What are the consequences of succession of one firm by the another firm?

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What are the consequences of succession of one firm by the another firm?

If PQR is a partnership firm and it is succeeded by ABC partnership firm, say on 31st of October 2018, what shall be the income tax implications.

Income of the year shall be taxable in hands of ABC or in hands of PQR Ltd is the question we will be discussing.


As per section 188, where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessment shall be made on the predecessor firm and successor firm in accordance with the provisions of section 170 (Succession to business otherwise than on death).

Also as per section 170 the predecessor firm shall be assessed in respect of the income of the previous year in which succession took place upto the date of the succession. The successor firm shall be assessed in respect of the income of the previous year after the date of succession

Therefore, in the above example the income of the firm shall be taxable in hands of PQR upto 31st October and in hands of ABC Ltd after 31st October.

For your reference:

Section 188 of the Income Tax Act, 1961 reads as under:

  1. Where a firm carrying on a business or profession is succeeded by another firm, and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with the provisions of section 170.

Section 187 of the Income Tax Act, 1961 reads as under:

  1. (1) Where at the time of making an assessment under section 143or section 144 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.

(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 one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change ; or

(b)  where all the partners continue with a change in their respective shares or in the shares of some of them :

Provided that nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners.

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