Change in constitution of a firm
[Section-327 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 327(1) of Income Tax Act 2025
327(1) Where at the time of making an assessment under section 270 or 271, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment.
Section 327(2) of Income Tax Act 2025
327(2) For the purposes of this section, there is a change in the constitution of the firm—
- (a) if one or more of the partners cease to be partners; or
- (b) one or more new partners are admitted, subject to the condition that at least one person who was partner of the firm before the change continues as partner after such change; or
- (c) where all the partners continue with a change in their respective shares or in the shares of some of them.
Section 327(3) of Income Tax Act 2025
327(3) The provisions of sub-section 2(a) shall not apply to a case where the firm is dissolved on the death of any of its partners.
FAQs on Section 327 of Income Tax Act 2025
What happens if a firm’s constitution changes before assessment under section 270 or 271?
If a change in the firm’s constitution is found before making an assessment under section 270 or 271, the assessment must be made on the firm as it exists at the time of assessment.
What constitutes a change in the constitution of a firm under section 327(2)?
A change in constitution occurs if one or more partners cease to be partners, new partners are admitted (with at least one existing partner continuing), or if all partners remain but there is a change in their profit-sharing ratios.
Is admission of a new partner always considered a change in constitution?
Yes, provided that at least one existing partner continues in the firm after the new partner is admitted.
Does a change in profit-sharing ratio among partners amount to a change in constitution?
Yes, if all the partners continue but there is a change in their respective shares, it is considered a change in the constitution.
What if one or more partners retire or leave the firm?
It will be treated as a change in the constitution of the firm under section 327(2)(a), unless the firm is dissolved due to the death of a partner.
Is the death of a partner always treated as a change in constitution?
No. If the firm is dissolved upon the death of a partner, it is not considered a change in constitution under section 327(3).
Can a firm be assessed under section 270 or 271 even after a change in its constitution?
Yes, the firm will be assessed as it stands at the time of the assessment, even if there was a prior change in constitution.
If all original partners remain but change their profit shares, does that count as a change in constitution?
Yes, a change in profit-sharing ratio among existing partners qualifies as a change in the constitution of the firm.
What is the relevance of change in constitution for tax assessments?
It determines the identity and composition of the firm to be assessed and ensures continuity of tax liability despite internal restructuring.
If a firm continues after a partner’s death without dissolving, is it a change in constitution?
Yes, if the firm continues and satisfies the conditions of section 327(2), it may still be considered a change in constitution unless it falls under the exception in section 327(3).
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