Sharing of the profits is only a prima facie evidence of the existence of partnership. The conclusive test is that of mutual agency. Explain the above statement and refer to decided cases.

The Statutory Basis: Section 6

Section 6 provides that in determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard must be had to the real relation between the parties as shown by all relevant facts taken together. The section then adds two explanations of considerable importance. Explanation 1 clarifies that the mere sharing of profits or of gross returns arising from property does not by itself make the persons sharing such profits or returns partners. Explanation 2 goes further, stating that the receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits, does not of itself make him a partner with the persons carrying on the business — expressly covering lenders who receive a share of profits in lieu of interest, servants or agents remunerated by a share of profits, widows or children of deceased partners receiving an annuity out of profits, and sellers of goodwill receiving a portion of profits as consideration for the sale. These explanations exist precisely because sharing profits is such a common feature of many relationships that are plainly not partnerships, and the legislature therefore chose to strip profit-sharing of any conclusive evidentiary force.

The Historical Shift Away from Profit-Sharing as the Test

The commentary traces this development to the celebrated House of Lords decision in Cox v. Hickman, which overturned an older line of authority that had treated profit-sharing as almost automatically conclusive of partnership. In that case, a trader's creditors had agreed, under a deed of arrangement, to appoint trustees to manage his business and use the profits to discharge outstanding debts. Third parties who later dealt with the business sought to make the creditors liable as partners on the ground that they were entitled to share in its profits. The House of Lords rejected this contention. Lord Wensleydale explained that the correct test is not whether a person participates in the profits of a business, but whether the business is carried on by an agent on his behalf — in other words, whether there exists a genuine relationship of principal and agent between the person receiving the profit and the person actually conducting the business. Since the creditors' trustees carried on the business for the benefit of the creditors as a class in discharge of the debtor's obligations, and not as agents for the individual creditors themselves, no partnership was found to exist, despite the undeniable fact that the creditors stood to benefit from the profits generated.

Mutual Agency as the Real, Conclusive Test

The commentary describes this agency-based inquiry as the true and decisive test of partnership, observing that "the law as to partnership is undoubtedly a branch of the law of principal and agent" — a phrase again drawn from Lord Wensleydale's reasoning. The words "acting for all" in Section 4's definition of partnership give statutory expression to exactly this idea: a partnership exists only where the business is carried on by all the partners, or by any of them as agent for the rest, and it is this reciprocal, mutual agency — not the incidental fact of receiving a share of profit — that marks the true partner off from every other person who might happen to share in a business's returns.

Illustrations Distinguishing Profit-Sharing from Partnership

The commentary offers several illustrative categories that flesh out Explanation 2 and demonstrate why profit-sharing alone cannot be conclusive. A lender who advances money to a trader on terms that he will receive a share of the profits in lieu of fixed interest is not, without more, a partner, because his role remains that of a creditor rather than an agent-principal in the conduct of the business. Similarly, a servant or agent who is remunerated by a share of the profits of the business he serves does not thereby become a partner in that business, since his participation in profits is merely a mode of payment for services rendered, not evidence that he is jointly carrying on the business with the proprietor. The same logic explains why the widow or child of a deceased partner, receiving an annuity calculated as a share of the firm's profits, is not a partner — she has no voice in, nor agency relationship with, the conduct of the business, and her annuity is simply a contractual entitlement arising from the deceased partner's estate.

The case of Chimanram v. Jayantilal, discussed earlier in relation to the doctrine of mutual agency, illustrates the same principle from a slightly different angle. Two firms jointly financed a pledge transaction, sharing profits and losses equally; the defendants argued this profit-and-loss-sharing arrangement made the two firms partners inter se. The Bombay High Court held that although sharing profit and loss is certainly a relevant fact, what mattered decisively was whether either firm possessed authority to act as agent for the other in conducting the joint venture — and finding no such agency relationship on the facts, the court declined to treat the arrangement as a partnership, notwithstanding the shared profit and loss. The court observed that it would be unusual for co-financiers to regard themselves as partners merely because they jointly bore the risk and reward of a single financing transaction — reinforcing that profit-sharing, however visible, cannot substitute for the deeper inquiry into mutual agency that Section 6 demands.

Why This Distinction Matters

The practical significance of treating profit-sharing as merely prima facie, rather than conclusive, evidence lies in preventing outsiders — creditors, employees, annuitants, and sellers of goodwill — from being unfairly saddled with a partner's unlimited personal liability merely because their compensation happens to be calculated by reference to business profits. Section 25 makes every partner liable jointly with the firm for all acts done while he is a partner, and it would be manifestly unjust to extend that liability to a lender or an employee who never had, and never sought, any agency relationship with the business or its other participants. By requiring courts to examine "all relevant facts taken together" under Section 6, and by directing particular attention to the presence or absence of mutual agency, the Act ensures that the label of "partner," with all its attendant risks, attaches only to those genuinely bound in that reciprocal principal-agent relationship that lies at the heart of partnership law.