Section 189 Dissolution of Partnership Firm

A partner may dissolve a partnership firm at any time. When any business or profession carried on by a firm has been discontinued, or where a firm is dissolved, an Assessing Officer would assess the total income of the partnership firm as if no such dissolution or discontinuance has taken place. The process of dissolving a partnership firm involves the sale or disposal of all the assets of the firm, a final settlement of all of its liabilities, and the settling of the accounts. In this article, we look at Section 189 of the Income Tax Act that deals with the Dissolution of a Partnership Firm.

Overview

Every individual who was at the time of the ending a partner of the firm, and the legal representative of any such person who is deceased, is jointly and severally liable for the amount of tax, penalty or other sums payable.

Mode of Dissolution

A partnership firm may be discontinued or dissolved in any of the following ways.

Dissolution by Agreement

The easiest and the most hassle-free method to dissolve a partnership firm is by mutual consent or an agreement. A partnership firm may be discontinued with the approval of all the partners or by a contract between the partners. A partnership is formed by a contract and may be terminated using a contract itself. It is essential for all the partners of the partnership firm to agree mutually for dissolving a partnership as stated in the Dissolution of Partnership Firm by Mutual Consent clause in the partnership agreement.

Dissolution by Notice

Where a partnership is at will, the partnership firm may be dissolved by a partner of the firm by sending out a notice in writing to all the other partners of his/ her intention to dissolve the partnership firm. A note of dissolution once given cannot be withdrawn without the consent of all the other partners. Any individual partner may initiate such dissolution after proper notice is issued.

Dissolution due to contingencies

Subject to a contract between the partners of a partnership firm, a firm may be dissolved under certain clauses/ situations:

By the expiry or end of a partnership period. Some partnership forms are started with a specific view of the tenure for which the partnership shall exist. These kinds of businesses will come to an end naturally once the period of the partnership is complete.
If the partnership firm is constituted to carry out one or more endeavours or undertakings and may be dissolved on completion, in other words, a partnership firm may be dissolved on account of the end of a project which the firm was initially formed to undertake.
By the death of a partner in the firm.
By the adjudication of a partner or more than one partner as an insolvent.

Compulsory Dissolution

At times, due to certain occurrences, a partnership firm may be forced to dissolve making it difficult for the firm to continue its initially decided tenure. A partnership firm may be compulsorily dissolved:

When all the partners of the firm, or all the partners except one, are adjudged insolvent;
When some occurrence has happened which makes it illegal for the business of the firm to be carried on.

Dissolution by Court

A partnership firm carried out its business by involving and working with various individuals at a given time. Regardless of being friends or relatives, there are situations when one or more partner may find it eligible anymore under their circumstances to continue. In such cases, the court may also dissolve the partnership firm. Below mentioned are some of the reasons why or how a partnership firm may be dissolved through court cases. Note: It is essential to note that for cases where the dissolution occurs through a court of law, it is only possible when the partnership deed is registered.

Due to Mental Instability

A business venture such as a partnership firm would not be able to function when a partner becomes mentally unstable/ incapacitated. At times, a partner may not be able to deal with the pressures of the job at hand due to mental instability. For such situations, a partner or partners can file a request or a case to dissolve the partnership firm at court. The illness or incapacity of a partner due to medical or other reasons may also result in the dissolution of a partnership firm through a court case. The partner, other than the partner that is incapacitated or mentally unstable, may file a request for dissolution of a partnership firm through the court.

Due to Misconduct

The primary reason for a dissolution of a partnership firm by a court of law is when the partnership firm or the partners involved participate in misconduct. Any partner or partners misbehaving with other members of the firm or not taking into consideration the signed agreement of that formed the partnership will find themselves ousted by their partners through a court case. A partnership agreement that is registered is a document that legally binds all the partners after they have signed it. If a partner misses out on any particular clause, and even after being warned multiple times, are not heeding to it, can be dealt with at the court. The partnership firm may be dissolved through the court's interference in such cases.

Transfer of Equity

A partner may decide to discontinue the partnership through the court of law if another individual in the partnership has transferred their share of interest or equity of the firm to a third party without consulting the partners of the firm.

Responsibility after Dissolution

Although the liabilities of the partners of the partnership firm ceases to exist once the firm is declared as dissolved, the partners are liable for any occurrences before the dissolution of the partnership firm. Only the partners who are considered to be disabled/ adjudicated as insolvent/ dead are supposed to be exempt from this liability after the dissolution of the partnership firm.