Our firm was dissolved two years ago. The Assessing Officer has now made an assessment in the firm's name and served the demand on me as an ex-partner, with a penalty on top. Can he assess a firm that no longer exists, and can he recover the whole amount from me alone?
Yes on both counts, and the two sections are in identical terms — s.189 for a firm and s.177 for an association of persons. Sub-section (1) of each requires the Assessing Officer, where the business or profession has been discontinued or the firm or association is dissolved, to make an assessment of the total income 'as if no such discontinuance or dissolution had taken place', with all the provisions of the Act, including those relating to the levy of a penalty or any other sum chargeable under any provision of the Act, applying so far as may be to that assessment. Sub-section (3) makes every person who was a partner (or member) at the time of the discontinuance or dissolution, and the legal representative of any such person who is deceased, jointly and severally liable for the amount of tax, penalty or other sum payable. Sub-section (2) preserves the penalty power expressly in the hands of the Assessing Officer, the Joint Commissioner (Appeals) or the Commissioner (Appeals).
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2023-04-01, reported as Income-tax Act, 1961, ss.177 and 189, sub-sections (1) to (5) of each, as printed on the Year 2024 (No. 2) and Year 2025 departmental pages. It bears on section 177, section 177(1), section 177(2), section 177(3), section 177(4), section 177(5), section 189, section 189(1), section 189(2), section 189(3), section 189(4), section 189(5), section 159(6), section 188A of the Income Tax Act 1961, in Assessment & Scrutiny, Penalty and Demand, Recovery & Stay matters.
The instinct that a dissolved firm cannot be assessed is wrong, and it is wrong because Parliament said so in terms. What a practitioner should be arguing instead is the three things the sections do NOT do. First, sub-section (3) fastens liability on a person who was a partner or member 'at the time of such discontinuance or dissolution' — so a partner who retired well before the dissolution is not caught by sub-section (3) itself, and the Revenue must find its authority elsewhere (in a firm's case, section 188A, and in the general law of partnership). Second, sub-section (4) allows proceedings already commenced to be continued against the persons in sub-section (3) 'from the stage at which the proceedings stood' at the time of the discontinuance or dissolution — it continues proceedings, it does not cure a want of notice to the person now sought to be made liable, and it does not permit the department to start afresh against him without the notice the Act otherwise requires. Third, sub-section (5) of each section provides that nothing in the section shall affect the provisions of sub-section (6) of section 159, which is the limit on a legal representative's liability to the estate — so the legal representative named in sub-section (3) is not exposed beyond what section 159(6) allows. Note also that the penalty power in sub-section (2) is expressly conferred on the Joint Commissioner (Appeals) as well as the Assessing Officer and the Commissioner (Appeals): those words were inserted with effect from 1 April 2023, and an order of a Joint Commissioner (Appeals) imposing a penalty on a dissolved firm for a period before that date needs the point checked. Finally, section 177 and section 189 are about the machinery of assessment after dissolution; whether there should be one assessment on the firm or two, on a change in constitution as against a succession, is governed by sections 187 and 188 and is a separate entry in this library.
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Section 189, as printed on the Year 2024 (No. 2) departmental page: '(1) 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, and 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 apply, so far as may be, to such assessment. (2) Without prejudice to the generality of the foregoing sub-section, if the Assessing Officer or the Joint Commissioner (Appeals) or the Commissioner (Appeals) in the course of any proceeding under this Act in respect of any such firm as is referred to in that sub-section is satisfied that the firm was guilty of any of the acts specified in Chapter XXI, he may impose or direct the imposition of a penalty in accordance with the provisions of that Chapter. (3) 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, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum. (4) Where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against the person referred to in sub-section (3) 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. (5) Nothing in this section shall affect the provisions of sub-section (6) of section 159.' Section 177 is in the same terms with 'an association of persons' for 'a firm' and 'a member of the association of persons' for 'a partner of the firm'; its sub-section (1) reads: 'Where any business or profession carried on by an association of persons has been discontinued or where an association of persons is dissolved, the Assessing Officer shall make an assessment of the total income of the association of persons as if no such discontinuance or dissolution had taken place, and 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 apply, so far as may be, to such assessment.'
Where a firm's or an association's business or profession has been discontinued, or the firm or association is dissolved, the Assessing Officer must assess its total income as if no discontinuance or dissolution had taken place, and all the provisions of the Act, including those relating to penalty, apply to that assessment. The penalty power is expressly available to the Assessing Officer, the Joint Commissioner (Appeals) and the Commissioner (Appeals). Every person who was a partner or member at the time of the discontinuance or dissolution, and the legal representative of any such person who is deceased, is jointly and severally liable for the tax, penalty or other sum payable. Proceedings commenced before the discontinuance or dissolution may be continued against those persons from the stage at which they stood. Nothing in either section affects section 159(6).
Not applicable — this is a statement of statutory text transcribed from departmental section pages. No judicial reasoning is involved.
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, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum.
