Section 189 · Mode of payment
Section 189 of the Income-tax Act, 2025 — Assessment of a Firm After Dissolution or Discontinuance of Business
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XII
📜 What the law says — Section 189, Income-tax Act 2025
189. For the purposes of this Chapter, unless the context otherwise requires,—
(a) “banking company” means a company to which the provisions of the
Banking Regulation Act, 1949 (10 of 1949) applies and includes any bank
or banking institution referred to in section 51 of that Act;
(b) “primary agricultural credit society”, and “primary co-operative agricul-
tural and rural development bank” shall have the meanings respectively
assigned to them in section 150;
(c) “specified sum” means any sum of money receivable, whether as advance
or otherwise, in relation to transfer of an immovable property, whether
or not the transfer takes place;
(d) “specified advance” means any sum of money in the nature of advance, by
whatever name called, in relation to transfer of an immovable property,
whether or not the transfer takes place.
CHAPTER XIII
DETERMINATION OF TAX IN SPECIAL CASES
A.—Determination of tax in certain special cases
Determination of tax where total income includes income on which no tax is
payable.
In plain language
Important accuracy note: Section 189 of the Income-tax Act, 2025 does not deal with transfer pricing. Transfer pricing sits in Chapter X of the 2025 Act (Sections 162 to 177). Section 189 is titled "Firm dissolved or business discontinued" and it lives in the Chapter dealing with the assessment of firms, associations of persons (AOPs) and bodies of individuals (BOIs). It is the direct successor to Section 189 of the old Income-tax Act, 1961, and carries forward substantially the same rules.
What Section 189 actually says
When a partnership firm winds up, the tax department must not be left without anyone to assess or recover tax from. Section 189 solves that problem by creating a legal fiction: even after a firm has closed down its business/profession or been dissolved, the Assessing Officer is empowered to assess the firm as if no discontinuance or dissolution had taken place.
- Assessment continues: The total income of the (now-defunct) firm is computed and assessed exactly as if the firm were still running.
- All provisions apply: Every provision of the Act — including levy of penalty, interest and any other sum chargeable — applies to that assessment "so far as may be".
- Penalties survive: If, during any proceeding, the officer is satisfied the firm committed a default of the type listed in the penalty chapter (Chapter XXI, the old Chapter XXI/271 series), he can still impose the penalty.
- Partners are personally on the hook: Every person who was a partner at the time of discontinuance/dissolution — and the legal representative of a partner who has died — is jointly and severally liable for the tax, penalty or other sum payable.
- Pending proceedings carry over: If dissolution happens after a proceeding for an assessment year has already begun, that proceeding may be continued against the partners (or legal representatives) from the exact stage it had reached.
Who it applies to
- Partnership firms registered under the Indian Partnership Act, 1932, and, by extension, LLPs and unregistered firms assessed as a firm.
- The partners as they stood on the date of closure/dissolution.
- The legal heirs / legal representatives of a deceased partner, to the extent of the estate they inherit.
Two situations it covers
- Discontinuance of business or profession — the firm exists on paper but has stopped carrying on the activity.
- Dissolution of the firm — the firm itself ceases to exist (by agreement, by operation of law, on death of a partner where the deed so provides, etc.).
In both cases the assessment machinery keeps working. The firm cannot escape tax simply by shutting shop before or during the assessment.
How it interacts with related sections
- Change in constitution vs. succession vs. dissolution: Where partners merely change but the firm continues, that is a "change in constitution" governed by a separate section — the firm continues to be assessed as one entity. Section 189 applies only when the firm's business is discontinued or the firm is dissolved.
- Joint and several liability of partners: The 2025 Act also carries a standalone provision (successor to the old Section 188A) making every partner jointly and severally liable for tax due from the firm — Section 189 reinforces this for the dissolution/discontinuance scenario.
- Penalty chapter (Chapter XXI): Penalties for concealment, under-reporting, failure to file, etc., remain leviable on the dissolved firm.
- Firm taxation rate: The dissolved firm is still taxed at the flat firm rate of 30% (plus surcharge and cess), not partner slab rates.
Practical implications for partners and advisors
- Do not assume that dissolving a firm wipes out its tax exposure. It does not. Pending scrutiny, reassessment and penalty proceedings all continue.
- Because liability is joint and several, the department can recover the entire firm demand from any one partner, who must then recover contributions from co-partners privately.
- On a partner's death, the estate/legal heirs can be pursued — so retiring or exiting partners should obtain a proper settlement, indemnity and, ideally, an income-tax clearance before dissolution.
