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TMI Blog1966 (7) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... baram Brothers, they borrowed three sums of money amounting in the aggregate to Rs. 50,000 from a certain Achaiah Chetty, and on April 28, 1960, they executed in his favour a promisory note for that amount. On the same day, an instrument of partnership was executed between these five brothers and Achaiah Chetty and his son, Parthasarathy. That partnership deed provided, among other things, that the capital of the firm amounting to Rs. 50,000 should be contributed by Achaiah Chetty and his son and that the profits and losses of the firm should be distributed between the parties in a particular way. It was further provided that if any monies had to be borrowed for the partnership, that should be borrowed jointly, although the bank account had to be operated upon by Achaiah Chetty and his son. But the more important provision in the partnership deed was that, immediately the firm earned a net profit of Rs. 1,00,000, the five brothers should retire from the partnership. On the same day, an agreement was executed in relation to the sum of Rs. 50,000 borrowed by Chidambaram Brothers for the purpose of their hotel business. Among other matters, that collateral agreement provided tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership which was executed on April 28, 1960, since there were many features of the arrangements which were reached between them on the one hand and Achaiah Chetty and his son on the other which precluded the view that there was any such partnership. The Tribunal thought that since Chidambaram Brothers made no contribution of capital and since they did not make themselves liable for losses and did not receive from the new partnership the real value of the goodwill pertaining to the old partnership, it was not possible to think that there was any teal or genuine partnership. Mr. Viswanatha Iyer contended, in our opinion rightly, that the Tribunal misdirected itself in thinking that the stipulation that only two partners shall share the losses or the covenant that the capital shall be produced by only two of the seven partners denuded the arrangement reached between the parties of the status of a partnership. It is well settled that there is in law no prohibition to a stipulation between the partners against community of loss; nor is it necessary for every partner to produce capital, since a person who becomes a partner may contribute his capital or his skill or both, and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haiah Chetty. It is true that the instrument of partnership does contain a provision that the five brothers should retire from the partnership when the partnership earned a net profit of Rs. 1,00,000, although the actual date on which such retirement had to happen was postponed till the last day of the month in which that net profit had been earned. It is obvious that the date of the retirement of these persons from the partnership was so fixed by reason of the fact that out of Rs. 1,00,000 so earned as net profits, a sum of Rs. 50,000, which would represent the share of the five brothers, would be equal to the sum of Rs. 50,000 which had been advanced by Achaiah Chetty to them some time before the execution of the promissory note on April 28, 1960. It is seen from the other collateral agreement executed on that day that Achaiah Chetty and his son became entitled to appropriate those profits towards that loan and, once the loan was discharged in that way after the partnership had earned a net profit of Rs. 1,00,000, the five brothers became liberated from their indebtedness and could walk out of the partnership. Indeed, as can be seen from the statement of the case, necessary e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership with any who is willing to finance him and to enter into an agreement that his share in the profits of the partnership should be appropriated towards the debt which he owes to the other partner. That arrangement cannot invite the condemnation that it is a contrivance for the circumvention of the law. It is one of the usual mercantile transactions against which there is no legal prohibition, and there is no legal principle supporting a contrary view which would stop the wheels of a legitimate business adventure. It is plain that the covenant for the liquidation of the debt out of the share of the profits of the five brothers is, on the contrary, what conferred on those brothers the status of partners. Such discharge is possible only if they owned a share in the profits of the firm and under the terms of the agreement, they could earn the profits in no other way than as partners. The Tribunal, as rightly pointed out by Mr. Viswanatha Iyer, committed a mistake in thinking that a smaller share of the profit had been credited to the share of the five brothers in respect of the profits earned between March 31, 1961, and September 1, 1961. The Tribunal was of the view that wher ..... X X X X Extracts X X X X X X X X Extracts X X X X
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