Section 327 — Change in constitution of a firm. Successor to s.187 of the 1961 Act.
Section 327 is in Chapter XVII — Special Provisions Relating to Certain Persons, which runs from section 302 to section 355.
Sub-section (1) directs that 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 is to be made on the firm as constituted at the time of making the assessment.
Sub-section (2) defines when there is a change in constitution: under clause (a), where one or more partners cease to be partners or new partners are admitted, subject to at least one person who was a partner before the change continuing after it; and under clause (b), where all the partners continue but there is a change in their respective shares or in the shares of some of them.
Sub-section (3) takes one case out of clause (a): it does not apply where the firm is dissolved on the death of any of its partners.
Partners come and go while the business continues, and without a rule the Department would have to decide whether the firm before the change and the firm after it are the same assessee. The section directs the assessment onto the firm as it stands when the assessment is made, so a reconstituted firm cannot say the income belonged to a different entity. Sub-section (3) keeps a dissolution on death outside the rule, because there is then no continuing firm of the kind clause (a) assumes.
The assessment follows the firm as it is at the date of assessment, not as it was in the year assessed, so incoming partners find the firm assessed in their hands and outgoing partners cannot treat their departure as having ended the assessment. Clause (a) has a condition that decides most cases: at least one person who was a partner before the change must continue after it, so a wholesale replacement of every partner is not a change in constitution within this section. Clause (b) is easy to overlook because nobody joins or leaves — a mere change in the profit sharing ratios is itself a change in constitution. Sub-section (3) removes only the case where the firm is dissolved on a partner's death.
A firm of four partners is assessed under section 270 for a tax year. Before the assessment is made, one partner retires and a new partner is admitted, the other three continuing. That is a change in constitution under sub-section (2)(a), since at least one pre-change partner continues, so under sub-section (1) the assessment is made on the firm as constituted at the time of assessment, including the newly admitted partner. Had nobody joined or left but the four partners simply altered their profit sharing ratios, clause (b) would make that a change in constitution as well.
In an assessment order under section 270 or 271 naming the firm as presently constituted, and in disputes raised by retiring or incoming partners about whether the assessment binds the firm they have left or joined.
the assessment shall be made on the firm as constituted at the time of making the assessment
subject to the condition that at least one person who was partner of the firm before the change continues as partner after such change
See the full 1961 to 2025 concordance.
See the circulars index.