This statement is a cornerstone principle in partnership law, particularly enshrined in Section 6 of the Indian Partnership Act, 1932. It emphasizes that the existence of a partnership is not determined by the labels or declarations made by the parties, but by the true nature of their relationship, as evidenced by their conduct and all surrounding circumstances.

Understanding Partnership:

According to Section 4 of the Indian Partnership Act, 1932, "Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all." This definition highlights three essential elements:

1. Agreement: There must be an agreement between two or more persons.
2. Sharing of Profits: The agreement must be to share the profits of a business.
3. Business Carried on by All or Any of them Acting for All (Mutual Agency): This is the most crucial element and the 'true test' of partnership.

The Significance of 'Real Relations':

The statement underscores that courts will look beyond superficial appearances or self-serving declarations. For instance:

• Calling themselves 'partners' is not conclusive: If individuals refer to themselves as partners but do not share profits, or, more importantly, lack mutual agency (i.e., one cannot bind the others), they may not be considered partners in the eyes of the law.
• Avoiding the label 'partner' is not conclusive: Conversely, if individuals deliberately avoid using the term 'partner' but their conduct demonstrates all the essential elements of a partnership, particularly mutual agency and profit-sharing, they may still be deemed partners by the court.

Section 6 of the Indian Partnership Act, 1932:

This section explicitly states: "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 shall be had to the real relation between the parties, as shown by all relevant facts taken together."

It further provides rules for determining the existence of a partnership, clarifying that:

• Sharing of gross returns does not, by itself, make persons partners.
• Receipt of a share of profits by a person does not, by itself, make him a partner, especially if received as:
  • A lender of money to persons engaged or about to engage in business.
  • A servant or agent.
  • The widow or child of a deceased partner, as an annuity.
  • A previous owner or part-owner of the goodwill of a business, as consideration for its sale.

The True Test: Mutual Agency:

The ultimate and conclusive test for determining partnership is 'mutual agency.' This means that each partner is an agent of all other partners and of the firm. Each partner has the authority to bind the firm and other partners by their acts done in the ordinary course of business. If this element of mutual agency is absent, there is no partnership, regardless of profit-sharing or other arrangements.

Conclusion:

The statement is fundamental because it prevents parties from manipulating legal definitions through mere nomenclature. It ensures that the legal status of a 'firm' or 'partner' is based on the substantive operational reality and the legal characteristics of their relationship, rather than just their stated intentions. Courts will meticulously examine all relevant facts – including agreements, conduct, financial arrangements, and the extent of authority each person exercises – to ascertain the true nature of the relationship and determine if a partnership, as defined by law, actually exists.