CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
Section 187 — Change in constitution of a firm
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. The most heavily litigated provision of Chapter XVI; the seat of the long "reconstitution versus dissolution" controversy.
Key amendment: The proviso to sub-section (2) — "nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners" — was inserted by the Taxation Laws (Amendment) Act, 1984, w.e.f. 1 April 1975, to resolve the conflict among the High Courts.
Finance Act, 2026: No change.
Successor (ITA 2025): Re-enacted (change in constitution of a firm).
A. SECTION COMMENTARY
1. The provision and its purpose
Section 187 governs the assessment of a firm whose constitution has changed during the previous year but which has not ceased to exist. Where, at the time of making an assessment under section 143 or 144, it is found that a change has occurred in the firm's constitution, the assessment is made on the firm as constituted at the time of assessment — that is, a single assessment for the whole year, on the reconstituted firm, treating it as the same assessable entity throughout. The provision rests on the income-tax fiction that, for assessment purposes, a reconstituted firm is a continuing entity, distinct from the position under the general law of partnership.
2. What counts as a "change in constitution" — section 187(2)
Sub-section (2) defines the change exhaustively for this section: (a) where one or more partners cease to be partners or one or more new partners are admitted, provided at least one pre-change partner continues after the change; or (b) where all the partners continue but with a change in their respective shares. The common thread in clause (a) is continuity of at least one partner; if no partner of the old firm continues, there is no "change in constitution" but a succession (section 188). A mere change in profit-sharing ratios, without any change in personnel, is also a change in constitution under clause (b).
3. The great controversy — death of a partner
The provision generated one of the longest-running controversies in income-tax law: when a partner dies and the surviving partners continue the business (taking in, say, the deceased's heir), is it a "change in constitution" (one assessment under section 187) or a "dissolution followed by succession" (two assessments under section 188 read with section 170)? The High Courts split. One line (for example the Allahabad Full Bench in Dahi Laxmi Dal Factory) held that death dissolves the firm and the matter falls under section 188, requiring two assessments. Another line (for example the Punjab & Haryana Full Bench in Nandlal Sohanlal) held that, so long as one partner continued, it was a change in constitution under section 187, requiring a single assessment. The stakes were real: two assessments could mean two separate slabs/charges and could affect set-off and carry-forward.
4. The legislative and judicial resolution
The Taxation Laws (Amendment) Act, 1984 inserted the proviso to section 187(2) with retrospective effect from 1 April 1975: clause (a) does not apply where the firm is dissolved on the death of any of its partners. The effect is that where, under the partnership deed and the Partnership Act, the firm stands dissolved on a partner's death, the case is taken out of section 187 (change in constitution) and falls under section 188 (succession) — two assessments. The Supreme Court settled the principle in Wazid Ali Abid Ali and in CIT v. Empire Estate: whether there is a change in constitution or a dissolution-and-succession depends on whether the firm survives the death — and that, in turn, depends on whether the deed (or section 42 of the Partnership Act) provides for continuance. If the deed provides that death shall not dissolve the firm, section 187 applies (one assessment); if there is no such provision and the firm stands dissolved on death, section 188 applies (two assessments).
5. The two-partner firm
A special case follows from general partnership law: a firm of only two partners cannot survive the death of one — there cannot be a partnership of one — so on the death of one of two partners the firm necessarily stands dissolved, and the case can never be one of "change in constitution". Empire Estate applies this principle: where one of the partners died and there was no provision for continuance, the firm was dissolved and two assessments were required.
The dividing line is identity. If the same firm continues (at least one common partner, no dissolution), it is section 187 — one assessment on the firm as reconstituted. If the old firm ceases and a new firm takes over the business (no common partner, or dissolution followed by a fresh firm), it is section 188 read with section 170 — two assessments, one on the predecessor and one on the successor, divided at the date of succession.
B. STATUTORY POSITION (verbatim text)
The text of section 187, as it stands in the Act, is set out below.
187. (1) Where at the time of making an assessment under section 143 or section 144 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, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change ; or
(b) where all the partners continue with a change in their respective shares or in the shares of some of them :
Provided that nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners.
