2025 (8) TMI 1424 - AT - Income Tax

Reassessment against dissolved partnership for post-dissolution years void; AO's reliance on s.176 and s.189 misplaced

JP Marketing Mehsana Versus The ITO, Ward-1 Mehsana.

JP Marketing Mehsana Versus The ITO, Ward-1 Mehsana. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether reassessment under section 147 can be sustained against a partnership firm that was dissolved prior to the assessment years in question. 2. Whether non-surrender of PAN after dissolution, failure to give notice under section 176(3), or applicability of section 189 can be treated as sustaining the continued legal existence of a dissolved partnership for assessment in subsequent years. 3. Whether assessment framed on a non-existent (dissolved) firm in years subsequent to dissolution is valid or void. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Validity of reassessment against a partnership firm dissolved prior to the assessment years Legal framework: Assessments and reassessments are governed by provisions of the Income Tax Act, 1961, specifically sections relevant to reassessment and assessment of firms; existence of a firm is a factual prerequisite for framing assessment in the firm's name. Precedent treatment: The Court relied on statutory interpretation of the partnership dissolution instrument (dissolution deed) as primary evidence of cessation of firm's existence; authorities below did not dispute the deed but treated other procedural indicators as establishing continued existence. Interpretation and reasoning: The Tribunal treated the dissolution deed dated 24.11.2010 as primary and sufficient proof that the partnership firm ceased to exist thereafter. Documentary evidence (partnership deed, dissolution deed, proprietor's ITRs, proprietor's audited books and tax assessments) showing continuation of business in proprietary form by a partner was accepted as demonstrating that transactions post-dissolution pertained to the proprietor, not the dissolved firm. Ratio vs. Obiter: Ratio - A dissolution deed executed by partners is the primary evidence of cessation of the partnership; once dissolution is established, reassessment in the name of the firm for years after dissolution is impermissible unless other statutory provisions applicable to post-dissolution assessment are engaged. Obiter - Observations on sufficiency of particular documentary items (e.g., specific PB pages) are incidental. Conclusions: Reassessment under section 147 in the name of the partnership firm for years after the firm's duly evidenced dissolution is not sustainable; the authorities below erred in proceeding against the firm when the firm did not exist in the impugned years. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Legal effect of non-surrender of PAN, failure to give notice under section 176(3), and reliance on section 189 Legal framework: Section 176 deals with taxation of discontinued businesses and requires notice of discontinuance for computation purposes; section 189 provides that where a firm is dissolved or business discontinued the Assessing Officer shall make assessment 'as if no such discontinuance or dissolution had taken place' for the purpose of assessing the firm's income and imposing penalties, and joint and several liability of partners is preserved. Precedent treatment: Authorities below relied on (a) non-surrender of the PAN, (b) absence of notice under section 176(3), and (c) section 189 to hold the firm effectively continued for assessment purposes. The Tribunal distinguished those bases from proof of legal existence. Interpretation and reasoning: Tribunal held (a) PAN non-surrender is a procedural matter and does not determine the legal existence of a partnership; (b) section 176's notice requirement governs the computation/timing of assessment for discontinued businesses but does not create a substantive rule that non-compliance validates continued existence of a firm; (c) section 189 facilitates assessment of a dissolved firm by treating income as assessable 'as if' the firm continued to exist for assessment purposes limited to the year of discontinuance/dissolution and to enable imposition of penalties and joint liability, but it does not permit assessing a firm in years subsequent to dissolution where the firm factually no longer exists. Ratio vs. Obiter: Ratio - Non-surrender of PAN and failure to give notice under section 176(3) cannot be treated as evidence of continued legal existence of a dissolved firm; section 189 is confined to enabling assessment of dissolved/discontinued firms in the year of dissolution and does not authorize assessment of a non-existent firm in subsequent years. Obiter - Detailed discussion of procedural consequences of public notice under partnership law (s.45 reference in assessment order) is explanatory. Conclusions: The Revenue's reliance on non-surrender of PAN and absence of notice under section 176(3) to deny dissolution is incorrect; section 189 does not assist the Revenue in sustaining assessments of the dissolved firm for years after dissolution. These grounds are legally insufficient to treat a dissolved firm as existing for the impugned assessment years. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Consequence of assessing a non-existent (dissolved) firm Legal framework: Assessment jurisdiction presumes a taxable entity; where a firm has been dissolved, assessments in the firm's name for years after dissolution lack factual basis unless statutory provisions permit retrospective or continuing treatment for assessment. Precedent treatment: The authorities below framed reassessment and additions in the name of the firm despite accepting the dissolution deed exists; Tribunal examined whether any statutory provision validated such continued assessment power in years subsequent to dissolution. Interpretation and reasoning: Tribunal concluded that because the partnership firm did not exist in the impugned years, assessment orders passed in its name for those years are null and void. Section 189's operation was held not to extend to sustaining assessments in years subsequent to dissolution; section 176 concerns taxation period computation and notice and does not validate existence. Therefore, no legal basis remained to support the reassessment additions made against the firm. Ratio vs. Obiter: Ratio - An assessment framed on a dissolved firm for years after dissolution is invalid; such assessment must be quashed where dissolution is duly proved and no statute authorizes assessment in the firm's name for the relevant subsequent years. Obiter - Remarks on natural justice and on the sufficiency of evidence submitted to authorities below are ancillary to the principal holding. Conclusions: Assessments and additions made in the name of the partnership firm for years after its proven dissolution are null and void and must be quashed; reassessments against the dissolved firm cannot be sustained on the bases relied upon by the Revenue in the present matter.