One of the key elements of the entity which is in partnership is the dissolution of the partnership firm. These firms can be dissolved in many ways like providing notice or with the help of an agreement etc. The dissolution process of such firms has been mentioned under section 189 of the Income Tax Act of 1961. We will discuss this section in this blog in detail for the reference of those who had partnership firm or who want to dissolve partnership firm. Dissolution of the partnership firm is a simple multi step process which can be completed in many ways which are discussed below in the current writeup. If you are having a partnership firm and you are thinking about dissolving the same you must go through this blog till its last line. It will help you out to know about many important aspects of the same.
What is a Partnership Firm?
As per the section 4 of the Partnership Act of 1932, it is an entity which is formed with the association of at least two people. It may have more than two people as well. There is no such restriction on the number of the membership of such firms. This association is commonly formed in order to do business. Such firms are best for those business entities which are running on a small or midsize level. The partnership firm registration procedure is easy and has less formalities. Also it does not have complicated compliances like corporate bodies. Hence it can be managed easily. Just like its registration procedure the dissolution of the partnership firm is also simple. All these features make this firm popular in the business world.
Section 189 of the Income Tax Act of 1961
Some of the key highlights of the section 189 of the Income Tax Act of 1961 regarding the dissolution of the partnership firm are discussed below:
- If a business carried on by a firm stops or the firm is dissolved, the Assessing Officer will assess the firm’s total income as if there was no discontinuance or dissolution.
- All provisions of the Income Tax Act of 1962, including penalties and charges, apply to this assessment.
- If, during proceedings, it’s found that the firm committed certain acts outlined in Chapter XXI, penalties can be imposed .
- Partners at the time of discontinuance or dissolution, and the legal representatives of deceased partners, are jointly and severally liable for tax, penalties, or other dues.
- If discontinuance or dissolution happens after proceedings for an assessment year have begun, the proceedings may continue against the individuals mentioned in point 4 from the stage they were at when discontinuance or dissolution occurred.
- All provisions of the Income Tax Act apply accordingly to such assessments or imposition of penalties or other dues.
- Nothing in this section affects the provisions of subsection (6) of section 159.
Mode of Dissolution of the Partnership Firm
Some of the key modes of the dissolution of the partnership are mentioned below:
Mutual Agreement
One of the most common ways of the dissolution of the partnership firm is dissolution through mutual agreement. The partners can mutually agree to dissolve the partnership firm and dissolve it accordingly. This is the most simple and preferred dissolution method of the partnership firms. One can go with the same by simply entering into an agreement.
Completion of Venture
This is the modern form of business where a form is established for a particular work and after the completion of that work the firm will automatically be dissolved. If the partnership was formed for a specific venture, completion of that venture can lead to automatic dissolution. These firms don’t need to go with any other method for the dissolution. In short we can say that if the partnership was formed for a specific term, the firm dissolves when that term expires.
Death or Insolvency
As it is a fact that partnership firms solely depend on their partners. Anything that happens with the partners will directly affect the partnership firms. For example if there are two partners in a partnership firm and one is dead or become insolvent then the firm will automatically dissolve unless there’s an agreement stating otherwise.
Dissolution on the Basis of the Illegality
The very first thing which all the business entities must be aware about is that they must form for the lawful purpose. If it is found that your firm can’t exist which means the firm will dissolve automatically. If the business becomes illegal or against public policy, the partnership may also dissolve. Hence one must take care of this fact that his or her business must be lawful and not against the public policy.
Court Order or Transfer of Interest
A court can order the dissolution of the firm due to various reasons like misconduct or unworkable differences among partners. Also in any case if a partner transfers their interest, it may result in dissolution of the partnership firm unless there’s an agreement allowing the transfer. Hence before transferring the interest every parent must check the agreement what it says about the same.
Miscellaneous Reasons of the Dissolution
There are many other reasons as well on the basis of which dissolution of the partnership is possible which are given below:
- If a partner declares bankruptcy, it might lead to the dissolution of the partnership firm.
- If the purpose for which the partnership was formed becomes impossible to achieve, it may lead to dissolution.
- As per the terms in the partnership deed, a majority decision of partners may lead to dissolution.
Conclusion
The dissolution of the partnership firm, governed by Section 189 of the Income Tax Act of 1961, is a straightforward process outlined to assess the firm’s total income after discontinuance or dissolution. The partners are collectively responsible for tax liabilities, penalties, or other dues, emphasizing the importance of clarity in legal agreements. The dissolution can occur through mutual agreement, completion of a specified venture or term, death, insolvency, illegality, court order, transfer of interest, or various other reasons. This simplicity, coupled with the ease of registration, makes partnership firms a popular choice for small and midsize businesses in India. Business owners considering dissolution should carefully review their partnership deed and legal obligations to ensure a smooth process.