- Maintain firm books, returns and Form-level records even after closure; you may need them to defend an assessment years later.
💡 Example
Worked example 1 — dissolved firm still assessed. Sharma & Associates, a two-partner firm (Anil and Vikas, 50:50), dissolved on 31 March 2026. During FY 2025-26 it had earned a taxable income of ₹40,00,000 which it had not fully disclosed. In FY 2027-28 the department reopens the matter. Under Section 189 the firm is assessed as if it never dissolved. Tax at the firm rate of 30% on ₹40,00,000 = ₹12,00,000, plus 4% health & education cess of ₹48,000 = ₹12,48,000 (no surcharge as income is below ₹1 crore). Both Anil and Vikas are jointly and severally liable for the full ₹12,48,000 — the officer can recover the entire amount from Anil alone if Vikas is untraceable.
Worked example 2 — surcharge kicks in. A dissolved firm is later assessed on income of ₹1,20,00,000. Base tax at 30% = ₹36,00,000; surcharge at 12% (income above ₹1 crore) = ₹4,32,000; sub-total ₹40,32,000; cess at 4% = ₹1,61,280; total demand ≈ ₹41,93,280 (before marginal relief and interest). This entire demand can be raised on the firm and enforced against the erstwhile partners.
A relatable story. Meena and her uncle ran a small catering firm in Jaipur and dissolved it after the uncle passed away, splitting the leftover cash. Two years later a tax notice arrived for an under-reported year. Meena assumed "the firm no longer exists, so there is nothing to pay." Her CA explained Section 189: the firm is assessed as if alive, and Meena — plus her late uncle's legal heirs — are jointly and severally liable. Because there was no dissolution deed with an indemnity, Meena ended up paying most of the demand herself and then chasing the family for their share. The lesson: settle tax matters and document indemnities before you dissolve.
| Aspect | Position under Section 189 (ITA 2025) |
|---|
| Section heading | Firm dissolved or business discontinued |
| 1961 Act equivalent | Section 189 (same subject); draft bill Clause 330 |
| When it applies | Business/profession of firm discontinued, OR firm dissolved |
| Core rule | Assess firm as if no discontinuance/dissolution took place |
| Who is liable | Partners at date of closure + legal representatives of deceased partner — jointly and severally |
| Penalties | Chapter XXI penalties can still be levied on the firm |
| Pending proceedings | Continue against partners from the stage they had reached |
| Firm tax rate (AY 2026-27) | 30% flat + 12% surcharge if income > ₹1 crore + 4% cess |
| Not covered here | Transfer pricing — that is Chapter X, Sections 162–177 |
Related sections
Transfer pricing, associated enterprises and arm's length price Joint and several liability of partners for firm's tax Change in constitution and succession of a firm Penalties imposable on the firm Liability in special cases and recovery of tax Safe harbour and ALP methods (unrelated to Sec 189)
Frequently asked questions
Does Section 189 of the Income-tax Act, 2025 relate to transfer pricing?
No. Section 189 deals with assessing a firm after its business is discontinued or the firm is dissolved. Transfer pricing is governed by Chapter X, Sections 162 to 177 of the 2025 Act.
If our firm is dissolved, can the tax department still assess it?
Yes. Section 189 lets the Assessing Officer assess the firm as if no dissolution or discontinuance had happened, and all provisions of the Act — including penalties — continue to apply.
Who has to pay the firm's tax after dissolution?
Every person who was a partner at the time of dissolution or discontinuance, and the legal representative of a deceased partner, is jointly and severally liable for the tax, penalty or other sum payable.
What does 'jointly and severally liable' mean for me as a partner?
It means the department can recover the entire firm demand from any one partner. That partner must then separately recover the other partners' shares. You are not protected merely because your profit share was small.
Can penalties still be imposed on a firm that no longer exists?
Yes. If the officer is satisfied the firm committed a default covered by Chapter XXI (such as under-reporting or concealment), the penalty can still be imposed even after dissolution.
What is the difference between dissolution and a mere change of partners?
A change in partners while the firm continues is a 'change in constitution' and the firm keeps being assessed as one entity under a separate section. Section 189 applies only when the business is actually discontinued or the firm is legally dissolved.
At what rate is a dissolved firm taxed?
At the normal firm rate for AY 2026-27 — 30% flat, plus a 12% surcharge if income exceeds ₹1 crore, plus 4% health and education cess. Partner slab rates do not apply to the firm's own income.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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