An assessment on a dissolved firm is valid if the AO was not informed of the dissolution.

Issue

Is an assessment order passed in the name of a partnership firm legally valid if the assessee claims the firm had already dissolved, but they failed to formally intimate the tax department about this dissolution?

Facts

The Assessing Officer (AO) framed an assessment in the name of a partnership firm, making additions for large cash deposits.
The assessee’s main legal challenge was that the assessment was invalid because the partnership firm had already dissolved on April 1, 2016, and the business was subsequently carried on by one of the partners as a proprietary concern.
However, it was an undisputed fact that the assessee had never given any intimation of this dissolution to the Assessing Officer.
Furthermore, the PAN of the firm continued to remain active, and the bank accounts continued to be operated in the firm’s name even after the alleged date of dissolution.

Decision

The court remanded the matter back to the Assessing Officer.

It held that, under these circumstances, framing the assessment in the name of the firm could not be considered a jurisdictional defect. The AO’s action was a direct consequence of the assessee’s own non-compliance and non-disclosure.
However, since the complex legal issues surrounding the assessment of a dissolved firm needed to be properly adjudicated, the court sent the matter back for a fresh decision.

Key Takeways

A Taxpayer Has a Duty to Inform: A taxpayer has a clear legal and procedural duty to inform the tax authorities about any change in their legal status, such as the dissolution of a firm.
Consequences of Non-Disclosure: If a taxpayer fails to inform the department of a dissolution and continues to use the firm’s PAN and bank accounts, they cannot then turn around and claim that an assessment framed in the firm’s name is invalid. The assessment is a consequence of their own actions.
The Role of Section 189: Section 189 of the Income-tax Act contains a legal fiction that allows the tax department to continue to assess a firm that has been discontinued or dissolved as if it were still in existence.
No Benefit from Your Own Wrong: A taxpayer cannot take advantage of their own failure to follow the law to then claim a procedural benefit, such as having an assessment declared void.

A case was remanded for a fresh decision to allow the AO to properly examine new evidence submitted by the taxpayer to explain the source of bank deposits.

Issue

What is the appropriate course of action for an appellate authority when a taxpayer, who has had additions made for unexplained bank credits, seeks to rely on new documentary evidence that was not fully examined by the lower authorities?

Facts

The Assessing Officer (AO) made two additions: one for the entire cash deposit made during demonetization and another for 10% of the total unexplained credits in the bank accounts, which amounted to a massive ₹7.52 crore.
The assessee claimed that these deposits and credits were duly recorded in the books of the successor proprietary concern and tried to rely on its audited accounts.
However, the AO and the lower authorities found that a complete and satisfactory reconciliation of all the credit entries with the books of account had not been demonstrated.
Before the higher court, the assessee indicated the availability of additional documentary evidence to prove their case.

Decision

The court remanded the matter back to the Assessing Officer.

It held that the factual issue of reconciling the numerous bank deposits and credits with the books of account of the proprietor needed to be properly and thoroughly adjudicated.
Since additional documentary evidence was now available, it was in the interest of justice to send the matter back to the primary fact-finding authority (the AO) for a fresh examination.

Key Takeways

The Burden of Proof is on the Assessee: The onus to explain every single credit entry in a bank account lies with the taxpayer. A simple, general claim that the deposits are from business receipts is not enough; a detailed and verifiable reconciliation is required.
Remand for Proper Verification of New Evidence: When a taxpayer brings forward new or additional evidence that is crucial to the case, especially in a matter that requires detailed factual verification, the standard judicial practice is to remand the case back to the Assessing Officer.
Appellate Authorities are Not for First-Hand Verification: Appellate bodies like the Tribunal or the High Court are generally not equipped to conduct a first-hand, detailed verification of voluminous documents and accounts. That is the primary role of the Assessing Officer.
The Goal is a Decision on Merits: The court’s decision to remand the case is driven by the principle of ensuring that the final decision is based on a full and fair examination of all the relevant facts and evidence, rather than on the taxpayer’s initial failure to provide a complete reconciliation.

IN THE ITAT AHMEDABAD BENCH ‘D’

Krishna Enterprise

Income-tax Officer

Siddhartha Nautiyal, Judicial Member
and MAKARAND V. MAHADEOKAR, Accountant Member

IT Appeal No.1419 (Ahd.) of 2025
[Assessment year 2017-18]

SEPTEMBER 26, 2025

B.T. Thakkar, AR for the Appellant. Amit Pratap Singh, Sr. DR for the Respondent.

