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Ramesh Agarwal, his two brothers and his father run an ancestral cloth shop in Jaipur as a Hindu undivided family business, with Ramesh as the karta. A bank asks whether the four of them are partners in a firm. What is the correct position under the Indian Partnership Act, 1932?

Members of a Hindu undivided family carrying on the family business as such are not partners. The Indian Partnership Act says partnership arises from contract and not from status, so family membership and shared profits do not by themselves create a firm.

  1. AThey are partners because they share the profits of the business among themselves
  2. BThey are partners only if the business has been carried on for more than one generation
  3. CThey are not partners merely because they carry on the family business as members of an HUFCorrect
  4. DThey are partners by status as soon as the karta starts managing the business

Explanation

Section 5 says partnership arises from contract and not from status. Members of a Hindu undivided family carrying on a family business as such are not partners in that business. Profit sharing alone does not create a partnership here, because the relation rests on family status and not on a contract.

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