Section 327 of the Income-tax Act, 2025 — Change in Constitution of a Firm

In plain language

What Section 327 actually deals with

A quick clarification: although this page is tagged under "trusts-charitable", Section 327 of the Income-tax Act, 2025 has nothing to do with trusts. It deals with the assessment of a partnership firm when there is a change in its constitution. It is the direct successor to Section 187 of the Income-tax Act, 1961, carried forward with cleaner language and updated cross-references.

The core rule is short and powerful: where, at the time of making an assessment under Section 270 or Section 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. In plain words, the firm is treated as one continuous entity even though partners have come and gone.

When is there a "change in constitution"?

The section says a change in the constitution of a firm happens in these situations:

• A partner leaves — one or more partners cease to be partners; or
• A new partner is admitted — one or more new partners join, provided at least one person who was a partner before the change continues as a partner after the change; or
• Profit-sharing ratios change — all partners continue, but their respective shares (or the shares of some of them) are altered.

The common thread in the first two situations is continuity of at least one partner. If not even one old partner remains, it is no longer a "change in constitution" — it becomes a succession of one firm by another, which is governed by Section 328 instead.

The death-of-partner exception

Important carve-out: the rule about admission/cessation of partners does not apply where the firm is dissolved on the death of any of its partners. If the partnership deed provides that the firm dissolves on a partner's death, then what follows is not treated as a mere change in constitution — the old firm ends and any new firm is a successor. This prevents the tax department from artificially clubbing income of a genuinely dissolved firm with a new one.

Who does it apply to?

• Partnership firms registered or assessed as a "firm" under the Act, including LLPs treated as firms.
• The Assessing Officer, who must decide, at assessment time, whether the situation is a change in constitution (Section 327) or a succession (Section 328).
• Continuing and outgoing partners, because it affects who is assessed and who bears the liability.

How the assessment works in practice

Under Section 327, a single assessment is made on the firm for the whole previous year, on the firm as it stands when the assessment is framed. There is no splitting of the year into pre-change and post-change periods and no separate assessment on each configuration of partners. This is what makes it different from a succession: in a change of constitution there is one firm, one assessment; in a succession there are two firms and (generally) two assessments.

How it interacts with related sections

• Section 328 (succession of one firm by another): applies when no partner is common — then predecessor and successor are assessed separately for their respective periods.
• Sections 270 and 271 (assessment): Section 327 is triggered "at the time of making an assessment" under these provisions; the old 1961 law referred to Sections 143/144.
• Liability of partners: continuing and retiring partners generally remain jointly and severally liable for the firm's tax for periods they were partners.

Practical implications

• Reconstitution (retirement, admission, change in ratio) does not break the tax identity of the firm, so carry-forward of losses, depreciation and the firm's PAN continuity are generally preserved subject to other conditions.
• Firms should document the exact date of reconstitution in a supplementary deed and keep books that clearly show the position at that date.
• Where a deed provides for dissolution on death, plan the transition carefully — the outcome (Section 327 vs Section 328) changes who is assessed.