SUCCESSION OF FIRM
This query is : Resolved
30 May 2017
Suppose there are 2 partners in a firm. Both of them retire on same day & their capital is converted to loan a/c of the firm and 2 new partners are admitted who are family members of retiring partners.. Does this amounts to succession or change in constitution of the firm???
What shall be the income tax implications?
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30 May 2017
It will be called constitution of firms.. As per income tax, setoff of loss and carried forward is not available to the new firm subject to other conditions..
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30 May 2017
Thanx sir
Is That means two assessments shall be done 1) upto retirement of pa
30 May 2017
Thanx sir,
Is that mean 2 assessment shall be done under income tax? 1) upto date of retirement of all the partners & 2) upto year end for new partners???
If so then weather i should upload 2 b/s & 2 pnl for different periods along with audit reports??
Please clarify
Thanks in advance
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26 July 2025
Great question! Let me break this down clearly for you regarding **succession of a firm, change in constitution, and income tax implications**.
---
## 1. **Is it Succession or Change in Constitution?**
* When **all existing partners retire** and **new partners (family members) are admitted**, **the constitution of the firm changes**.
* However, whether this counts as a **"succession"** depends on:
* If the **new firm continues the old business without interruption**, usually it is treated as **succession**.
* If **new partners bring in fresh capital or business substantially different**, it might be treated as a **new firm**.
But generally, **retirement of all partners + admission of new ones = Change in Constitution**, not a simple succession.
---
## 2. **Income Tax Implications**
* When there is a **change in constitution**, **the existing firm is considered to have ceased** and a **new firm starts**.
* Hence, **two assessments are required**:
1. **Old firm**: From start of the previous year to date of retirement of all partners.
2. **New firm**: From the date of admission of new partners to the end of the previous year.
---
## 3. **Treatment of Losses**
* **Losses of old firm cannot be carried forward by the new firm** except under special conditions.
* Loss set-off and carry forward rules apply separately to both firms.
---
## 4. **Financial Statements & Audit**
* You should prepare **two sets of financial statements**:
* **Old firm**: Balance Sheet and Profit & Loss account till the date of retirement.
* **New firm**: Balance Sheet and Profit & Loss account from the date of admission to year-end.
* Similarly, **two audit reports** corresponding to the two periods.
---
## 5. **Practical Tips**
* Properly document the **retirement and admission** through agreements.
* Maintain clarity on the date of retirement and admission.
* Inform the Income Tax Department by filing returns separately for both periods.
* If capital is converted into loan accounts, ensure proper accounting treatment and disclosure.
---
## **Summary Table**
| Aspect | Explanation |
| ------------------------------------- | -------------------------------------------------------------- |
| Change in constitution or succession? | Change in constitution (all partners retire, new admitted) |
| Number of assessments? | Two assessments (old firm and new firm) |
| Carry forward of losses? | Not allowed to new firm, unless special conditions met |
| Financial statements required? | Two sets (till retirement date and post-admission to year-end) |
| Audit reports? | Two audit reports corresponding to periods |
---
If you want, I can help you draft the **accounting entries** or outline the **tax return filing process** for both firms. Just let me know!
---
## 1. **Is it Succession or Change in Constitution?**
* When **all existing partners retire** and **new partners (family members) are admitted**, **the constitution of the firm changes**.
* However, whether this counts as a **"succession"** depends on:
* If the **new firm continues the old business without interruption**, usually it is treated as **succession**.
* If **new partners bring in fresh capital or business substantially different**, it might be treated as a **new firm**.
But generally, **retirement of all partners + admission of new ones = Change in Constitution**, not a simple succession.
---
## 2. **Income Tax Implications**
* When there is a **change in constitution**, **the existing firm is considered to have ceased** and a **new firm starts**.
* Hence, **two assessments are required**:
1. **Old firm**: From start of the previous year to date of retirement of all partners.
2. **New firm**: From the date of admission of new partners to the end of the previous year.
---
## 3. **Treatment of Losses**
* **Losses of old firm cannot be carried forward by the new firm** except under special conditions.
* Loss set-off and carry forward rules apply separately to both firms.
---
## 4. **Financial Statements & Audit**
* You should prepare **two sets of financial statements**:
* **Old firm**: Balance Sheet and Profit & Loss account till the date of retirement.
* **New firm**: Balance Sheet and Profit & Loss account from the date of admission to year-end.
* Similarly, **two audit reports** corresponding to the two periods.
---
## 5. **Practical Tips**
* Properly document the **retirement and admission** through agreements.
* Maintain clarity on the date of retirement and admission.
* Inform the Income Tax Department by filing returns separately for both periods.
* If capital is converted into loan accounts, ensure proper accounting treatment and disclosure.
---
## **Summary Table**
| Aspect | Explanation |
| ------------------------------------- | -------------------------------------------------------------- |
| Change in constitution or succession? | Change in constitution (all partners retire, new admitted) |
| Number of assessments? | Two assessments (old firm and new firm) |
| Carry forward of losses? | Not allowed to new firm, unless special conditions met |
| Financial statements required? | Two sets (till retirement date and post-admission to year-end) |
| Audit reports? | Two audit reports corresponding to periods |
---
If you want, I can help you draft the **accounting entries** or outline the **tax return filing process** for both firms. Just let me know!
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