Section 327 Income Tax Act 2025: When Does a Firm Change Constitution?

Section 327 explains when a partnership firm is treated as having undergone a change in its constitution and how its assessment is made after that change.

Current law: Section 327 of the Income-tax Act, 2025, effective from 1 April 2026, read with the Finance Act, 2026 amendments in the supplied consolidated text. The statutory heading is Change in constitution of a firm.

What does Section 327 provide?

Where a change in the constitution of a firm is found while making an assessment under Section 270 or Section 271, Section 327(1) directs that the assessment be made on the firm as constituted at the time of making the assessment. The provision identifies two categories of changes and expressly excludes a particular case of dissolution following a partner's death.

Section 327 explained subsection by subsection

Section 327(1): Assessment of the reconstituted firm

If, when making an assessment under Section 270 or 271, the tax authority finds that the firm's constitution has changed, the assessment is made on the firm in its constitution at the time of assessment. The statutory test is tied to the composition of the firm when the assessment is made.

Section 327(2)(a): Admission or retirement of partners

A change occurs when one or more partners leave or one or more new partners join, provided at least one person who was a partner before the change remains a partner afterwards. This continuity condition distinguishes reconstitution from certain cases of succession.

Section 327(2)(b): Change in partners' shares

A change in constitution also occurs where all partners continue but their respective shares, or the shares of some partners, change. A change in profit-sharing ratios may therefore qualify even without admission or retirement.

Section 327(3): Dissolution on death of a partner

The rule in Section 327(2)(a) does not apply where the firm is dissolved on the death of any partner. Whether a firm was actually dissolved should be examined against the partnership agreement and applicable law; this exception should not be read as applying automatically to every partner's death.

Relevant statutory definitions and concepts

Firm - Section 2(45)

The term has the meaning assigned under Section 4 of the Indian Partnership Act, 1932, and includes a limited liability partnership as defined under Section 2(1)(n) of the Limited Liability Partnership Act, 2008.

Assessment - Section 2(13)

Includes reassessment and recomputation.

Change in constitution - Section 327(2)

For this section, a change includes specified partner admissions or departures with continuity of at least one existing partner, or a change in partners' shares while all partners remain.

Practical illustrations

Example 1: New partner admitted

A and B are partners. C joins while A and B remain. The admission constitutes a change under Section 327(2)(a). If the change is found at assessment, Section 327(1) governs the firm's assessment.

Example 2: Profit-sharing ratio revised

A and B continue as partners but revise their shares from 50:50 to 60:40. This is a change under Section 327(2)(b), even though no partner enters or leaves.

Example 3: Dissolution following death

If the partnership is dissolved on the death of a partner, Section 327(3) excludes application of Section 327(2)(a). Other provisions governing dissolution or succession may need consideration according to the facts.

Compliance point: Maintain the original and revised partnership deeds, admission or retirement documentation, effective dates, and records of profit-sharing ratios. Also examine the separate requirements for assessment as a firm under Section 325.

Section 324 - Charge of tax in case of a firm
Section 325 - Assessment as a firm
Section 326 - Assessment when Section 325 is not complied with
Section 328 - Succession of one firm by another firm
Section 329 - Joint and several liability of partners for tax payable by firm
Section 330 - Firm dissolved or business discontinued

Frequently asked questions

Does adding a partner change the firm's constitution?

Yes, if at least one person who was a partner before the change continues as a partner after it, as required by Section 327(2)(a).

Does changing only the profit-sharing ratio count?

Yes. Section 327(2)(b) covers changes in shares where all partners continue.

Which constitution is used for assessment?

Under Section 327(1), where the change is found at the time of assessment under Section 270 or 271, the assessment is made on the firm as constituted at that time.

Does Section 327(2)(a) apply to dissolution on death?

No. Section 327(3) expressly excludes a case where the firm is dissolved on a partner's death.

Statutory source

Read the consolidated Income-tax Act, 2025, as amended by the Finance Act, 2026, especially Section 327. The article is explanatory and should be read with the applicable statutory text.

Last reviewed: 12 November 2026.