C. AUTHORITIES
This is the most authority-rich section of Chapter XVI. The controlling decisions are of the Supreme Court (Wazid Ali Abid Ali; Empire Estate), read with the High Court Full Benches that framed the controversy before the 1984 proviso. The position is now settled; older Full-Bench reasoning is retained for its analytical value and because it continues to be applied to fact-patterns of continuance versus dissolution.
Cluster 1 — Supreme Court: the settled test
Whether section 187 or section 188 applies turns on whether the firm survives the death/change.
Wazid Ali Abid Ali v. CIT (1988) 169 ITR 761 (SC)
Facts: The partnership deed provided that on the death of a partner the firm would not be dissolved but would be carried on by the surviving partners with the heir/representative of the deceased.
Held: Where the deed provides that death shall not dissolve the firm, the firm survives the partner's death and the case is one of change in constitution under section 187 — a single assessment. Where there is no such provision and a partner dies, the firm stands dissolved; the case falls outside section 187 and, the surviving partners continuing the business, section 188 is attracted as a succession of one firm by another.
Significance: The leading Supreme Court statement reconciling sections 187 and 188 by reference to the survival of the firm; it validates the 1984 proviso's logic.
Court / status: Supreme Court; followed.
CIT v. Empire Estate (1996) 218 ITR 355 (SC)
Facts: A firm constituted under a 1968 deed; a partner died in January 1974; the deed contained no provision for continuance on death.
Held: In the absence of a provision that death shall not dissolve the firm, the firm stood dissolved on the partner's death. The case was not a change in constitution under section 187(2); it fell under section 188, and two assessments were required — one up to the date of death and one thereafter. The Court affirmed that the existence (or absence) of a continuance clause, read with section 42 of the Partnership Act, is decisive.
Significance: Confirms that dissolution-on-death takes the case out of section 187 into section 188 (two assessments); applied also to the two-partner situation.
Court / status: Supreme Court; the governing authority.
Cluster 2 — The High Court Full Benches (the pre-proviso controversy)
These decisions framed the conflict the 1984 proviso and the Supreme Court later resolved; they remain instructive on the dissolution/reconstitution distinction.
Dahi Laxmi Dal Factory v. ITO (1976) 103 ITR 517 (Allahabad)(FB)
View: Where a partner dies and the firm is thereby dissolved, the case is one of succession governed by section 188 (read with section 170) — two assessments, one on the predecessor firm and one on the successor — and not a change in constitution under section 187. Section 187 does not provide for two assessments; a case truly within it yields a single assessment for the whole year.
Significance: The leading exposition of the "dissolution → section 188 → two assessments" line; broadly vindicated by the 1984 proviso and the Supreme Court.
Court / status: High Court (Allahabad), Full Bench.
View: On the facts, death of a partner followed by induction of a fresh partner, with some pre-existing partners continuing, was treated as a change in the constitution of the firm within section 187(2) (one assessment); the Full Bench held the matter to be governed by the Income-tax Act rather than the general law of partnership.
Significance: Represents the opposing "continuity → section 187 → one assessment" line that produced the conflict; its width was curtailed by the 1984 proviso (dissolution on death now removed from clause (a)) and by the Supreme Court's survival test.
Court / status: High Court (Punjab & Haryana), Full Bench. To be read subject to the proviso to section 187(2) and to Wazid Ali Abid Ali / Empire Estate.
Vishwanath Seth v. CIT (1984) 146 ITR 249 (Allahabad)
Principle: Distinguishes reconstitution (Chapter V of the Partnership Act — retirement, admission — preserving the firm's continuity, hence section 187, one assessment) from dissolution (Chapter VI — e.g., death, breaking the firm unless the deed provides for continuance, hence section 188 read with section 170, two assessments).
Significance: A clear High Court articulation of the conceptual line that the Supreme Court later adopted.
Court / status: High Court (Allahabad).
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the Income-tax Act, 1961 (local Act print, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; no statutory word has been altered. The new scheme of firm taxation (firm as a separate taxable entity, abolition of registration) operates from assessment year 1993-94; sections 182, 183 and 186 stand omitted by the Finance Act, 1992, w.e.f. 1-4-1993. The Finance Act, 2026 makes no amendment to any section of Chapter XVI. Citations are stated as reported; orders of the Tribunal and High Courts are flagged as such. Where a section has not been judicially construed on its own terms, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.
CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
Section 187 — Change in constitution of a firm
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. The most heavily litigated provision of Chapter XVI; the seat of the long "reconstitution versus dissolution" controversy.
