Indian income-tax law | Partnership firms

Section 187 of the Income-tax Act, 1961: Change in Constitution of a Firm

Section 187 explains how a partnership firm is assessed when its constitution changes, such as when a partner retires, a new partner joins, or partners revise their profit-sharing ratios.

Applicable period: This article explains section 187 of the Income-tax Act, 1961, relevant to assessments governed by that Act. The Income-tax Act, 2025 comes into force on 1 April 2026; for later tax years, consult its corresponding provisions and transitional rules rather than assuming the old section number continues unchanged.

What is a change in the constitution of a firm?

A change in constitution generally means that the partnership continues but its partners or their respective shares change. This is different from a genuine succession by a separate firm or dissolution of the original firm.

Section 187(1): Assessment after a change

Where, at the time of making an assessment under section 143 or section 144, the Assessing Officer finds that the constitution of a firm has changed, the assessment is made on the firm as constituted at the time of making the assessment.

Section 143 deals with assessment procedures, including scrutiny assessment. Section 144 provides for best-judgment assessment in specified cases of non-compliance.

Section 187(2): When a change is deemed to occur

Clause (a): Admission or retirement of partners

A change occurs if one or more partners cease to be partners or new partners are admitted, provided at least one person who was a partner before the change continues as a partner after the change.

Clause (b): Change in profit-sharing ratio

A change also occurs where all partners continue, but the respective shares of all or some partners change.

Proviso: Dissolution on death

The proviso to section 187(2) states that clause (a) does not apply where the firm is dissolved on the death of any of its partners. Whether the firm is dissolved depends on the partnership agreement and applicable partnership law, including section 42(c) of the Indian Partnership Act, 1932, which is subject to contract between the partners.

Practical examples

Situation	General treatment under section 187
Partner A retires; B and C continue	Change in constitution where continuity requirements are met.
A, B and C remain; profit shares are revised	Change in constitution under section 187(2)(b).
A partner dies and the partnership is dissolved under the deed and law	The death-dissolution proviso may exclude the case from section 187(2)(a); consider section 188 and the facts.
Entirely different persons take over the business	Examine whether succession under section 188 applies rather than assuming a mere change in constitution.

Documents and tax compliance

Firms should maintain an original partnership deed, duly executed supplementary or reconstitution deed, dates of admission or retirement, revised profit-sharing ratios, and supporting books of account. Section 184(4) requires a certified copy of the revised instrument of partnership to be furnished with the relevant return when there is a change in constitution or partner shares, subject to the applicable filing rules and procedures.

Review whether a revised return, updated PAN particulars, or other registrations and tax filings are required on the facts. A change in constitution does not automatically mean a new PAN is required.

Section 187 concerns assessment where the same firm undergoes a change in constitution. Section 188 deals with succession of one firm by another, where separate assessments may be required for the predecessor and successor in accordance with the statutory conditions. The legal character of the event matters more than the label used in the partnership deed.

Legislative notes

The earlier proviso to section 187(1) was omitted by the Finance Act, 1992 with effect from 1 April 1993. The proviso to section 187(2), concerning dissolution on a partner's death, was inserted by the Taxation Laws (Amendment) Act, 1984 with retrospective effect from 1 April 1975.

Official legal resources

For the authoritative statutory wording and any subsequent amendments, consult the Income Tax Department, the India Code legislative database, and the Income Tax e-Filing portal. Search for section 187 of the Income-tax Act, 1961 and the corresponding provisions of the Income-tax Act, 2025 for the relevant tax year.

This article is general legal information, not an assessment of a particular partnership deed or tax filing. Statutory applicability depends on the relevant tax year and facts.