Change in constitution of Firm: Income Tax

How will the assessment of a partnership firm be made in case there is change in constitution of the firm?

To discuss the same let us have understand what the term change in constitution mean. The term change in constitution is explained in section 187 sub-section 2 of the Income Tax Act, 1961. The section reads as under:

(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.

 

Analysis:

Following cases (illustrative) constitute the change in constitution of Firm:

·         Retirement of a partner.

·         Death of a partner (Whether or not child of deceased is admitted in his place for the same proportion).

·         Admission of a partner with corresponding retirement of another partner.

In case there are three partners in a firm and all the three partners go out and another three partners take over the control. It is succession of partnership and not change in constitution. In such case Section 188 shall apply.

The assessment in case of change of change of constitution is given in section 187 sub-section 1 of the Income Tax Act, 1961. The section reads as under:

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

As constituted at the time of making assessment means this section would apply if at the time of making an assessment order under section 143 or 144 (which would also include reassessment section 147) it is found that a change has occurred in the constitution of the firm.

The change might have occurred either in the relevant previous year, or in the assessment year or even later.

The words ‘at the time of making an assessment’ means in the course of the process of assessment and do not refer merely to the act of making an assessment order, Thus, where a notice under section 142(1)(i) for filing the return of income has been issued, the process of assessment of the person to whom notice is issued begins and would continue until an order of assessment is made and the assessment shall be made on the firm reconstituted if a change of the partners in the partnership occurs at any time before the assessment is made.

However, this section has no application to a case where the change occurs after the assessment of the firm is completed.

The liability of the partner shall be governed by the section 188A and not by this section.