ORDER

Makarand V. Mahadeokar, Accountant Member.- This appeal filed by the assessee is directed against the order passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “CIT(A)”] dated 17.05.2024, for the Assessment Year 2017-18, arising from the assessment order passed by the Income Tax Officer, Ward 5, Nadiad [hereinafter referred to as “Assessing Officer of AO”] u/s 144 of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] dated 17.10.2019.

2. Condonation of Delay

2.1 At the outset, it is noted that the appeal has been filed belatedly with a delay of 344 days. The assessee filed an affidavit of Shri Yogesh H. Aalwani, ex-partner of the assessee firm, explaining the reasons for the delay. The explanation offered by the assessee can be summarised as under:

The assessee firm, Shri Krishna Enterprise, was a partnership which stood dissolved with effect from 01.04.2016, and thereafter the business was continued by Shri Yogesh H. Aalwani as a sole proprietor under the same trade name.

The assessment order u/s 144 was framed in the name of the dissolved firm. Upon receiving notice of demand, the assessee preferred appeal before the learned CIT(A).

The learned CIT(A) passed order on 17.05.2024 through the faceless system. The assessee contends that it was not conversant with electronic communication and did not check emails regularly. Further, the mobile number updated in Form 35 was not in active use by the assessee, and therefore the electronic intimation of the appellate order did not come to its notice.

The assessee submits that all documents, including the deed of dissolution and audited accounts of the proprietary concern, were filed along with Form 35 before the CIT(A), but these were not taken into consideration while passing the order.

It was only when a communication was received from the Department on 24.06.2025 regarding non-compliance with penalty proceedings that the assessee came to know of the CIT(A)’s dismissal order. Immediately thereafter, the present appeal was filed before the Tribunal.

2.2 The assessee has thus explained that the delay was occasioned due to lack of awareness of electronic communication, coupled with the fact that the mobile number registered in Form 35 was not in operation, and that there were no deliberate or intentional latches on its part. The affidavit also stresses that the matter involves substantial merits, namely validity of assessment framed on a non-existent entity and double taxation of income already accounted for in the hands of the proprietor.

3. We have given our thoughtful consideration to the reasons advanced by the assessee. It is well-settled law that the expression “sufficient cause” for delay should receive a liberal construction so as to advance substantial justice. The Hon’ble Supreme Court in Collector, Land Acquisition v. Mst. Katiji [1987] 167 ITR 471 (SC) laid down that ordinarily a litigant does not stand to benefit by lodging an appeal late and that refusing to condone delay can result in a meritorious matter being thrown out at the threshold. Similarly, in N. Balakrishnan v. M. Krishnamurthy (1998) 7 SCC 123, it was held that the length of delay is not decisive, but the acceptability of the explanation is what matters.

3.1 In the present case, the explanation tendered by the assessee appears bona fide. With the advent of e-proceedings, it is not uncommon for small-town taxpayers to face genuine difficulties in receiving electronic communications and in promptly acting upon them. It is also a matter of record that once the assessee became aware of the appellate order, the present appeal was filed without further delay.

3.2 Considering the totality of circumstances, and guided by the aforesaid judicial pronouncements, we are satisfied that the assessee was prevented by sufficient cause from filing the appeal in time. In the interest of substantial justice, the delay of 344 days in filing the present appeal is therefore condoned and the appeal is admitted for adjudication on merits.

4. Facts of the Case

4.1 The assessee was originally a partnership firm. Based on information from the Annual Information Report (AIR) and “Operation Clean Money,” the AO noticed substantial cash deposits in the bank accounts of the assessee during the demonetisation period. Despite issue of statutory notices u/s 142(1), the assessee did not file return of income or details as required. The AO, therefore, proceeded to complete assessment u/s 144 of the Act.

4.2 During the course of assessment proceedings, the AO also issued notices under section 133(6) of the Act to Bank of India, Nadiad, calling for information regarding the assessee’s bank accounts. In response, the bank furnished account statements. On verification, the AO noticed that the assessee had deposited cash of Rs.12,10,400/- during the period from 09.11.2016 to 30.12.2016 and further observed total credits in bank accounts amounting to Rs.7,52,08,145/-. In the absence of satisfactory explanation, the AO treated the entire cash deposit of Rs.12,10,400/- and 10% of the unexplained bank credits amounting to Rs.75,28,815/- as income u/s 69A of the Act. The total assessed income was determined at Rs.87,39,215/-, taxed u/s 115BBE, and penalty proceedings were separately initiated.

