Assessment of Discontinued Business or Profession
Introduction
If a business or profession is discontinued during the year, the tax officer can tax the income earned from the start of that year up to the date of discontinuance in the same year itself.
Income Taxable in the Previous Year Itself
Normally, the income of a previous year is chargeable in the next following assessment year. However, this general principle is subject to some exceptions in which income is charged to tax in the previous year itself.
One exception arises when any business or profession is discontinued in any assessment year. In this situation, the total income from such business or profession for the relevant financial year (from 1st day of previous year and up to the date of discontinuation) shall be charged to tax in that year itself.
Possibility of Regular Assessments
- A firm discontinuing its business may be assessed in the manner provided under the provisions ofSection 176in the year itself in which it discontinues its business, it may also be assessed in the year of assessment as per Section 189.
- Similarly, where an AOP discontinues its business, it may be assessed in the manner provided under the provisions ofSection 176in the year itself in which it discontinues its business, it may also be assessed in the year of assessment as per Section 177.
Notice of Discontinuance
- The taxpayer must notify the Assessing Officer within 15 days of discontinuance.
- Failure to do so attracts a penalty of Rs. 500 per day underSection 272A.
Separate Assessments and Tax Rates
- Income is taxed at the rates in force for the relevant assessment year.
- Separate assessments are made for each completed financial year or part thereof.
Issue of Notice and Filing of Return
- The Assessing Officer issues a notice underSection 142(1)(i), requiring the taxpayer to furnish:
o Returns for each completed previous year.
o Estimated income for the period up to discontinuance.
- The return must be filed within the specified time, not less than seven days.
- If no return is filed:
o Best judgment assessment under Section 144 applies.
o Penalty under Section 271 may be levied.
o Prosecution under Section 276CC may be initiated.
Receipts After Discontinuance
- Any income received after discontinuance is taxable in the year of receipt, provided it would have been taxable if received earlier.
- The CBDT has directed Assessing Officers to useSection 133(6)to collect information on outstanding professional fees at the time of discontinuance. [Instruction No. 703, dated 12-6-1974]