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Handle my notice → Ask a CA on WhatsAppYes on both counts, and the two sections are in identical terms — s.189 for a firm and s.177 for an association of persons. Sub-section (1) of each requires the Assessing Officer, where the business or profession has been discontinued or the firm or association is dissolved, to make an assessment of the total income 'as if no such discontinuance or dissolution had taken place', with all the provisions of the Act, including those relating to the levy of a penalty or any other sum chargeable under any provision of the Act, applying so far as may be to that assessment. Sub-section (3) makes every person who was a partner (or member) at the time of the discontinuance or dissolution, and the legal representative of any such person who is deceased, jointly and severally liable for the amount of tax, penalty or other sum payable. Sub-section (2) preserves the penalty power expressly in the hands of the Assessing Officer, the Joint Commissioner (Appeals) or the Commissioner (Appeals). This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 177, section 177(1), section 177(2), section 177(3), section 177(4), section 177(5), section 189, section 189(1), section 189(2), section 189(3), section 189(4), section 189(5), section 159(6), section 188A of the Income Tax Act 1961. It is reported as Income-tax Act, 1961, ss.177 and 189, sub-sections (1) to (5) of each, as printed on the Year 2024 (No. 2) and Year 2025 departmental pages. The instinct that a dissolved firm cannot be assessed is wrong, and it is wrong because Parliament said so in terms. What a practitioner should be arguing instead is the three things the sections do NOT do. First, sub-section (3) fastens liability on a person who was a partner or member 'at the time of such discontinuance or dissolution' — so a partner who retired well before the dissolution is not caught by sub-section (3) itself, and the Revenue must find its authority elsewhere (in a firm's case, section 188A, and in the general law of partnership). Second, sub-section (4) allows proceedings already commenced to be continued against the persons in sub-section (3) 'from the stage at which the proceedings stood' at the time of the discontinuance or dissolution — it continues proceedings, it does not cure a want of notice to the person now sought to be made liable, and it does not permit the department to start afresh against him without the notice the Act otherwise requires. Third, sub-section (5) of each section provides that nothing in the section shall affect the provisions of sub-section (6) of section 159, which is the limit on a legal representative's liability to the estate — so the legal representative named in sub-section (3) is not exposed beyond what section 159(6) allows. Note also that the penalty power in sub-section (2) is expressly conferred on the Joint Commissioner (Appeals) as well as the Assessing Officer and the Commissioner (Appeals): those words were inserted with effect from 1 April 2023, and an order of a Joint Commissioner (Appeals) imposing a penalty on a dissolved firm for a period before that date needs the point checked. Finally, section 177 and section 189 are about the machinery of assessment after dissolution; whether there should be one assessment on the firm or two, on a change in constitution as against a succession, is governed by sections 187 and 188 and is a separate entry in this library. If it applies to you, the first step is this: Do not argue that the assessment is void because the firm or association no longer exists. Sub-section (1) of each section directs the assessment to be made as if no discontinuance or dissolution had taken place.
Section 189, as printed on the Year 2024 (No. 2) departmental page: '(1) 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, and 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 apply, so far as may be, to such assessment. (2) Without prejudice to the generality of the foregoing sub-section, if the Assessing Officer or the Joint Commissioner (Appeals) or the Commissioner (Appeals) in the course of any proceeding under this Act in respect of any such firm as is referred to in that sub-section is satisfied that the firm was guilty of any of the acts specified in Chapter XXI, he may impose or direct the imposition of a penalty in accordance with the provisions of that Chapter. (3) 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, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum. (4) Where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against the person referred to in sub-section (3) 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. (5) Nothing in this section shall affect the provisions of sub-section (6) of section 159.' Section 177 is in the same terms with 'an association of persons' for 'a firm' and 'a member of the association of persons' for 'a partner of the firm'; its sub-section (1) reads: 'Where any business or profession carried on by an association of persons has been discontinued or where an association of persons is dissolved, the Assessing Officer shall make an assessment of the total income of the association of persons as if no such discontinuance or dissolution had taken place, and 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 apply, so far as may be, to such assessment.' The matter was decided on 2023-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Where a firm's or an association's business or profession has been discontinued, or the firm or association is dissolved, the Assessing Officer must assess its total income as if no discontinuance or dissolution had taken place, and all the provisions of the Act, including those relating to penalty, apply to that assessment. The penalty power is expressly available to the Assessing Officer, the Joint Commissioner (Appeals) and the Commissioner (Appeals). Every person who was a partner or member at the time of the discontinuance or dissolution, and the legal representative of any such person who is deceased, is jointly and severally liable for the tax, penalty or other sum payable. Proceedings commenced before the discontinuance or dissolution may be continued against those persons from the stage at which they stood. Nothing in either section affects section 159(6).
Not applicable — this is a statement of statutory text transcribed from departmental section pages. No judicial reasoning is involved. In the words reproduced by the source cited on this page: "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, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum."