4.3 Aggrieved, the assessee carried the matter in appeal before the learned CIT(A). The case of the assessee was that the firm had already been dissolved on 01.04.2016 and the business was thereafter carried on by Shri Yogesh H. Aalwani as a sole proprietor under the same name and style. It was further submitted that the impugned deposits and credits were duly accounted for in the books of the proprietary concern and had been subject to audit u/s 44AB. Supporting documents such as the deed of dissolution, audited accounts, and income tax return acknowledgments were claimed to have been filed. The learned CIT(A), however, dismissed the appeal by observing that the assessee did not respond to notices and failed to prosecute the appeal. Referring to judicial precedents, the CIT(A) held that the conduct of the assessee showed lack of interest and, accordingly, sustained the addition of Rs.87,39,215/-.

4.4 Aggrieved by the order of CIT(A), the assessee is in appeal before us raising following grounds:

Addition of Rs. 87,39,230/- being unjust and unlawful be deleted.

Assessment having been framed on dissolved firm is bad in law.

Your appellant prays to add, alter or amend grounds of appeal at the time of hearing.

5. Before us, the learned Authorised Representative (AR) submitted that the assessment was framed in the name of a dissolved firm. It was explained that the partnership firm stood dissolved on 01.04.2016 and thereafter the business was continued by Shri Yogesh H. Aalwani as a sole proprietor under the same trade name. Therefore, the assessment made in the name of a non-existent firm is bad in law. It was further submitted that all bank deposits and credits have been duly recorded in the books of the proprietary concern of Shri Yogesh H. Aalwani, which were audited u/s 44AB. Copies of the dissolution deed, financial statements, income tax return acknowledgment, and other supporting documents were placed in the paper book. It was argued that taxing the same income again in the name of the dissolved firm amounts to double taxation and the addition deserves to be deleted.

6. The learned Departmental Representative (DR), on the other hand, supported the orders of the authorities below. It was submitted that apart from cash deposits of Rs.12,10,400/-, the AO noticed total credits of Rs. 7,52,08,145/- in the bank account and, in the absence of any reconciliation, treated 10% thereof as unexplained income. It was further pointed out that the Profit & Loss account filed by the assessee reflected turnover of only Rs.1,28,09,737/- which is far less than the quantum of credits appearing in the bank accounts. In such circumstances, the addition made by the AO was justified.

7. We have carefully considered the rival submissions and perused the record. It is a matter of record that the assessee firm claims to have been dissolved on 01.04.2016 and thereafter the business was carried on by one of the erstwhile partners as a proprietary concern. However, the assessee did not participate in the assessment proceedings, and no intimation of dissolution was ever given to the Assessing Officer. The PAN of the firm also continued to remain active, and the bank accounts were operated in the same name. In these circumstances, the Assessing Officer had no means to know that the firm had ceased to exist. The assessment was therefore framed in the name of the firm on the basis of records available to him. Thus, the framing of assessment in the name of the firm in the present facts cannot be straightaway termed as a jurisdictional defect, but rather a consequence of the assessee’s own non-compliance and nondisclosure.

7.1 The assessee has placed reliance on audited accounts of the proprietary concern and income tax return acknowledgments to submit that the impugned deposits and credits were duly recorded in the successor’s books. However, we notice that the AO has pointed out large unexplained credits aggregating to Rs. 7.52 crore in the bank accounts, whereas the turnover disclosed in accounts is much lower at Rs. 1.28 crore. No reconciliation of these entries with the books of account has been demonstrated before us.

7.2 In view of the rival contentions and the availability of additional documentary evidence filed before us, we are of the considered opinion that the matter requires a fresh examination at the end of the AO.

Both legal issue regarding assessment on a dissolved firm and factual issue regarding reconciliation of bank deposits/credits with the books of accounts of the proprietor need to be properly adjudicated.

Accordingly, in the interest of justice, we set aside the impugned order of the CIT(A) and restore the matter to the file of the AO for de novo adjudication, after considering all documents filed by the assessee, including the dissolution deed, audited accounts, and tax return of Shri Yogesh H. Aalwani. The AO shall provide reasonable opportunity of being heard to the assessee.

8. In the result, the appeal is allowed for statistical purposes.