Chapter XVII - Special Provisions Relating to Certain Persons
Section 327
Section 327: change in constitution of a firm
Section 327 addresses how a firm is assessed when its partners, or their profit shares, have changed during the year - the assessment is made on the firm as it is constituted at the time of assessment, not as it was earlier in the year.
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Need advice on Section 327?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Where at the time of making an assessment under section 270 or 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.
(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, subject to the condition that at least one person who was partner of the firm before the change continues as partner after such change; or
(b) where all the partners continue with a change in their respective shares or in the shares of some of them.
(3) The provisions of sub-section 2(a) shall not apply to a case where the firm is dissolved on the death of any of its partners.
Introduction
Section 327 explains when a partnership continues to be assessed as the same firm after a change in partners or their shares.
It identifies changes in constitution and distinguishes dissolution caused by a partner’s death.
Key takeaways
Assessment follows the current firm
Where a Section 270 or 271 assessment finds a change in constitution, the firm is assessed as constituted when the assessment is made.
A continuing partner links reconstitution
For partners joining or leaving, at least one partner from before the change must continue afterward for this definition to apply.
Profit-share changes also count
If all partners remain but their respective shares change, the firm's constitution has changed under Section 327.
Death-related dissolution is excluded
The partner-change limb does not apply where the firm dissolves on a partner's death.
Assessment on the firm as currently constituted
Where, at the time of making an assessment under section 270 or 271, it is found that a change has occurred in a firm's constitution, the assessment is made on the firm as constituted at the time of making the assessment.
What counts as a "change in constitution"
For the purposes of Section 327, there is a change in the constitution of the firm:
- If one or more partners cease to be partners, or one or more new partners are admitted - provided at least one person who was a partner before the change continues as a partner after it; or
- Where all partners continue, but with a change in their respective shares, or in the shares of some of them.
Exception: dissolution on a partner's death
The first limb of the "change in constitution" definition (partners ceasing/new partners admitted) does not apply to a case where the firm is dissolved on the death of any of its partners.
Step-by-step flow for applying Section 327
- 1
Is an assessment being made under Section 270 or 271?
Section 327(1) applies at the time of making an assessment under those sections.
- 2
Has the firm's constitution changed?
Under Section 327(2), there is a change if (a) one or more partners leave or new partners join, provided at least one pre-change partner continues, or (b) all partners continue but some or all shares change.
- No change: Section 327 has nothing to decide; the firm is assessed as it stands.
- Yes, a change under Section 327(2)(a) or (b): Go to the next step.
- 3
Was the firm dissolved on the death of a partner?
Section 327(3) says Section 327(2)(a) does not apply where the firm is dissolved on the death of any of its partners.
- Yes: This is not a change in constitution under Section 327(2)(a). Look at the provisions on dissolution (for example Section 330) instead.
- No: Go to the next step.
- 4
Assess the firm as constituted at the time of assessment
Under Section 327(1), the assessment is made on the firm as it is constituted when the assessment is made, not as it was during the tax year.
Practical checklist
Do
- Record the joining, retirement, death or share change date.
- Keep the amended deed and profit-sharing ratios for the whole tax year.
Avoid
- Assume every partner change creates a new firm for tax assessment.
Illustrative example
Worked example: a partner retires and a new one joins
Hypothetical facts (illustration only, not a real taxpayer): Firm ABC had three partners, A, B and C, at the start of a tax year. During that year C retired and D was admitted. A and B continued throughout. The assessment for that tax year is taken up under Section 270 a year later, when the partners are A, B and D.
Is there a change?
One partner (C) ceased and one new partner (D) was admitted, and A and B continued after the change. This is a change under Section 327(2)(a).
Death exclusion
The firm was not dissolved on the death of a partner, so Section 327(3) does not take the case out of Section 327(2)(a).
Who is assessed
Under Section 327(1), the assessment is made on the firm as constituted at the time of making the assessment, i.e. A, B and D.
Outcome
- The tax year's assessment is made on the firm consisting of A, B and D.
- Section 327 decides only on whom the assessment is made; C's position as a past partner is dealt with by other provisions, such as Section 329.
Frequently asked questions
If a firm's partners change during the year, which version of the firm gets assessed?
The firm as constituted at the time the assessment is actually made, under Section 327(1) - not the firm as it was constituted earlier in the tax year.
Does adding or removing a partner always count as a "change in constitution"?
Yes, provided at least one continuing partner links the old and new firm, per Section 327(2)(a). A change in the partners' respective profit shares, even without any change in who the partners are, also counts under Section 327(2)(b).
Does a firm dissolved by a partner's death count as a "change in constitution"?
No - Section 327(3) carves this out from the "change in constitution" definition where the firm is dissolved because of a partner's death.
Need help applying this provision to your situation?
Get help with partnership firm reconstitution tax filingLast updated 9 October 2026