Discontinued Business and Assessment After Dissolution of an Association
The Income-tax Act, 2025 contains special provisions for a business or profession that is discontinued and for an association of persons whose business is discontinued or which is dissolved. The current provisions are Sections 320 and 321.
Section 320 - Discontinued business
Section 320 applies irrespective of Section 4. Where a business or profession is discontinued in a tax year, the Assessing Officer has discretion to charge in that tax year the income for the period beginning on the first day of the tax year and ending on the date of discontinuance.
Separate assessment of periods
The total income of each completed tax year or part of a tax year included in the relevant period is chargeable at the rate or rates in force in that tax year, and separate assessments are made for each completed tax year or part.
Notice of discontinuance within 15 days
A person discontinuing a business or profession must give the Assessing Officer notice of the discontinuance within 15 days.
Receipts after discontinuance of business
If a business has been discontinued, a sum received after discontinuance is deemed to be the recipient's income and is taxed in the year of receipt where the sum would have formed part of the total income of the person carrying on the business if it had been received before discontinuance.
Receipts after discontinuance of profession
Where a profession is discontinued because the person carrying it on ceases the profession, retires or dies, a later receipt is similarly deemed to be income of the recipient and charged in the year of receipt if it would have been included in that person's total income had it been received before discontinuance.
Notice for assessment
For an assessment under Section 320, the Assessing Officer may serve the required notice on the person whose income is to be assessed. In the case of a firm, notice may be served on a person who was a partner when the firm discontinued its business; in the case of a company, it may be served on its principal officer. The provision links this procedure to Section 268(1).
Shorter period for return
Where Section 320(1) applies, the Assessing Officer may issue the relevant notice under Section 268 or Section 280 for other tax chargeable under the Act and require the return within a period of not less than seven days.
Tax is additional
Tax chargeable under Section 320 is in addition to tax, if any, chargeable under another provision of the Act.
Section 321 - Association dissolved or business discontinued
Where a business or profession carried on by an association of persons is discontinued, or the association itself is dissolved, the Assessing Officer assesses the association's total income as if the discontinuance or dissolution had not taken place. The other provisions of the Act, including provisions concerning penalty and other sums chargeable, apply so far as may be.
Penalty proceedings
If the Assessing Officer, Joint Commissioner (Appeals) or Commissioner (Appeals), during a proceeding concerning such an association, is satisfied that the association was guilty of an act specified in Chapter XXI, the authority may impose or direct imposition of penalty in accordance with that Chapter.
Joint and several liability
Every person who was a member of the association at the time of discontinuance or dissolution, together with the legal representative of a deceased member, is jointly and severally liable for the tax, penalty or other sum payable under the statutory provision.
Proceedings already commenced
If discontinuance or dissolution occurs after proceedings for a tax year have begun, those proceedings may continue against the persons covered by the joint-liability provision from the stage at which they stood when the discontinuance or dissolution occurred.
Legal representative provision
Section 321 expressly preserves the operation of Section 302(4), which forms part of the provisions dealing with legal representatives.
Former Sections 176 and 177 of the Income-tax Act, 1961
Former Section 176 dealt with discontinued business or profession. It included accelerated assessment at the Assessing Officer's discretion, a 15-day notice of discontinuance, taxation of qualifying receipts received after discontinuance, assessment notices and a minimum seven-day period in the specified return-notice circumstances.
Former Section 177 dealt with an association of persons whose business or profession was discontinued or which was dissolved. It allowed assessment as though no discontinuance or dissolution had occurred and dealt with penalty, joint and several liability of members and continuation of pending proceedings.
1961 Act and 2025 Act correspondence
| Subject | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Discontinued business or profession | Section 176 | Section 320 |
| Association dissolved or business discontinued | Section 177 | Section 321 |
Practical points
- Give notice of discontinuance to the Assessing Officer within 15 days.
- Do not assume that a receipt escapes tax merely because it is collected after the business or profession has closed.
- For an AOP, dissolution does not prevent assessment, penalty proceedings or recovery under Section 321.
- Members of a discontinued or dissolved AOP may face joint and several liability under the statutory conditions.
- Pending proceedings may continue after dissolution or discontinuance against the persons specified by the Act.
This article is a general explanation. Actual liability depends on the relevant tax year, legal form of the taxpayer, date and nature of discontinuance or dissolution, post-discontinuance receipts, pending proceedings and applicable transition provisions.