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Sachin Sehgal (Working under guidence of Advocate)     07 October 2009

partnership deed

please guide me what is partnershio deed and how two brothers who are in business can take the advantage.


 6 Replies

AEJAZ AHMED (Legal Consultant/Lawyer)     07 October 2009

Dear Sachin

Deed of partnership
A deed of partnership is a legally binding agreement between the partners who are in business together. It describes how the partnership will be run and the rights and duties of the partners themselves.
It's not necessary to have a deed of partnership in order to set up a partnership, but it's a good idea, as it will help to avoid misunderstandings and disputes between partners in the future
In writing is called Partnership Deed. Partnership deed is a document which is signed by all the partners and which contains all the matters determining and governing the mutual rights, duties and liabilities of the partners in the conduct and management of the affairs of the partnership. It may also be referred to as articles of partnership” containing the name, nature of business, capital, duration of the firm, etc.

It has been observed that partners start bickering and quarrelling after the firm has worked for some time. It is, therefore, advisable that the articles of partnership should be drawn up through the lawyer. A partnership deed on stamp paper is considered to be valid in the court against any dispute. The importance of partnership deed can be judged from the following facts.

1. It forms the basis of formation of the partnership.
2. It defines the mutual rights, duties and liabilities of the partners.
3. It helps in minimizing the areas of disputes among the partners.
4. It serves as guidepost for the conduct of firm business.

Clauses or Contents of Partnership Deed:
The partnership deed usually contains the following clauses
1.                  Name and location of business.
2.                  The nature of the business.
3.                  The amount of capital to be contributed by each partner.
4.                  Provisions or reinvestment in business.
5.                  The duties, powers and obligations of all the partners.
6.                  Length or life of business.
7.                  The method of distribution of profit and sharing of the losses.
8.                  Method of admitting a new partner.
9.                  Procedure for withdrawal of a partner.
10.             The method of valuation of goodwill on and or retirement or death of a partner.
11.             Method of revaluation of assets or liabilities on admission, retirement or death of a partner.
12.             Procedure to be followed for expulsion of a partner.
13.             Arrangements to be followed in case a partner becomes insolvent.
14.             Salary, if any, payable to the partners for managing the firm.
15.             The method of preparing accounts and arrangement for audit.
16.             Procedure for the dissolution of the firm and settlement of accounts.
17.             Arbitration in case of disputes among partners.
18.             Operation of bank account.

