Section 189 of ITA, 1961 : Section 189: Firm Dissolved Or Business Discontinued

Explanation using Example

Imagine a partnership firm 'XYZ Associates' that provides consulting services. In July 2021, the firm decides to dissolve due to internal disagreements among partners. Despite the dissolution, the Indian Income Tax Department still needs to assess the firm's income for the financial year 2020-2021. According to Section 189(1) of the Income-tax Act, 1961, the Assessing Officer will proceed to assess the firm's income as if the firm had not been dissolved.

During the assessment, if it is found that XYZ Associates had engaged in tax evasion or any fraudulent activity in that financial year, under Section 189(2), the Assessing Officer has the authority to impose a penalty on the firm in line with the provisions of Chapter XXI of the Act.

Furthermore, as per Section 189(3), all partners of XYZ Associates at the time of its dissolution will be jointly and severally liable for any tax, penalty, or other sums due. This means that the tax authorities can recover the due amounts from any or all partners individually.

If there were ongoing tax proceedings against the firm before it dissolved, Section 189(4) allows these proceedings to continue against the former partners as if the firm were still in existence.

Lastly, Section 189(5) clarifies that the liability of the partners as per this section does not override the provisions related to the legal representatives of deceased persons as mentioned in Section 159(6) of the Act.