Section 189 of the Income-tax Act, 1961: Firm Dissolved or Business Discontinued
Dissolution of a partnership firm or discontinuance of its business does not, by itself, extinguish income-tax liabilities. Section 189 of the Income-tax Act, 1961 authorised assessment of the firm despite dissolution or discontinuance and provided for liability of partners, penalties and continuation of proceedings. For tax years governed by the Income-tax Act, 2025, the corresponding rule appears in section 330.
Meaning and scope of section 189
Dissolution means termination of the partnership relationship among all partners, as distinct from a mere change in constitution. Discontinuance refers to cessation of a business or profession carried on by the firm. Section 189 prevents either event from frustrating tax assessment or recovery.
Section 189 explained, subsection by subsection
Section 189(1): Assessment after dissolution or discontinuance
The Assessing Officer assesses the firm's total income as though the dissolution or discontinuance had not occurred. Provisions relating to assessment, penalties and other sums chargeable under the Act continue to apply, as relevant.
Section 189(2): Penalties
If the competent tax authority is satisfied during proceedings that the firm committed an act attracting penalty under Chapter XXI, a penalty may be imposed or directed in accordance with that Chapter. The amended 1961 Act includes the Joint Commissioner (Appeals) alongside the Assessing Officer and Commissioner (Appeals) in the relevant provision.
Section 189(3): Joint and several liability
Every person who was a partner at the time of dissolution or discontinuance, and the legal representative of a deceased such partner, is jointly and severally liable for the firm's tax, penalty or other sum payable. Joint and several means recovery need not be confined to a partner's profit-sharing percentage. The statutory limits applicable to legal representatives, including section 159, remain relevant.
Section 189(4): Pending proceedings
Where assessment proceedings had already commenced before dissolution or discontinuance, they may continue against the persons described in subsection (3) from the stage reached at that time. Dissolution does not automatically require restarting proceedings.
Section 189(5): Protection of section 159(6)
Section 189 does not override section 159(6), which addresses the personal liability of a legal representative in specified circumstances involving estate assets. Liability of a legal representative must therefore be considered with section 159, not in isolation.
Corresponding law: Section 330 of the Income-tax Act, 2025
Section 330 substantially carries forward the dissolved-firm assessment framework: assessment notwithstanding dissolution, penalties, joint and several liability, continuation of proceedings and protection of the legal-representative provision. Its subsection (5) refers to section 302(4) of the 2025 Act rather than section 159(6) of the 1961 Act. Section 320 of the 2025 Act separately addresses discontinued businesses and related notice requirements.
| Issue | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Assessment of dissolved firm | Section 189(1) | Section 330(1) |
| Penalty proceedings | Section 189(2) | Section 330(2) |
| Liability of partners | Section 189(3) | Section 330(3) |
| Pending proceedings | Section 189(4) | Section 330(4) |
| Legal representatives | Section 189(5) read with 159(6) | Section 330(5) read with 302(4) |
Practical example
Suppose a partnership firm discontinues business during a tax year and later receives a notice concerning income earned before closure. The firm cannot resist assessment merely because it ceased operating. Depending on the applicable tax year and law, the Assessing Officer may proceed under section 189 or section 330; partners' exposure and any recovery must be assessed under the relevant statutory provisions.
Compliance points for a dissolving firm
- Record the dissolution date, deed, partner details and allocation of assets and liabilities.
- Preserve books, bank statements, tax filings and correspondence for the required period.
- Complete applicable return, tax-payment, TDS and other statutory obligations.
- Review pending notices, appeals, demands and possible penalties before distributing assets.
- Check the separate discontinuance-notice rule, where applicable, and the relevant provisions for the tax year.
Related provisions
Section 187: Change in constitution of a firm differs from dissolution. Section 188: Succession of one firm by another firm deals with separate assessments where applicable. Section 188A separately addresses partners' joint and several liability for firm dues.
Official legislation and references
- Income-tax Act, 1961 as amended by Finance Act, 2025 (Income Tax Department PDF)
- Income-tax Act, 2025 as amended by Finance Act, 2026 (Income Tax Department PDF)
- Income-tax Act, 2025 (Income Tax Department PDF)
Frequently asked questions
Can a dissolved partnership firm be assessed for income tax?
Yes. Section 189 of the 1961 Act and section 330 of the 2025 Act provide for assessment notwithstanding dissolution or discontinuance, subject to the applicable year and law.
Are partners personally liable for the firm's outstanding tax?
The relevant provisions impose joint and several liability on persons who were partners at the time of dissolution or discontinuance. The exact liability and recovery procedure depend on the governing law and facts.
Does dissolution end pending tax proceedings?
No. Proceedings may continue from the stage already reached, against the persons specified by law.
This article is general legal information, not a substitute for advice on a particular assessment or recovery notice. Updated 27 October 2026.