Section 177 of ITA, 1961 : Section 177: Association Dissolved Or Business Discontinued

Explanation using Example

Imagine a scenario where a group of three friends formed a partnership to run a cafe. After a couple of years, they decide to dissolve the partnership due to personal differences. Even though the cafe is no longer in operation, the Income Tax Act mandates that for the purpose of assessment, the business is treated as if it is still running. This means that the Income Tax Officer will assess the income and tax liabilities for the period prior to the dissolution as if the cafe was still operational.

During the assessment, if it is found that the partnership had engaged in tax evasion or any act in violation of the Income Tax Act, the Officer has the authority to levy a penalty against the partnership.

Furthermore, each friend, as a former member of the partnership, is jointly and severally liable for any taxes or penalties due. This means that the tax authorities can recover the entire amount from any one of the partners or from each partner's share.

If there were any ongoing tax proceedings at the time the cafe was dissolved, those proceedings would continue against the individual partners as if the dissolution had not occurred.