Tag: #partnershipact

India’s Startups and Legal Roller Coaster

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In India, startups are still relatively new. They are attempting to survive and, occasionally, succeed in the local environment. However, because of its intricate and constantly evolving corporate policies, the legal issues faced by start-ups are particularly distinctive. Let’s investigate and analyze the complexity of many aspects that have an immediate influence on start-ups in India.

BUSINESS STRUCTURE

Many start-ups struggle to identify the best business structure for their venture because it differs from industry to industry and one business structure that works well for one may not work well for another in terms of risk, the number of participants, profit distribution, liability, taxation, annual meetings, and registration, among other factors.

SOLE PROPRIETORSHIP

It has an easier taxation structure based on the revenue made by the proprietor; It is not taxed as a distinct legal entity; It is the appropriate business structure for individuals who wish to have complete control over their business and enjoy all the earnings alone. Instead, the business owners include their tax filings in their tax forms; The responsibility of a sole proprietor is infinite since the business’s assets are not considered to be private or personal if the proprietor is unable to pay the debts of the company; Its ability to raise cash for businesses is extremely constrained.1

PARTNERSHIP FIRM

When multiple persons are involved in the business, it is appropriate; One of the most straightforward business structures, it is controlled by the Indian Contract Act of 1972 and the Partnership Act of 1932; Its taxation resembles that of a proprietorship firm quite a bit; several partners split the profit; Conflicts between the ideas of the different partners might be one of many problems.2

LIMITED LIABILITY PARTNERSHIP (‘LLP’)

When a business is unstable or dangerous, it works best; The Limited Liability Partnership Act of 2008 governs it; Because the liability is restricted, the business and personal assets are seen as distinct, and the personal assets cannot be depleted to pay off the obligations; There is no maximum number of members in an LLP, however, there must be at least two members; Its formation costs are considerably higher than those of a sole proprietorship business; The tax authorities treat limited liability partnerships (LLP) as a separate legal entity from its owners and require that they register with the Income Tax Department for taxation purposes. This makes LLP more advantageous than private limited companies because it is simpler to establish, manage, and register than a private limited company.3

PRIVATE LIMITED COMPANY

When there is a chance for corporate growth and equity investors, it is most appropriate; The 2013 Companies Act governs it; A privately held firm for small businesses is known as a private limited company; A Private Limited Company’s members’ liability is only as great as the number of shares they each own; Private Limited Company’s shares cannot be exchanged publicly; Compared to an LLP company, starting a private limited company has higher startup costs; It is crucial to be aware that the tax authorities view it as a separate legal entity from its shareholders and that it is legally required to register with the Income Tax Department for taxation purposes; it is appropriate for an entrepreneur who needs outside funding and is working toward a high level of turnover.4

REGISTRATION AND LICENSES

Obtaining all necessary paperwork and permissions before starting a business is essential for success. The absence of a license with the company will result in pricey legal actions and settlements. Firm licenses are different from business registration in that the latter is the paperwork required for a business to operate, whereas the former is required for listing a business with the registrar.

Another sort of registration that is required is the Startup India Registration, provided that the company satisfies the criteria established by the Department of Industrial Policy and Promotion of India (DIPP). Additional registrations like MSME, GST, Udyog Aadhar, import-export codes, etc. may be required depending on the type and size of the company.

Startups should be aware that, in addition to the aforementioned, they can require extra permits to set up and run a business depending on state regulations.5

PROPERTY LAWS

The distribution of property for the use of offices, warehouses, service centers, manufacturing plants, etc. is a key problem for startups in India. Since local state laws governing the commercial use of real estate or land vary from state to state and fall under the jurisdiction of the government, startups should be aware of them. For instance, the local municipal government may create a rule prohibiting the use of any property or land for industrial or commercial purposes in a residential area.

Typically, the municipal zoning authority divides a community into eight divisions. Residential, commercial, industrial, public, and semi-public, public utilities, open spaces/parks/playgrounds, transportation and communication, and agricultural use are all permitted in these parts. For carrying out commercial work, the zoning authorities may choose to specify the height, position, and map of the building.

Startups must conduct the necessary due diligence for any local municipal zoning laws or reservations and obtain the necessary permissions or licenses from such authorities if they intend to operate from a property, whether it be for an office, warehouse, service center, manufacturing units, etc. These requirements vary from state to state.

CONTRACT MANAGEMENT

Startups should practice strong contract discipline to control expenses, provide the maximum value, and reduce business risk; otherwise, they face expensive lawsuits.

Some of the most important contracts that a business typically needs include employment agreements, non-disclosure agreements, services agreements, lease agreements, rent agreements, and leave licenses, among others.