Key amendment: The proviso to sub-section (2) — "nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners" — was inserted by the Taxation Laws (Amendment) Act, 1984, w.e.f. 1 April 1975, to resolve the conflict among the High Courts.
Finance Act, 2026: No change.
Successor (ITA 2025): Re-enacted (change in constitution of a firm).
A. SECTION COMMENTARY
1. The provision and its purpose
Section 187 governs the assessment of a firm whose constitution has changed during the previous year but which has not ceased to exist. Where, at the time of making an assessment under section 143 or 144, it is found that a change has occurred in the firm's constitution, the assessment is made on the firm as constituted at the time of assessment — that is, a single assessment for the whole year, on the reconstituted firm, treating it as the same assessable entity throughout. The provision rests on the income-tax fiction that, for assessment purposes, a reconstituted firm is a continuing entity, distinct from the position under the general law of partnership.
2. What counts as a "change in constitution" — section 187(2)
Sub-section (2) defines the change exhaustively for this section: (a) where one or more partners cease to be partners or one or more new partners are admitted, provided at least one pre-change partner continues after the change; or (b) where all the partners continue but with a change in their respective shares. The common thread in clause (a) is continuity of at least one partner; if no partner of the old firm continues, there is no "change in constitution" but a succession (section 188). A mere change in profit-sharing ratios, without any change in personnel, is also a change in constitution under clause (b).
3. The great controversy — death of a partner
The provision generated one of the longest-running controversies in income-tax law: when a partner dies and the surviving partners continue the business (taking in, say, the deceased's heir), is it a "change in constitution" (one assessment under section 187) or a "dissolution followed by succession" (two assessments under section 188 read with section 170)? The High Courts split. One line (for example the Allahabad Full Bench in Dahi Laxmi Dal Factory) held that death dissolves the firm and the matter falls under section 188, requiring two assessments. Another line (for example the Punjab & Haryana Full Bench in Nandlal Sohanlal) held that, so long as one partner continued, it was a change in constitution under section 187, requiring a single assessment. The stakes were real: two assessments could mean two separate slabs/charges and could affect set-off and carry-forward.
4. The legislative and judicial resolution
The Taxation Laws (Amendment) Act, 1984 inserted the proviso to section 187(2) with retrospective effect from 1 April 1975: clause (a) does not apply where the firm is dissolved on the death of any of its partners. The effect is that where, under the partnership deed and the Partnership Act, the firm stands dissolved on a partner's death, the case is taken out of section 187 (change in constitution) and falls under section 188 (succession) — two assessments. The Supreme Court settled the principle in Wazid Ali Abid Ali and in CIT v. Empire Estate: whether there is a change in constitution or a dissolution-and-succession depends on whether the firm survives the death — and that, in turn, depends on whether the deed (or section 42 of the Partnership Act) provides for continuance. If the deed provides that death shall not dissolve the firm, section 187 applies (one assessment); if there is no such provision and the firm stands dissolved on death, section 188 applies (two assessments).
5. The two-partner firm
A special case follows from general partnership law: a firm of only two partners cannot survive the death of one — there cannot be a partnership of one — so on the death of one of two partners the firm necessarily stands dissolved, and the case can never be one of "change in constitution". Empire Estate applies this principle: where one of the partners died and there was no provision for continuance, the firm was dissolved and two assessments were required.
6. Distinguishing section 187 from section 188
The dividing line is identity. If the same firm continues (at least one common partner, no dissolution), it is section 187 — one assessment on the firm as reconstituted. If the old firm ceases and a new firm takes over the business (no common partner, or dissolution followed by a fresh firm), it is section 188 read with section 170 — two assessments, one on the predecessor and one on the successor, divided at the date of succession.
B. STATUTORY POSITION (verbatim text)
The text of section 187, as it stands in the Act, is set out below.
187. (1) Where at the time of making an assessment under section 143 or section 144 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, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change ; or
(b) where all the partners continue with a change in their respective shares or in the shares of some of them :
Provided that nothing contained in clause (a) shall apply to a case where the firm is dissolved on the death of any of its partners.
