15.—Change in constitution, succession and dissolution

Change in constitution of a firm.

327(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.

327(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
• (b) 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
• (c) where all the partners continue with a change in their respective shares or in the shares of some of them.

327(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.

Explanation

Section Summary:

Section 15 (327) of the new income tax law addresses how changes in the constitution of a firm (such as changes in partners or their profit-sharing ratios) are handled during tax assessments. It ensures that the firm is assessed for tax purposes based on its current structure at the time of assessment, rather than its previous structure.

Key Changes:

1. Assessment Based on Current Constitution: The law now explicitly states that tax assessments must be made on the firm as it is constituted at the time of assessment, not as it was before any changes.
2. Definition of Change in Constitution: The section clarifies what constitutes a change in the firm's constitution, including:
   • Partners leaving the firm.
   • New partners joining, provided at least one original partner remains.
   • Changes in profit-sharing ratios among existing partners.
3. Exception for Dissolution Due to Death: If a firm dissolves due to the death of a partner, the provisions of sub-section 2(a) (regarding partners ceasing to be partners) do not apply.

Practical Implications:

• For Firms: Firms must ensure that any changes in their constitution (e.g., admission or exit of partners, changes in profit-sharing ratios) are properly documented and reported to tax authorities. The tax assessment will reflect the firm's current structure.
• For Tax Authorities: Assessments must be based on the firm's current constitution, which may require updated information from the firm.
• For Partners: Changes in the firm's structure could impact individual tax liabilities, especially if profit-sharing ratios are altered.

Critical Concepts:

• Change in Constitution: This refers to any alteration in the partnership structure, such as partners leaving, new partners joining, or changes in profit-sharing ratios.
• Assessment: The process of determining the taxable income of the firm for a given period.
• Dissolution Due to Death: If a partner dies and the firm dissolves as a result, the rules about partners ceasing to be partners do not apply.

Compliance Steps:

1. Document Changes: Maintain proper records of any changes in the firm's constitution, such as partnership deeds, admission or exit of partners, and revised profit-sharing agreements.
2. Update Tax Authorities: Notify the tax authorities of any changes in the firm's constitution to ensure accurate assessments.
3. File Returns Accurately: Ensure that tax returns reflect the firm's current structure and profit-sharing ratios.

Examples:

1. Scenario 1: A firm has three partners: A, B, and C. Partner C leaves the firm, and Partner D joins. The firm now consists of A, B, and D. Under Section 327, the tax assessment will be based on the new constitution (A, B, and D), not the old one (A, B, and C).
2. Scenario 2: A firm has two partners: X and Y. Partner X passes away, and the firm dissolves. Since the dissolution is due to the death of a partner, the provisions of sub-section 2(a) (regarding partners ceasing to be partners) do not apply. The firm's tax assessment will be handled differently, likely as part of the dissolution process.

This section ensures that tax assessments align with the current state of the firm, providing clarity and consistency in tax treatment for firms undergoing structural changes.