Startups should avoid using traditional and time-consuming methods for contract drafting; instead, they should write their contracts in a clear, concise, and simple manner without the use of legal maxims or challenging legal terms, making them easier to understand for the average person or anyone without a background in law.6

DATA PROTECTION & PRIVACY

Startups and other online retailers track and make use of user data, including search history. Startups should ideally avoid requesting permissions that aren’t required for the proper operation of their website or app or gaining access to user’s private information without their approval.

Startups ought to treat user privacy highly, which can only be done by developing privacy policies that are succinct, clear, summarised, and available in the user’s local/native language. Before logging in to any app, users will be able to easily read and understand the privacy policies, terms, and conditions.

A user agreement stating the startup won’t disclose or utilize their personal information is also required. This will help the company get the respect and confidence of the general population. What categories of personal information are collected by the website and how they will be shared or sold to third parties must be specified by the company in the privacy policy agreement.7

ADDITIONAL RESOURCES RELATED TO THE STARTUP INDIA PROGRAM

Identifying Startup The ability of an entrepreneur to exceed the competition in the market is essential, but doing so necessitates first comprehending the competition and creating an ominous business plan. When a company registers, it will become aware of all the other companies operating in the same industry, which will help it develop a development plan.

  • Networking
    The business approach of “networking” pulls all the strings necessary to draw in investors, seize opportunities, increase customer awareness, and establish a strong brand identity.
  • Investors 
    Investors are also your company’s stock speculators. A startup that has registered will have the opportunity to introduce itself to a large group of investors and give them the chance to develop some level of trust in your company.
  • Mentor
    You can discover hope within yourself with the help of a mentor. A startup that has registered might look for the best mentor who has already been through all the difficult times that it will now face surviving.
  • Accelerator
    After your business makes it through the start-up phase, accelerators offer financial support for building it up.
  • Government Office
    A large number of government agencies have enrolled with the platform so that the startup can easily reach them.
  • Accessibility for Startup
    A registered startup will have access to several online tools and be able to use resources on the Startup India platform without any hassles.
  • The knowledge base
    All the information needed for a company, including important words, stakeholders, legal requirements, statistical data, business analysis, and more, is available online.
  • Associated services
    This entails contacting every associated service provider, such as banks, law offices, and cloud computing services, and utilizing the best services offered by leading service providers.
  • Templates 
    It is possible to obtain templates for practically every function, including legal, human resources, and customer service, which could make it simpler to complete tasks with the least amount of people and money.
  • Startup Programs and Events
    Being constantly engaged and aware of your position in the company are now requirements. Consequently, the following program for startups is hosted by the government and various private entities: 
  • Online Programs
    Learning never ends, thus an entrepreneur can always refresh his knowledge to stay consistent by enrolling in one of the many online courses offered on the website Innovative Challenges. Possibility to take part in various tasks that aid in identity formation, as well as interactions with mentors and incubators.

CONCLUSION

In conclusion, the Startup India Movement seeks to make lucid entrepreneurial ambitions and ideas a reality, which aids in the country’s overall development not just by creating more jobs or high-quality products but also by creating a standard for the global industrial development sector.

References:

  1. ALEXANDRA TWIN, Sole Proprietorship, Investopedia (July 26, 2022) Available at: https://www.investopedia.com/terms/s/soleproprietorship.asp
  2. Arvind Manohar, India’s Startups And Legal Roller Coaster, Legal Service India(Last Visited: 16 September, 2022) Available at: https://www.legalserviceindia.com/legal/article-9182-india-s-startups-and-legal-roller-coaster.html
  3. ibid
  4. Indeed Editorial Team, What Is A Private Limited Company? A Complete Guide,indeed(Last visited: 16 September, 2022) Available at: https://in.indeed.com/career-advice/career-development/what-is-private-limited-company
  5. Supra Note 2
  6. Bennett Conlin,The Fundamentals of Contract Management,BusinessNewsDaily(Last Visited: 16 September, 2022) Available at: https://www.businessnewsdaily.com/4813-contract-management.html
  7. The Editor, Data Protection and Privacy: 12 Ways to Protect User Data, Cloudian( Last Visited: 16 September, 2022) Available at: https://cloudian.com/guides/data-protection/data-protection-and-privacy-7-ways-to-protect-user-data/#:~:text=Data%20protection%20is%20a%20set,handles%2C%20or%20stores%20sensitive%20data.

This article has been written by Jay Kumar Gupta. He is currently a second-year BBA LL.B.(Hons.) student at the School of Law, Narsee Monjee Institute of Management Studies, Bangalore.

