CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
Section 189 — Firm dissolved or business discontinued
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. The machinery provision for assessing a firm after discontinuance of its business or its dissolution; among the most litigated provisions of the Chapter.
Recent amendment: In sub-section (2) the words "the Joint Commissioner (Appeals) or" were inserted by the Finance Act, 2023 (Act 8 of 2023), w.e.f. 1-4-2023, to reflect the new Joint Commissioner (Appeals) tier.
Finance Act, 2026: No change.
Successor (ITA 2025): Re-enacted (assessment of a discontinued or dissolved firm).
Section 189(1) is the heart of the provision. Where a firm's business has been discontinued, or the firm is dissolved, the Assessing Officer is to make an assessment of the firm's total income as if no such discontinuance or dissolution had taken place, and all the provisions of the Act — including those relating to the levy of penalty or any other sum — apply, so far as may be, to such assessment. The provision thus creates a legal fiction of continuity: for assessment purposes the firm is deemed to subsist notwithstanding that, under the general law, it has ceased to exist. Without this fiction a firm could escape assessment of income already earned simply by dissolving.
Sub-section (2) makes explicit that the deeming extends to penalty: if the Assessing Officer, the Joint Commissioner (Appeals) or the Commissioner (Appeals), in the course of any proceeding in respect of such a firm, 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 under that Chapter. The satisfaction must be reached in the course of the proceeding; on the analogue under the 1922 Act the Supreme Court held in S.V. Angidi Chettiar that it is the satisfaction before the conclusion of the proceeding — not the issue of the penalty notice — that founds jurisdiction, and that penalty may be imposed on a dissolved firm.
3. Liability of partners and legal representatives — section 189(3)
Sub-section (3) fastens joint and several liability on every person who was, at the time of discontinuance or dissolution, a partner of the firm, and on the legal representative of a deceased partner, for the amount of tax, penalty or other sum payable; all the provisions of the Act apply to such assessment or imposition. This is the dissolved-firm counterpart of section 188A; it ensures the demand is recoverable from the persons who were behind the firm.
Where discontinuance or dissolution takes place after proceedings for an assessment year have commenced, sub-section (4) allows those proceedings to be continued against the persons referred to in sub-section (3) from the stage at which they stood at the time of discontinuance or dissolution, and all the provisions of the Act apply accordingly. The fiction of continuity is thus carried into procedure: a dissolution mid-assessment does not abate the proceeding.
Sub-section (5) provides that nothing in section 189 shall affect the provisions of section 159(6) (liability of a legal representative limited to the estate of the deceased). The two provisions are harmonised: the joint-and-several liability of a deceased partner's legal representative under section 189(3) is subject to the estate-based limitation of section 159(6).
6. The continuity fiction in the case-law
The provision codifies a principle the Supreme Court had already developed under the 1922 Act: that a firm does not, by discontinuing its business or dissolving, escape liability to tax on income it had earned, and that the assessment and penalty machinery continues to operate against the firm and its partners. Shivram Poddar and Raja Reddy Mallaram are the foundational statements; S.V. Angidi Chettiar applies the principle to penalty.
B. STATUTORY POSITION (verbatim text)
The text of section 189, as it stands in the Act, is set out below.
189. (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.
Explanation.—[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]
(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.
Editorial note: In sub-section (2) the words "the Joint Commissioner (Appeals) or" were inserted by Act 8 of 2023, w.e.f. 1-4-2023, and are shown in the running text above (the publisher's footnote marker has been removed). The Explanation to the section stands omitted by the Finance Act, 1992, w.e.f. 1-4-1993, and is shown only by its omission marker.
C. AUTHORITIES
Section 189 is squarely supported by Supreme Court authority developed under the cognate provision of the 1922 Act (section 44) and carried into the 1961 Act. The leading decisions are set out below; they remain the governing law on the continuity fiction, on penalty after dissolution, and on partner liability.
A firm cannot defeat assessment of income already earned by dissolving or discontinuing.
Shivram Poddar v. ITO (1964) 51 ITR 823 (SC)
Held: The discontinuance of a firm's business does not relieve the firm of liability to tax on the income it has earned; for assessment purposes a firm is a distinct entity whose personality is not altered by reconstitution or by the coming in or going out of partners. The assessment machinery continues to operate notwithstanding discontinuance.
Significance: Foundational authority for the continuity fiction now embodied in section 189(1).
Court / status: Supreme Court.
CIT v. Raja Reddy Mallaram (1964) 51 ITR 285 (SC)
Held: An association/firm that has dissolved before assessment can nonetheless be assessed, and its members/partners made answerable, through the machinery provided for assessment after dissolution; dissolution before the assessment proceedings does not bar the assessment or recovery from the members.
