector General of Registration, 2016 SCC OnLine Mad 10436.

[38] BT Patil & Sons v. Commissioner of Gift Tax, (2003) 9 SCC 172.

[39] Ramakrishna Ayyar v. Muthusami Ayyar, (1929) Mad 672.

[40] Ramnik Vallabhdas Madhvani v. Taraben Pravinlal Madhvani, (2004) 1 SCC 497.

[41] Inland Revenue Commr v. Muller & Co, [1901] AC 223.

[42] SC Combatta and Co v. Commissioner of Excess Profits Tax, AIR 1961 SC 1010.

[43] Trego v. Hunt, [1896] AC 24.

[44] Austen v. Boys, (1858) 2 De G&J 626.

[45] Steuart v. Gladstone, (1879) 10 Ch D 626.

[46] C Abdul Shukoor Saheb v. Arji Papa Rao, AIR 1963 SC 1150.

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