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AI Drafter ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether a mere alteration in the partners' profit-sharing ratios, without any change in the partners themselves, amounted to a change in the constitution of a firm within Section 26(1) of the Income-tax Act, 1922, so as to require assessment on the basis of the altered ratio at the time of assessment rather than the ratio prevailing during the accounting year.
Analysis: The expression "change in the constitution of a firm" was construed as referring to a change in the personnel of the firm, that is, a change in the partners composing it, and not merely a rearrangement of the proportions in which existing partners divide profits. Support for this meaning was drawn from the Partnership Act, 1932, where the relevant provisions used the phrase in connection with changes in the partners or continuing partnership structure. On the admitted facts, the partners remained the same and only their shares in profits were altered by deed after the accounting year. That did not constitute a reconstitution of the firm within the meaning of Section 26(1).
Conclusion: Section 26(1) did not apply. The assessee was liable to assessment on the basis of his share of profits during the accounting year, not on the later altered share at the time of assessment.
Ratio Decidendi: A mere change in the profit-sharing ratio among existing partners does not amount to a change in the constitution of a firm for purposes of income-tax assessment; the provision applies only where the personnel of the firm changes.
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