The above items are not the final list of clauses. Any clause mutually agreed to by the partners can be Included in the agreement. If the deed is silent on any point, then the provisions of Partnership Act of 1932, will apply.
The partners of a firm are broadly divided into three main categories.
(1) General Partners (2) Special Partners (3) Other Partners
Basically all the partners of a firm are general partners. General partners we those whose liability is unlimited in the f General partners are of two types (a) Active Partners (b) Sleeping Partners.
(a) Active Partner
A partner who takes active part in the day to day management of the business is cared an active partner. An active partner (also called working partner) may work in different capacities such as manager, organizer, adviser, controller of all the affairs of the firm. The active partner is rewarded as per agreement between the partners.
(b) Sleeping Partner
A sleeping partner is one who contributes capital, shares profits and losses of the firm but takes no part in the day to day management of the affairs of the firm. A person, who has money to invest but cannot spare time for the business, may become sleeping partner. A sleeping partner is liable for the liabilities of the business like other partners.
Special partners are partners whose liability is limited to the extent of their capital contributed in the firm. They are only found in limited partnership. The special partners cannot take part in the management of the business of the firm. In Pakistan limited partnership is not recognized.
The other types of partners sometimes found in a firm are as follows.
(a) Secret Partner
A partner who takes active part in the affairs of a business but is not known to the public as a partner is called Secret partner”. He, like other partners, is liable to the creditors of the firm to an unlimited extent He shares profits according to the agreement signed.
(b) Nominal Partner
nominal partner lends his name for the goodwill and credit worthiness to the firm. He neither contributes capital nor takes active part in the management of business. Such partners are called nominal partners. Nominal partners are liable for the debts of the firm.
(c) Minor Partner
Partnership is a contract and a contract with minor is void. Under Section 30 of Partnership Act, a minor is not able to enter into a contract and so he cannot become a partner of a firm. He can, however be admitted to the benefits of a firm with the consent of other members and that too n a business which is already operating. His liability remains limited to the extent of his share in the capital. On attaining majority, he has to choose whether he has to continue as a partner or not.
(d) Partner at Will
type of partner will continue so long the partners have mutual faith, trust and confidence among them.
(e) Partners In Profit Only
If a partner is entitled to receive certain share of profit and is not held liable for the losses, he is known as partner in profit only. He is not allowed to take part in the management of the business.
(f) Partner by Estoppels
There is another minor type of partner which is called partner by estoppels. If person styles the character of a partner in a business before a third party (outsiders) by words or in writing or by his act, he is called a partner by estoppels. The third party mistaking him as a partner in the business advances loans on his creditability, that person would be personally responsible for the liability attaching to the position of a partner The partner by estoppels would, however, not be entitled to any right like other partners in the business.
This partnership deed must be made on stamp paper as per the laws of the place of signing. The whole process of drafting the partnership deed can be done through lawyer.
After preparation of the deed, it must be signed by all the partners. It must also have signatures of independent witnesses.
The deed is then submitted to the Concerned  “ Registrar Of Firms” of Dist/State along with the Registration Form and other supporting documents. On approval of these documents by the “Registrar Of Firms” the “Partnership Firm” is established as a legal entity and can start business under the chosen name.
With Concerned to other part of your query, if both brothers are already in business, they can enter into Partnership Deed on mutual Terms & Condition and can execute the Deed as per above and change their business as Partnership Firm.

Sachin Sehgal (Working under guidence of Advocate)     08 October 2009

what is the taxation part in partnership deed.