Significance: Supports the post-dissolution assessment and partner-liability scheme of section 189(1) and (3).
Court / status: Supreme Court.
Cluster 2 — Penalty on a dissolved firm — section 189(2)
CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739 (SC)
Held: A registered firm exposed to penalty by a default remains liable to penalty notwithstanding its dissolution; the assessment/penalty proceedings may be continued against it as if it had not dissolved. The satisfaction of the authority must be arrived at before the conclusion of the proceedings — it is that satisfaction, and not the issue of the penalty notice or the initiation of any step, that is the condition for the exercise of jurisdiction.
Significance: The leading authority on penalty after dissolution; directly supports section 189(2) and supplies the "satisfaction in the course of the proceeding" requirement.
Court / status: Supreme Court.
Cluster 3 — Assessment of the dissolved firm versus partners
Held: Under the 1922 Act, where an unregistered firm/association had earned income, the Officer had an option to assess either the firm/association as a unit or the partners/members individually, but not both.
Significance / caveat: Relevant to the historical assessment of dissolved firms. For the Income-tax Act, 1961 this option was held not to exist — the correct assessable entity must be taxed — in ITO v. Ch. Atchaiah (1996) 218 ITR 239 (SC). Under the present scheme section 189 makes the dissolved firm itself the assessable entity, with the partners jointly and severally liable under sub-section (3).
Court / status: Supreme Court; read subject to Ch. Atchaiah for 1961-Act cases.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the Income-tax Act, 1961 (local Act print, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; no statutory word has been altered. The new scheme of firm taxation (firm as a separate taxable entity, abolition of registration) operates from assessment year 1993-94; sections 182, 183 and 186 stand omitted by the Finance Act, 1992, w.e.f. 1-4-1993. The Finance Act, 2026 makes no amendment to any section of Chapter XVI. Citations are stated as reported; orders of the Tribunal and High Courts are flagged as such. Where a section has not been judicially construed on its own terms, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.
CHAPTER XVI — SPECIAL PROVISIONS APPLICABLE TO FIRMS
Section 189 — Firm dissolved or business discontinued
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. The machinery provision for assessing a firm after discontinuance of its business or its dissolution; among the most litigated provisions of the Chapter.
Recent amendment: In sub-section (2) the words "the Joint Commissioner (Appeals) or" were inserted by the Finance Act, 2023 (Act 8 of 2023), w.e.f. 1-4-2023, to reflect the new Joint Commissioner (Appeals) tier.
Finance Act, 2026: No change.
Successor (ITA 2025): Re-enacted (assessment of a discontinued or dissolved firm).
A. SECTION COMMENTARY
1. The deeming fiction — section 189(1)
Section 189(1) is the heart of the provision. Where a firm's business has been discontinued, or the firm is dissolved, the Assessing Officer is to make an assessment of the firm's total income as if no such discontinuance or dissolution had taken place, and all the provisions of the Act — including those relating to the levy of penalty or any other sum — apply, so far as may be, to such assessment. The provision thus creates a legal fiction of continuity: for assessment purposes the firm is deemed to subsist notwithstanding that, under the general law, it has ceased to exist. Without this fiction a firm could escape assessment of income already earned simply by dissolving.
2. Penalty after dissolution — section 189(2)
Sub-section (2) makes explicit that the deeming extends to penalty: if the Assessing Officer, the Joint Commissioner (Appeals) or the Commissioner (Appeals), in the course of any proceeding in respect of such a firm, 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 under that Chapter. The satisfaction must be reached in the course of the proceeding; on the analogue under the 1922 Act the Supreme Court held in S.V. Angidi Chettiar that it is the satisfaction before the conclusion of the proceeding — not the issue of the penalty notice — that founds jurisdiction, and that penalty may be imposed on a dissolved firm.
3. Liability of partners and legal representatives — section 189(3)
Sub-section (3) fastens joint and several liability on every person who was, at the time of discontinuance or dissolution, a partner of the firm, and on the legal representative of a deceased partner, for the amount of tax, penalty or other sum payable; all the provisions of the Act apply to such assessment or imposition. This is the dissolved-firm counterpart of section 188A; it ensures the demand is recoverable from the persons who were behind the firm.
4. Continuation of pending proceedings — section 189(4)
Where discontinuance or dissolution takes place after proceedings for an assessment year have commenced, sub-section (4) allows those proceedings to be continued against the persons referred to in sub-section (3) from the stage at which they stood at the time of discontinuance or dissolution, and all the provisions of the Act apply accordingly. The fiction of continuity is thus carried into procedure: a dissolution mid-assessment does not abate the proceeding.