M/s Juggilal Kamlapat Vs. M/s Sew Chand Bagree

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Case Number:

Award No 36 of 1951

Equivalent Citation:

AIR 1960 Cal 463

Bench:

Single Judge Bench, Justice G Mitter presiding

Decided On:

Thursday, 30th July 1959

Relevant Acts And Sections:

  1. Section 45 of the Partnership Act, 1932
  2. Sections 249 and 251 of the Contract Act, 1872
  3. Section 264 of the Contract Act, 1872
  4. Section 45 of the Indian Partnership Act, 1932
  5. Section 36 of the Partnership Act, 1932 
  6. Section 208 of the Contract Act, 1872
  7. Section 36 of the English Contract Act
  8. Section 50 of the Civil Procedure Code, 1908

Facts Of The Case In Brief:

M/s Juggilal Kamlapat and M/s Sew Chand Bagree had entered into a contract in the year 1948. M/s Juggilal Kamlapat (hereafter referred to as Juggilal) demanded Rs 31,000 in lieu of this contract from M/s Sew Chand Bagree (hereafter referred to as Sew Chand). There were various disagreements about which partners from Sew Chand were actually liable to pay the amount which only further delayed the payment. Aggrieved by this situation, Juggilal approached the High Court of Calcutta to reach a settlement.  According to the application made to the Court, Manik Chand Bagree, Moti Chand Bagree, and Jankidas Bagree have been projected as the partners of the Sew Chand as even mentioned in the Registrar of Firms who owe money to Juggilal. This was opposed by Manik Chand and Moti Chand who submitted to the Court that Manik Chand and Moti Chand had dissolved their partnership in 1945. Long after the dissolution of the firm, Jankidas had assumed the name of this firm and started his business. However, this was not disclosed to the Registrar of Firms.

Issues Before The Court:

The issues which needed to be decided by the Court include:

  1. If Manik Chand and Moti Chand were liable to pay M/s Juggilal Kamlapat the amount of claim
  2. If the partnership firm of M/s Sew Chand Bagree stood dissolved as in the year 1945

Ratio Of The Case:

Since it was not possible to determine if Manik Chand and Moti Chand were to be made liable to pay the amount of claim demanded by the claimant, the case proceeded to an evidence-based trial. The counsel appearing for Juggilal pointed out to the Court that no public disclosure was made about the dissolution of the firm. The absence of evidence on paper corroborated this argument in favor of the claimant.  The counsel further pointed out that the Bagrees did not attempt to produce any witness other than Sriratan Damani who would support their statements. However, the Court deemed it fit to consider other evidence such as the memorandum of understanding prepared by M/s Dutt and Sen, bearing signatures of the Bagree brothers, the Corporation of Calcutta’s issuance of the trade license, the opening of the account with Hindustan Commercial Bank Ltd., and the letter written to Bank of Baroda Ltd. All these verify the Bagrees’ oral version of events. Thus Judge G K Mitter concluded that M/s Sew Chand Bagree had been dissolved in 1945. The Court also referred to various sections of the Indian Partnership Act, 1964 as well as the Indian Contract Act, 1870 Judge G K Mitter after considering the shreds of evidence presented in Court and the intricacies connected with it, came to a conclusion that Manik Chand and Moti Chand were not a partner of M/s Sew Chand Bagree while the contract was being executed. 

Decision Of The Court:

 The Court considered the fact that although the Registrar of Firms did not reflect the dissolution of M/s Sew Chand Bagree; it also kept in mind that Juggilal while entering into the contract with Sew Chand did not run through these records as a basis for entering this contract. Thus Moti Chand Bagree and Manik Chand Bagree were rescued from having any liability. Jankidas Bagree was directed to pay a sum of Rs 31,000 to M/s Juggilal Kamlapat and the claimant was allowed to add costs to this claim as they deemed fit.

The case analysis has been done by Debasmita Nandi, a first-year law student of CHRIST (DEEMED TO BE UNIVERSITY), LAVASA.

The case analysis has been edited by Shubham Yadav, a student of Banasthali Vidyapith, Jaipur.

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Saligram Ruplal Khanna & Anr vs Kanwar Rajnath on 1 May 1974

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Equivalent citations:

1974 AIR 1094, 1975 SCR (1) 358

Bench:

KHANNA, HANS RAJ

BEG, M. HAMEEDULLAH

CHANDRACHUD, Y.V.