It was decided by the CBDT Circulars & Instructions on 2023-04-01 and is reported as Income-tax Act, 1961, ss.177 and 189, sub-sections (1) to (5) of each, as printed on the Year 2024 (No. 2) and Year 2025 departmental pages. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 177, section 177(1), section 177(2), section 177(3), section 177(4), section 177(5), section 189, section 189(1), section 189(2), section 189(3), section 189(4), section 189(5), section 159(6), section 188A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Where a firm's or an association's business or profession has been discontinued, or the firm or association is dissolved, the Assessing Officer must assess its total income as if no discontinuance or dissolution had taken place, and all the provisions of the Act, including those relating to penalty, apply to that assessment. The penalty power is expressly available to the Assessing Officer, the Joint Commissioner (Appeals) and the Commissioner (Appeals). Every person who was a partner or member at the time of the discontinuance or dissolution, and the legal representative of any such person who is deceased, is jointly and severally liable for the tax, penalty or other sum payable. Proceedings commenced before the discontinuance or dissolution may be continued against those persons from the stage at which they stood. Nothing in either section affects section 159(6). It arises in Assessment & Scrutiny, Penalty and Demand, Recovery & Stay matters, on section 177, section 177(1), section 177(2), section 177(3), section 177(4), section 177(5), section 189, section 189(1), section 189(2), section 189(3), section 189(4), section 189(5), section 159(6), section 188A of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Fix the date of dissolution or discontinuance and identify precisely who was a partner or member on that date. Sub-section (3) reaches those persons and the legal representatives of the deceased among them, and no one else. If you retired before that date, take the point that sub-section (3) does not reach you, and make the department identify the provision it is actually relying on — in a firm's case that will usually be section 188A. If you are a legal representative, plead sub-section (5) with section 159(6): the section expressly does not affect the limit that sub-section places on your liability. Where proceedings had already commenced before the dissolution, check under sub-section (4) that the department has continued them from the stage they stood at, and has not restarted them against you without the notice the Act requires. On a penalty, check who imposed it and for which year: the words conferring the power on the Joint Commissioner (Appeals) were inserted with effect from 1 April 2023. For an association of persons, use section 177 and not section 189, and vice versa for a firm; the wording is the same but citing the wrong section invites an easy answer.
Still good law. The Year 2024 (No. 1), Year 2024 (No. 2) and Year 2025 departmental pages for each section print the same text, which is the strongest evidence available on this pass that nothing has displaced it since the Joint Commissioner (Appeals) reference was inserted with effect from 1 April 2023. No Finance Act text was read and no Year 2026 page was located. Any authority or precedent recording the penalty power in sub-section (2) as vested only in the Assessing Officer and the Commissioner (Appeals) is superseded by amendment for a proceeding on or after 1 April 2023. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Both sections were transcribed this pass from departmental pages that printed the section heading and the Act name 'Income-tax Act, 1961' alongside a 'Year:' stamp. Section 189, heading 'Firm dissolved or business discontinued': https://incometaxindia.gov.in/w/section-189-63 (Year: 2024 (No. 2)), sub-sections (1) to (5) in sequence; /w/section-189-64 (Year: 2025), sub-sections (1) to (3) re-transcribed identically; /w/section-189-62 (Year: 2024 (No. 1)), sub-section (2) with footnote 95, 'Inserted by the Finance Act, 2023, w.e.f. 1-4-2023'. Section 177, heading 'Association dissolved or business discontinued': /w/section-177-63 (Year: 2024 (No. 2)), sub-sections (1) to (5) in sequence; /w/section-177-64 (Year: 2025), sub-sections (1), (3) and (5) re-transcribed identically; /w/section-177-62 (Year: 2024 (No. 1)), sub-section (2) with footnote 92, 'Inserted by the Finance Act, 2023, w.e.f. 1-4-2023'. The footnoted insertion is the reference to the Joint Commissioner (Appeals) in sub-section (2) of each section, which is why 'decided_on' is 1 April 2023 — a COMMENCEMENT DATE, not a decision date. I did not establish the Act number for the Finance Act, 2023 from these two pages; the departmental pages for section 170A read on the same pass give it as Act No. 8 of 2023. I did not locate a page for either section stamped Year 2026. This library already holds a separate statutory entry on sections 187, 188, 188A and 189 dealing with the different question of whether there is one assessment on the firm or two; this entry deliberately does not revisit that and confines itself to the machinery in sections 177 and 189 themselves. I did not retrieve the text of section 159(6) this pass and therefore describe it only as the provision that sub-section (5) of each section preserves, without stating its terms. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Where a firm's or an association's business or profession has been discontinued, or the firm or association is dissolved, the Assessing Officer must assess its total income as if no discontinuance or dissolution had taken place, and all the provisions of the Act, including those relating to penalty, apply to that assessment. The penalty power is expressly available to the Assessing Officer, the Joint Commissioner (Appeals) and the Commissioner (Appeals). Every person who was a partner or member at the time of the discontinuance or dissolution, and the legal representative of any such person who is deceased, is jointly and severally liable for the tax, penalty or other sum payable. Proceedings commenced before the discontinuance or dissolution may be continued against those persons from the stage at which they stood. Nothing in either section affects section 159(6).
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