Dissolution or discontinuance of Firm: Provision under Income Tax
To start with the topic, let us first understand the meaning dissolution of a partnership firm. Dissolution of partnership firm means, discontinuing the business under the name of said partnership firm.
The dissolution may be due to mutual consent of partners, Compulsory dissolution (All partners or all partners except one partner are declared insolvent, the firm is carrying unlawful activities), Dissolution depending on certain contingent events, Dissolution by notice etc.
The question is what shall be the tax consequence on dissolution. The tax implications on dissolution are dealt in section 189 of the Income Tax Act, 1961. Let us have a detail study of dissolution of firm.
Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Assessing Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place.
All the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act shall be applicable to such assessment.
Every person who was at the time of such discontinuance or dissolution a partner of the firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable.
All the provisions of this Act shall be applicable for any such assessment or imposition of penalty or other sum as may be applicable.
Where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against above mentioned person from the stage at which the proceedings stood at the time of such discontinuance or dissolution, and all the provisions of this Act shall, so far as may be, apply accordingly.
In case due to death of a partner the firm gets dissolved and the remaining partners with or without the new partners enters into a new partnership deed it shall be the case of Succession of firm and two assessments as per section 188 of the Income Tax Act, 1961 shall be made.