5. Saving for section 159(6) — section 189(5)
Sub-section (5) provides that nothing in section 189 shall affect the provisions of section 159(6) (liability of a legal representative limited to the estate of the deceased). The two provisions are harmonised: the joint-and-several liability of a deceased partner's legal representative under section 189(3) is subject to the estate-based limitation of section 159(6).
6. The continuity fiction in the case-law
The provision codifies a principle the Supreme Court had already developed under the 1922 Act: that a firm does not, by discontinuing its business or dissolving, escape liability to tax on income it had earned, and that the assessment and penalty machinery continues to operate against the firm and its partners. Shivram Poddar and Raja Reddy Mallaram are the foundational statements; S.V. Angidi Chettiar applies the principle to penalty.
B. STATUTORY POSITION (verbatim text)
The text of section 189, as it stands in the Act, is set out below.
189. (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.
Explanation.—[Omitted by the Finance Act, 1992, w.e.f. 1-4-1993.]
(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.
Editorial note: In sub-section (2) the words "the Joint Commissioner (Appeals) or" were inserted by Act 8 of 2023, w.e.f. 1-4-2023, and are shown in the running text above (the publisher's footnote marker has been removed). The Explanation to the section stands omitted by the Finance Act, 1992, w.e.f. 1-4-1993, and is shown only by its omission marker.
C. AUTHORITIES
Section 189 is squarely supported by Supreme Court authority developed under the cognate provision of the 1922 Act (section 44) and carried into the 1961 Act. The leading decisions are set out below; they remain the governing law on the continuity fiction, on penalty after dissolution, and on partner liability.
Cluster 1 — The continuity fiction: liability survives dissolution / discontinuance
A firm cannot defeat assessment of income already earned by dissolving or discontinuing.
Shivram Poddar v. ITO (1964) 51 ITR 823 (SC)
Held: The discontinuance of a firm's business does not relieve the firm of liability to tax on the income it has earned; for assessment purposes a firm is a distinct entity whose personality is not altered by reconstitution or by the coming in or going out of partners. The assessment machinery continues to operate notwithstanding discontinuance.
Significance: Foundational authority for the continuity fiction now embodied in section 189(1).
Court / status: Supreme Court.
CIT v. Raja Reddy Mallaram (1964) 51 ITR 285 (SC)
Held: An association/firm that has dissolved before assessment can nonetheless be assessed, and its members/partners made answerable, through the machinery provided for assessment after dissolution; dissolution before the assessment proceedings does not bar the assessment or recovery from the members.
Significance: Supports the post-dissolution assessment and partner-liability scheme of section 189(1) and (3).
Court / status: Supreme Court.
Cluster 2 — Penalty on a dissolved firm — section 189(2)
CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739 (SC)
Held: A registered firm exposed to penalty by a default remains liable to penalty notwithstanding its dissolution; the assessment/penalty proceedings may be continued against it as if it had not dissolved. The satisfaction of the authority must be arrived at before the conclusion of the proceedings — it is that satisfaction, and not the issue of the penalty notice or the initiation of any step, that is the condition for the exercise of jurisdiction.
Significance: The leading authority on penalty after dissolution; directly supports section 189(2) and supplies the "satisfaction in the course of the proceeding" requirement.
Court / status: Supreme Court.
Cluster 3 — Assessment of the dissolved firm versus partners
CIT v. Murlidhar Jhawar & Purna Ginning & Pressing Factory (1966) 60 ITR 95 (SC)
Held: Under the 1922 Act, where an unregistered firm/association had earned income, the Officer had an option to assess either the firm/association as a unit or the partners/members individually, but not both.
Significance / caveat: Relevant to the historical assessment of dissolved firms. For the Income-tax Act, 1961 this option was held not to exist — the correct assessable entity must be taxed — in ITO v. Ch. Atchaiah (1996) 218 ITR 239 (SC). Under the present scheme section 189 makes the dissolved firm itself the assessable entity, with the partners jointly and severally liable under sub-section (3).
Court / status: Supreme Court; read subject to Ch. Atchaiah for 1961-Act cases.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the Income-tax Act, 1961 (local Act print, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; no statutory word has been altered. The new scheme of firm taxation (firm as a separate taxable entity, abolition of registration) operates from assessment year 1993-94; sections 182, 183 and 186 stand omitted by the Finance Act, 1992, w.e.f. 1-4-1993. The Finance Act, 2026 makes no amendment to any section of Chapter XVI. Citations are stated as reported; orders of the Tribunal and High Courts are flagged as such. Where a section has not been judicially construed on its own terms, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.