AEJAZ AHMED (Legal Consultant/Lawyer)     08 October 2009

Taxation of Partnerships

Partnership is the most common form of business organisation in India. Partnership firms are governed by the provisions of the Indian Partnership Act,1932. The Act lays down the rules relating to formation of partnership, the rights and duties of partners and dissolution of partnership. It defines partnership as a "relationship between persons who have agreed to share the profits of business carried on by all or any of them acting for all". This definition gives three minimum requirements to constitute a partnership :-
There must be an agreement entered into orally or in writing by the persons who desire to form a partnership.
The object of the agreement must be to share the profits of business intended to be carried on by the partnership.
The business must be carried on by all the partners or by any of them acting for all of them.
Under the Act, persons who have entered into partnership with one another are individually called as 'partners' and collectively as 'firm' and the name under which they run their business is called the 'firm name'.
Provisions for taxation of Partnership Firms
Partnership firm is subjected to taxation under the Income Tax Act,1961. It is the umbrella Act for all the matters relating to income tax and empowers the Central Board of Direct Taxes (CBDT) to formulate rules (The Income Tax Rules,1962) for implementing the provisions of the Act. The CBDT is a part of Department of Revenue in the Ministry of Finance. It has been charged with all the matters relating to various direct taxes in India and is responsible for administration of direct tax laws through the Income Tax Department. The Income Tax Act is subjected to annual amendments by the Finance Act, which mentions the 'rates' of income tax and other taxes for the corresponding year.
Under the Income Tax Act, the Partnership firm is taxed as a separate entity, distinct from the partners. In the Act, there is no distinction between assessment of a registered and unregistered firms. However, the partnership must be evidenced by a partnership deed. The partnership deed is a blue print of the rights and liabilities of partners as to their capital, profit sharing ratio, drawings, interest on capital, commission, salary, etc, terms and conditions as to working, functioning and dissolution of the partnership business.
Under the Act, a partnership firm may be assessed either as a partnership firm or as an association of persons(AOP). If the firm satisfies the following conditions, it will be assessed as a partnership firm, otherwise it will be assessed as an AOP:-
  • The firm is evidenced by an instrument i.e. there is a written partnership deed.
  • The individual shares of the partners are very clearly specified in the deed.
  • A certified copy of partnership deed must accompany the return of income of the firm of the previous year in which the partnership was formed.
  • If during a previous year, a change takes place in the constitution of the firm or in the profit sharing ratio of the partners, a certified copy of the revised partnership deed shall be submitted along with the return of income of the previous years in question.
  • There should not be any failure on the part of the firm while attending to notices given by the Income Tax Officer for completion of the assessment of the firm.
It is more beneficial to be assessed as a partnership firm than as an AOP, since a partnership firm can claim the following additional deductions which the AOP cannot claim :-
  • Interest paid to partners, provided such interest is authorised by the partnership deed.
  • Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual. The remuneration paid to such a partner must be authorised by the partnership deed and the amount of remuneration must not exceed the given limits.
Assessment of Partners of a Firm
  • The share of the partner (including a minor admitted for the benefit of the firm), in the inome of the firm is not included in computing his total income i.e. his share in the total income of the firm shall be exempt from tax [section 10(2A) of the Act].
  • If conditions of section 184 and section 40(b) of the Act are satisfied, then any interest, salary, bonus, commission or remuneration paid/payable by the firm to the partners is taxable in the hands of partners (to the extent these are allowed as deduction in the hands of the firm).
  • The points to be noted are :-
    • Remuneration from a firm is not taxable under the head "Salaries". Hence, standard deductions cannot be claimed in respect of such remuneration.
    • Any expenditure incurred in order to earn such income can be claimed as a deduction from such income. For example, if a partner borrows money to make his capital contribution to the firm and he is paid interest on his capital contribution, the amount of such interest will be taxed under the head "Profits and gains of business or profession", but the interest paid by him on the borrowed money will have to allowed as a deduction.
If the whole or a part of salary/interest is not allowed as deduction in the hands of the firm , than the whole or that part of salary/ interest is not taxable in the hands of the partners. In other words, in the hands of partners the entire remuneration/ interest (excluding the amount disallowed under. section 40(b) and/or section184 of the Act) is chargeable to tax
Compute Taxable Income of a Firm
Steps for Computation of taxable income of a firm:-
  • Find out the firms income under the different heads of income, ignoring the prescribed exemptions. The heads of income are:-
    • Income from House Property
    • Profits and Gains of Business or Profession
    • Capital Gains
    • Income from other sources including interest on securities,winnings from lotteries,races,puzzles,etc. ('Salary' income head is not included)
  • The payment of remuneration and interest to partners is deductible if conditions of section 184 and section 40(b) of the Income Tax Act are satisfied. Any salary, bonus, commission or remuneration which is due to or received by partners is allowed as a deduction from income of the partnership firm and the same is taxable in the hands of partners.
  • Make adjustments on account of brought forward losses/ disallowances of interests, salary, etc paid by firm to its partners. The total income so obtained is the "gross total income".

Ritu Kalia (Lawyer)     15 March 2011

Pls guide me in respect of partnership changes. In case of addition of a partner and changes in clauses as to capital sharing ratio and any other changes do i hav to make a fresh deed. Earlier deed is yet not registered it is being submitted for registration, pending for compliances.

Madhusudhan REddy (n/a)     12 August 2011

in a partership firm one or more partners are retired from the firm the partnership deed will be amended/chages will have to make for firm or it will be same for all remaining partners.

please suggest me.



Pls. enlighten me whether the Capital Clause in Parthership Deed should specify an amount as capital contributed by partners or else is it sufficient if it ismentioned that the capital  will be the amount standing to the credit of partners on a specified date

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