Section 328: succession of one firm by another firm

Introduction

Section 328 deals with one firm succeeding another in the same business. The assessment follows the succession rule in section 313 for predecessor and successor firms.

Key takeaways

What Section 328 says

"Where a firm carrying on a business or profession is succeeded by another firm, except in a case covered by section 327, separate assessments shall be made on the predecessor firm and the successor firm as per the provisions of section 313."

So the rule only applies where there is genuine succession by another firm - not a mere change in the constitution of the same firm (which is instead governed by Section 327). Where succession does happen, the predecessor firm and the successor firm are assessed separately, following the procedure in Section 313.

Why the distinction matters

Apply Section 327 before classifying the event. Its continuing-partner and share-change tests determine a change in constitution, and Section 327(3) excludes a firm dissolved on the death of a partner from the specified admission or departure rule. Succession by another firm outside those tests falls under Section 328 even if some people remain involved. Separate predecessor and successor assessments then follow Section 313, including its applicable exceptions.

When this provision applies

First decide whether the event is covered by Section 327. Its continuing-partner and share-change tests, together with the exception for dissolution on a partner’s death, matter more than the title placed on the reorganisation documents.

Where another firm succeeds to the business or profession and the case is outside Section 327, Section 328 requires separate assessments under Section 313. Record the succession date and allocate the relevant income to the predecessor and successor periods under that section.

Limits and procedural safeguards

Separate assessments do not establish that the successor can never face a predecessor-related tax liability. Section 313 contains rules where the predecessor cannot be found and where an assessed sum cannot be recovered, subject to the statutory conditions and the Assessing Officer’s required finding.

Section 328 is not itself an exemption for gains arising from the transfer of the business. Section 313(6)(a) includes such gains within income for that section; the applicable computation and any claimed exemption need separate examination.

Step-by-step review

1. Read the partnership and succession documents and identify the persons carrying on the business before and after the event.

2. Test Section 327, including the continuing-partner condition and death-related dissolution exception.

3. If Section 328 applies, establish the succession date and prepare the predecessor and successor income schedules under Section 313.

4. Review pending proceedings and any Section 313 assessment or recovery exceptions before finalising the compliance plan.

Hypothetical example

Hypothetical illustration: Firm A transfers its continuing business to Firm B and the facts are assumed to fall outside Section 327. Section 328 calls for separate assessments following Section 313. The accounts must identify the relevant income up to the succession date and after it; simply treating all receipts collected by Firm B as its own post-succession income is not a substitute for that analysis.

Records to prepare

The earlier and later partnership instruments and the succession agreement.

The effective succession date, income allocation and transfer-gain analysis.

Pending assessment records and evidence relevant to any predecessor assessment or recovery issue.

Official amended Act source

• Income-tax Act, 2025 as amended by Finance Act, 2026: Section 328 and related provisions

Step-by-step flow for applying Section 328

1. 1

   Is a firm carrying on a business or profession succeeded by another firm?

   • No: Section 328 does not apply.
   • Yes: Go to the next step.
2. 2

   Is the case covered by Section 327?

   Section 327 covers a change in constitution, for example where some partners leave or join but at least one pre-change partner continues, or where only the shares change.

   • Yes: Treat it as a change in constitution under Section 327, not a succession under Section 328.
   • No: Go to the next step.
3. 3

   Make separate assessments on the predecessor and the successor

   Section 328 requires separate assessments on the predecessor firm and the successor firm, as per Section 313.

4. 4

   Split the income at the date of succession

   Under Section 313(1), the predecessor firm is assessed on the income of the tax year up to the date of succession and the successor firm on the income after that date. Under Section 313(6)(a), "income" includes any gain from the transfer of the business as a result of the succession.

5. 5

   Check recovery of the predecessor's dues

   Under Section 313(4), if a sum assessed on the predecessor cannot be recovered from it, the Assessing Officer records a finding and the sum becomes recoverable from the successor, which may in turn recover it from the predecessor.

Practical checklist

Glossary

Predecessor firm

The firm carrying on the business or profession before the succession.

Successor firm

The firm that succeeds to and continues the business or profession.

Reconstitution test

The conditions in Section 327 that distinguish a covered change in constitution from a Section 328 succession.

Frequently asked questions