Firm dissolved or business discontinued.

330(1)

Where a firm is dissolved or any business or profession carried on by it has been discontinued, the Assessing Officer shall make an assessment of the total income of the firm, as if no such dissolution or discontinuance 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.

330(2)

Regardless of the generality of sub-section (1), if the Assessing Officer or Joint Commissioner (Appeals) or Commissioner (Appeals), in the course of any proceeding under this Act in respect of any such firm as 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 as per the provisions of that Chapter.

330(3)

Every person who was at the time of such dissolution or discontinuance 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.

330(4)

Where such dissolution or discontinuance takes place after any proceedings in respect of a tax 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 dissolution or discontinuance, and all the provisions of this Act shall, so far as may be, apply accordingly.

330(5)

The provisions of this section shall not affect the provisions of section 302(4)

Explanation

Section Summary:

Section 330 of the Income Tax Act deals with the tax implications when a firm is dissolved or a business/profession is discontinued. It ensures that the tax assessment and penalty provisions continue to apply as if the firm or business were still operational. The section also holds partners (or their legal representatives) jointly and severally liable for any tax, penalty, or other sums payable.

Key Changes:

1. Continuity of Assessment: The Assessing Officer is required to assess the firm's income as if no dissolution or discontinuance occurred. This ensures that tax liabilities are not avoided due to the dissolution.
2. Penalty Provisions: Penalties can still be imposed on the firm or its partners for any violations under Chapter XXI, even after dissolution.
3. Joint and Several Liability: Partners (or their legal representatives) remain liable for tax, penalties, or other sums payable, even after the firm is dissolved.
4. Continuation of Proceedings: If tax proceedings were ongoing at the time of dissolution, they can continue against the partners or their legal representatives from the stage where they were left off.

Practical Implications:

• For Firms: Dissolving a firm does not absolve it of its tax liabilities. The Assessing Officer will assess the firm's income and impose penalties as if it were still operational.
• For Partners: Partners remain personally liable for the firm's tax obligations, even after dissolution. This includes penalties for any violations committed by the firm.
• For Legal Representatives: If a partner dies, their legal representatives (e.g., heirs) are also liable for the firm's tax dues.
• For Tax Authorities: The section ensures that tax authorities can continue proceedings against the firm or its partners without interruption, even after dissolution.

Critical Concepts:

• Joint and Several Liability: This means that each partner (or their legal representative) can be held individually responsible for the entire tax liability of the firm. The tax authority can recover the full amount from any one partner if others are unable to pay.
• Chapter XXI: This chapter deals with penalties for various offenses under the Income Tax Act, such as concealment of income or failure to comply with tax provisions.
• Section 302(4): This section is referenced to clarify that the provisions of Section 330 do not override the specific rules outlined in Section 302(4).

Compliance Steps:

1. Maintain Records: Ensure all financial records are maintained even after dissolution, as the Assessing Officer may require them for assessment.
2. File Returns: File the necessary tax returns for the period up to the date of dissolution.
3. Settle Liabilities: Partners should ensure all tax liabilities, penalties, and other sums are settled to avoid personal liability.
4. Notify Authorities: Inform the tax authorities of the dissolution and provide details of the partners and their legal representatives, if applicable.

Examples:

• Scenario 1: A partnership firm dissolves in March 2023. In June 2023, the Assessing Officer discovers that the firm underreported its income for the financial year 2022-23. The officer assesses the firm's income and imposes a penalty. The partners, including a deceased partner's legal heir, are held jointly and severally liable for the tax and penalty.
• Scenario 2: A business discontinues operations in September 2023, but tax proceedings for the financial year 2022-23 were already underway. The proceedings continue against the partners, and the Assessing Officer imposes a penalty for non-compliance with tax filing requirements.

This section ensures that tax obligations are not evaded through dissolution or discontinuance, and partners remain accountable for the firm's tax liabilities.