Section 328 of the Income-tax Act, 2025 — Succession of One Firm by Another Firm

In plain language

What Section 328 actually says

Section 328 of the Income-tax Act, 2025 deals with a very specific situation: when one partnership firm carrying on a business or profession is succeeded by another firm. In plain words, if Firm A stops running the business and Firm B takes over that same business, the law treats this as a "succession of one firm by another firm."

The section is short but powerful. It says that in such a case — except where the situation is actually a mere change in the constitution of the firm (covered by Section 327) — separate assessments must be made on the predecessor firm (the old firm, Firm A) and the successor firm (the new firm, Firm B), and these assessments follow the machinery of Section 313 (succession to business otherwise than on death).

This provision is the Income-tax Act, 2025 re-enactment of Section 188 of the old Income-tax Act, 1961. The wording has been modernised, but the principle is identical.

Who it applies to

• Only firms — both the predecessor and the successor must be partnership firms (including LLPs treated as firms for tax).
• Situations where the old firm ceases and a genuinely different firm continues the same business or profession.
• Common triggers: dissolution of a firm and a brand-new firm taking over; a firm's business transferred to another firm; wholesale change of partners so complete that in substance a new firm has come into existence.

The crucial line: succession vs. change in constitution

This is where most taxpayers and even professionals get confused. The Act draws a bright line:

• Change in constitution (Section 327): The same firm continues, but one or more partners join, retire, or the profit-sharing changes, and at least one partner is common before and after. There is one continuing firm and normally one single assessment for the whole year.
• Succession (Section 328): The old firm has effectively died and a new firm has taken over. This needs two separate assessments — one on the old firm up to the date of succession, one on the new firm after that date.

Section 328 opens with the words "except in a case covered by section 327" precisely so that a mere reconstitution is not wrongly split into two assessments.

How the two assessments work (via Section 313)

• Predecessor firm is assessed on the income of the year up to the date of succession.
• Successor firm is assessed on the income after the date of succession.
• If the predecessor cannot be found, the successor can be assessed for the predecessor's period too — for the year of succession and even the preceding year — in the same manner as the predecessor would have been.
• Where the predecessor's tax cannot be recovered from it, the Assessing Officer records that finding and the tax becomes recoverable from the successor firm (the successor then has a right to recover it back from the predecessor).

Why this matters — practical implications

• Two returns, two PANs, two assessments. Do not club a full year's income into one return when a genuine succession has happened mid-year.
• Prevents tax leakage. The rule stops firms from restructuring to escape or blur tax liability, and stops income for a period from falling through the cracks.
• Successor inherits recovery risk. A firm taking over another's business should do due diligence on the predecessor's pending tax dues, because unpaid tax can land on the successor.
• Pending proceedings carry over. Assessment or reassessment started against the predecessor is deemed to continue against the successor, so litigation does not vanish on restructuring.

Section 328 sits in the chapter on special provisions relating to certain persons, alongside firm-specific rules like Section 327 (change in constitution) and Section 329 (joint and several liability of partners for the firm's tax). Read together, they ensure that no matter how partners come and go, someone is always accountable for the firm's tax.