Date Of Judgement:

01/05/1974

Act:

Indian Partnership Act. ss. 42 and 47,

Displaced Persons Claims Act, 1950

 Facts:

The appellants and the respondent formed a partnership and entered into a lease agreement with the Custodian of Evacuee Property for a mill, which they gained control of on August 31, 1952. The period of the partnership was for 5 years, being the period of the said lease. After failing to pay one rent installment, the Custodian served the partners with a show-cause notice on 12-2-54, requesting that they explain why the lease should not be terminated. On account of specific financial difficulties, the parties entered into a second agreement on February 24, 1954. Due to disagreements between the appellants and the respondent, the appellants filed a lawsuit on December 20, 1960, alleging that after the Custodian terminated the lease on May 25, 1954, the two appellants and the respondent orally agreed not to dissolve the partnership despite the lease termination. They requested a declaration that the partnership between them and the respondent continued to exist under the terms of the agreement as stipulated in the partnership document dated February 24, 1954, and also prayed for a rendition of the partnership accounts.

On the other hand, the respondent claimed that the parties had reached no oral agreement and that the claim for a rendition of accounts was precluded by limitation.

The trial court found that the appellants had failed to establish that the parties had reached an oral agreement and that the claim for a rendition of accounts was time-barred.

The High Court confirmed the trial court’s findings on appeal.

Thus, the appeal was dismissed.

Issue:

(i)Is the Tribunal correct in overturning the CITY’s decision under s. 263 based on the certitudes and incidents of the case? 

(ii) Whether the Tribunal was correct in ruling that there was nothing improper with the assessee valuing the closing stock at cost rather than market price based on the certitudes and incidents of the case?

(iii) Whether the Tribunal was legally correct in holding that the assessee-capital firm’s assets were not transferred to the partners, notwithstanding the fact that the assessee-firm was dissolved on December 18, 1987, based on the case’s certitudes and incidents?

Ratio Of The Case:

 Rai Bahadur Kanwar Raj Nath & Ors. v. Pramod C. Bhatt, Custodian of Evacuee Property. The Custodian has the power to cancel the lease under section 12 of the Administration of Evacuee Property Act, and the notification made by the Custodian was legitimate. The Court did not rule on the partnership’s eligibility to possess the mills under the lease agreement.

Sathappa Chetty & Ors. v. S. N. Subrahmanyan Chetty & Ors. The aforementioned case did not involve a firm formed for a specific period of time. No issue of a firm dissolving on the expiration of the defined term of partnership occurred.

Decision Of The Court:

The supreme court held observed the proposition could not be disputed. The partnership exists only to complete ongoing transactions, wind up the business, and adjust partners’ interests after dissolution. Unless a contract specifies otherwise, a firm formed for a specific period will be dissolved at the end of that period. 

Therefore, the appeal was dismissed, although without cost, due to the circumstances.

The case analysis has been done by Shruti Bose, a student at Christ (Deemed to be University), Lavasa.

The case analysis has been edited by Shubham Yadav, a student at Banasthali Vidyapith, Jaipur.

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Commissioner Of Income-Tax, … vs Jayalakshmi Rice And Oil Mills … on 15 January 1971

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Civil Appellate Jurisdiction:

Civil Appeal No. 545 of 1967.

Equivalent citations:

1971 AIR 1015, 1971 SCR (3) 365

Bench:

Grover, A.N.

Date Of Judgement:

15/01/1971

Act:

Income Tax, 1922 – S. 26A

Partnership Act, 1922 –  S. 58, 59, 69-Rule 2(b)

Facts: 

A deed of a partnership signed October 6, 1955, established the assessee firm. It was scheduled to go into force on November 5, 1954. The assessee applied for firm registration under section 26A of the Act for 1956-57. The firm’s prior year was shown as ending on October 26, 1955. On October 14, 1955, the Income-tax Officer received the application. The assessee submitted a statement under section 58 of the Indian Partnership Act, 1932, with the Registrar of Firms on October 20, 1955. The Registrar of Firms filed the assessee’s statement and made entries in the register of firms on November 2, 1955. The Income-tax Officer issued an order on March 23, 1961, and refused to register the company under s. 26-6A, citing, among other things, the fact that the application had not been submitted on time. The Appellate Assistant Commissioner’s appeal was dismissed. The Tribunal also supported the decision of the lower courts. The High Court ruled in favor of the assessee, holding that on the date the application is filed, the partnership should be considered registered and the rules would be satisfied if the partnership was registered under the Partnership Act after s.26A application was filed. 

Issue: 

The underlying question is whether a partnership’s registration under the Partnership Act results on the day the application for registration is filed under section 58 of the Act.

Ratio Of The Case: 

A partnership is registered under the Partnership Act when the requisite entry is made in the register of firms, according to Ram Prasad v. Kamta Prasad. Even under the Partnership Act’s section 69, which addresses the repercussions of non-registration, it has been decided repeatedly that a firm’s registration did not resolve the problem after a complaint was filed.

