12 important features of partnership firms

The important features of partnership firms are :

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12 Important features of partnership firms

1. Essential Elements :

There must be three essential elements to constitute a partnership—(i) an agreement entered into by all the persons concerned; (ii) the agree­ment must provide for sharing of profits and losses of a business; and (iii) the business must be carried on by all or by some of the partners for the benefit of all.

2. Two Adults :

To constitute a legal partnership, there must be at least two adults. In case a minor has been admitted to the partnership as a full-fledged partner, thus making him liable for losses also, the firm cannot be registered under this Act as it shall not be considered a valid partnership.

3. Karta, HUF and Firm :

The Karta of an HUF cannot enter into a partnership with the family in his individual capacity and a family as such can also not be a partner in a partnership. The Karta of an HUF can, however, become a partner for and on be­half of the family with a stranger.

• There can be a valid partnership between the Karta of an HUF and one or more of its coparceners in their individual capacity, while remaining joint, if the copar­ceners contributes to the partnership what is admittedly his separate property held in his individual capacity. It will also be valid where the capital investment in the partnership is only from the funds of the HUF. Such a partnership can be entered into not only for commencing a new business but also in respect of an existing joint family business.

• The Karta is also entitled to admit a working partner from the family without get­ting any capital.

4. Widow of a partner :

The widow of a deceased partner is entitled to share the profits of the firm even though she may have not yet become a partner.

5. Assessment of partner :

Partners arc assessable on their firm’s profit irrespective of whether the profits are distributed and paid over to the partners or not.

6. Accrual of income :

Income of the partner of a firm does not accrue from day to day but accrues only when the accounts of the firm are made up.

7. Deduction u/s 80L :

A partner of a firm is not entitled to deduction u/s 80 L in respect of the interest earned by the firm and allocated to the partners on the bank deposits held in the firm’s name.

8. Separate firms having same partners :

In the absence of prohibition in any law for the creation or existence of two partnership firms with the same set of partners, the assessment of such firms cannot be clubbed and one assessment cannot be made. merely because the partners arc the same in both the firms.

9. Contribution of capital :

It is not necessary that before a partnership comes into existence each partner must contribute capital to the firm. It is sufficient that the con­sideration for the partnership contract is skill and labour, which a working partner puts.

10. Business intentions :

A firm can be registered only if there is an existing partnership. If a firm is not carrying on business or there was no intention on the part of the partners that any business should be carried on by the firm, it cannot be a partnership because partnership is the relation between persons who have agreed to share the profits of a business. Such a firm would not be entitled to registration.

11. Minor and the partnership :

A minor cannot be fastened with any liabilities in respect of a partnership but he may be admitted to the benefits of the partnership. For such admission, the consent of all partners is a necessary pre-condition. The agree­ment is not between the minor and the other partners but the agreement should be amongst the partners.

• There is no provision in section 30 of the Partnership Act, 1932, requiring an agreement either between the minor or between the natural guardian acting for and on behalf of a minor and other partners. When a minor is not required by law to be admitted as a partner of a firm, the question of an agreement between him and the other partners dos not arise. A minor is incapable, under the law, of entering into a contract.
• Whosoever receives benefits on behalf of a minor is bound to render an account to the minor. Failure to do so will give a valid cause of action to the minor within three years of his attaining majority to bring an action against the person who failed to render account. Merely because someone acting as a guardian of the minor hap­pens to be a signatory to the application for registration u/s 185 of the Income-tax Act, no inference flows or is deducible that the interests of the minor would be safe. As the minor is incapable of entering into a contract, the law confers only benefits on him and absolves him of liabilities.
• The signature of either the minor or a person acting as guardian of minor is a neutral circumstance. It neither fastens any liability nor creates any rights which are not otherwise conferred by law.
• There is no requirement in law obligating the guardian of a minor to sign the partnership deed on behalf of the minor. Failure to do so would not vitiate registra­tion of the firm. Srinivas Stainless Steel v CIT [1987] 167 ITR 1 (AP).

12. Capital Gains and Partnership firm :

Capital gain shall be considered as arising to a partner of a firm on introduction of an asset as capital contribution in the firm. For this purpose the amount recorded in the books of the firm is to be taken as the “consideration”. This nullifies the principles laid down by the Supreme Court in Kartikeya Sarabhal v CIT 156 509 which opined that such capital contribution was not liable to capital gains tax in the hands of a partner.

• For the purpose of claiming depreciation “actual cost” is defined in section 43(1), Since there is no actual cost in such a case principles laid down by the Supreme Court in Kalooram Govindram v CIT 57 ITR 335 may be considered. Accordingly fair market value of the asset on the date it became the asset of the firm would be taken as the actual cost for allowing depreciation.
• Under the newly inserted section 45(4) on ‘distribution’ of capital assets on the dis­solution of a firm capital gain tax shall be levied on the firm. For the purpose fair market value of the asset on the elate of dissolution shall be deemed to be the con­sideration.