C. AUTHORITIES
This is the most authority-rich section of Chapter XVI. The controlling decisions are of the Supreme Court (Wazid Ali Abid Ali; Empire Estate), read with the High Court Full Benches that framed the controversy before the 1984 proviso. The position is now settled; older Full-Bench reasoning is retained for its analytical value and because it continues to be applied to fact-patterns of continuance versus dissolution.
Cluster 1 — Supreme Court: the settled test
Whether section 187 or section 188 applies turns on whether the firm survives the death/change.
Wazid Ali Abid Ali v. CIT (1988) 169 ITR 761 (SC)
Facts: The partnership deed provided that on the death of a partner the firm would not be dissolved but would be carried on by the surviving partners with the heir/representative of the deceased.
Held: Where the deed provides that death shall not dissolve the firm, the firm survives the partner's death and the case is one of change in constitution under section 187 — a single assessment. Where there is no such provision and a partner dies, the firm stands dissolved; the case falls outside section 187 and, the surviving partners continuing the business, section 188 is attracted as a succession of one firm by another.
Significance: The leading Supreme Court statement reconciling sections 187 and 188 by reference to the survival of the firm; it validates the 1984 proviso's logic.
Court / status: Supreme Court; followed.
CIT v. Empire Estate (1996) 218 ITR 355 (SC)
Facts: A firm constituted under a 1968 deed; a partner died in January 1974; the deed contained no provision for continuance on death.
Held: In the absence of a provision that death shall not dissolve the firm, the firm stood dissolved on the partner's death. The case was not a change in constitution under section 187(2); it fell under section 188, and two assessments were required — one up to the date of death and one thereafter. The Court affirmed that the existence (or absence) of a continuance clause, read with section 42 of the Partnership Act, is decisive.
Significance: Confirms that dissolution-on-death takes the case out of section 187 into section 188 (two assessments); applied also to the two-partner situation.
Court / status: Supreme Court; the governing authority.
Cluster 2 — The High Court Full Benches (the pre-proviso controversy)
These decisions framed the conflict the 1984 proviso and the Supreme Court later resolved; they remain instructive on the dissolution/reconstitution distinction.
Dahi Laxmi Dal Factory v. ITO (1976) 103 ITR 517 (Allahabad)(FB)
View: Where a partner dies and the firm is thereby dissolved, the case is one of succession governed by section 188 (read with section 170) — two assessments, one on the predecessor firm and one on the successor — and not a change in constitution under section 187. Section 187 does not provide for two assessments; a case truly within it yields a single assessment for the whole year.
Significance: The leading exposition of the "dissolution → section 188 → two assessments" line; broadly vindicated by the 1984 proviso and the Supreme Court.
Court / status: High Court (Allahabad), Full Bench.
Nandlal Sohanlal v. CIT (1977) 110 ITR 170 (Punjab & Haryana)(FB)
View: On the facts, death of a partner followed by induction of a fresh partner, with some pre-existing partners continuing, was treated as a change in the constitution of the firm within section 187(2) (one assessment); the Full Bench held the matter to be governed by the Income-tax Act rather than the general law of partnership.
Significance: Represents the opposing "continuity → section 187 → one assessment" line that produced the conflict; its width was curtailed by the 1984 proviso (dissolution on death now removed from clause (a)) and by the Supreme Court's survival test.
Court / status: High Court (Punjab & Haryana), Full Bench. To be read subject to the proviso to section 187(2) and to Wazid Ali Abid Ali / Empire Estate.
Vishwanath Seth v. CIT (1984) 146 ITR 249 (Allahabad)
Principle: Distinguishes reconstitution (Chapter V of the Partnership Act — retirement, admission — preserving the firm's continuity, hence section 187, one assessment) from dissolution (Chapter VI — e.g., death, breaking the firm unless the deed provides for continuance, hence section 188 read with section 170, two assessments).
Significance: A clear High Court articulation of the conceptual line that the Supreme Court later adopted.
Court / status: High Court (Allahabad).
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the Income-tax Act, 1961 (local Act print, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; no statutory word has been altered. The new scheme of firm taxation (firm as a separate taxable entity, abolition of registration) operates from assessment year 1993-94; sections 182, 183 and 186 stand omitted by the Finance Act, 1992, w.e.f. 1-4-1993. The Finance Act, 2026 makes no amendment to any section of Chapter XVI. Citations are stated as reported; orders of the Tribunal and High Courts are flagged as such. Where a section has not been judicially construed on its own terms, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.