Kerala Road Lines Corporation v. Commissioner of Income-tax, – a firm cannot be considered as registered when The Registrar receives the statement required by sections 58 and 59 of the Indian Partnership Act. The case has been referred to the Supreme Court for further hearing in January. 

Decision Of The Court: 

The appeal is granted, and the High Court’s decision is reversed. The answer to the referred question must be approbative and adverse to the assessee. In this Court, the appellant is entitled to costs.

The case analysis has been done by Shruti Bose, a student of Christ (Deemed to be University), Lavasa

The case analysis has been edited by Shubham Yadav, a student at Banasthali Vidyapith, Jaipur.

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Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd., AIR 1964 SC 1882

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Equivalent Citation

1964 AIR 1882, 1964 SCR (8) 50

Bench

HIDAYATULLAH, M.

WANCHOO, K.N.

GUPTA, K.C. DAS

AYYANGNAR, N. RAJAGOPALA

Decided on

29 APRIL, 1964

Relevant Act/ Section

S. 69 OF INDIAN PARTNERSHIP ACT, 1932 (9 OF 1932)

S. 8(2) OF ARBITRATION ACT, 1940 (ACT 10 OF 1940) 

Petitioner 

JAGDISH CHANDRA GUPTA

Respondent 

KAJARIA TRADERS (INDIA) LTD.

Facts 

On  30 July 1955, the respondent Messrs. Kajaria Traders (India) Ltd. and Messrs. Foreign Import and Export Association (exclusively owned by the appellant Jagdish C. Gupta) entered into a partnership to export between January and June 1956, 10,000 plenty of manganese ore to Phillips Brothers (India) Ltd., New York. Each partner was to provide a particular quantity of manganese ore. The agreement has arbitration clauses. The corporation claimed that Jagdish Chander Gupta did not carry out his part of the partnership agreement. The corporation wrote to Jagdish Chander Gupta on February 28, 1959, that they had appointed an arbitrator and asked Jagdish Chander Gupta either to confirm Mr. Kolah’s appointment as the only arbitrator or to appoint his arbitrator. Jagdish Chander Gupta postpones consideration and on St Patrick’s Day, 1959, the corporate informed Jagdish Chander Gupta that as he had not assigned an arbitrator within 15 days, they were appointing Mr. Kolah as the only arbitrator. Jagdish Chander Gupta discovered this. And on March 28, 1959, the company filed a plea under s. 8 (2) of the Indian Arbitration Act, 1940 for the nomination of Mr. Kolah or any other person as arbitrator. Jagdish Chander Gupta appeared and demurred the petition.

Issues before High Court

  1. Whether S. 8(2) of the Indian Arbitration Act was applicable in this agreement because it was not expressly provided in the Letter of Intent that the arbitrators were to be appointed by consent of the parties?
  2. Whether S. 69(3) of the Indian Partnership Act, 1932 petition can be filed because the partnership was not registered?

Judgment by High Court 

 Mr. Jagdish Gupta firstly argued that if the appointment is not made within 15 days of notice, on the application of the party who has given the notice, and following the principle of Audi Alteram Partem, the court may appoint an arbitrator. The Bombay High Court bench consists of Justice Mudholkar and Justice Naik, who agreed on the first contention constructed by Mr. Jagdish.

But the division bench contradicts the 2nd point. Justice Mudholkar believed that the application cannot be filed under s. 69(3) of the Indian Partnership Act, 1932, while Justice Naik has a different opinion. Then the case went to Justice KT Desai who agreed with Justice Naik’s view. And the court held that the application was held to be competent.

Contentions before Supreme Court

After the Bombay High Court Judgement, the appeal was filed in which it was contended that the High Court wrongly interpreted the grounds under S. 69(3) of the Indian Partnership Act, 1932.

Judgment by Supreme Court

The Supreme Court held that the words ‘other proceeding’ in S. 69(3) of the partnership act must receive their meaning and must be unaffected by words’ claim of set-off. Therefore, the appeal is allowed to rescind the decision of the Bombay High Court.

Conclusion 

The judgment answers the question of whether an unregistered firm can initiate arbitration proceedings negatively. Despite the arbitration clause, the arbitration proceedings were barred in this case. Hence, to function like a well-oiled machine, the firm must get registered.

The case analysis has been done by Megha Patel, a 2nd year Law Student at the Mody University of Science and Technology, Laxmangarh, Rajasthan.

The case analysis has been edited by Shubham Yadav, a 4th-year student at Banasthali Vidpyapith, Jaipur.

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