The Delhi Bench of the Income Tax Appellate Tribunal has clarified a critical principle in partnership taxation: income received after dissolution, but credited to the dissolved firm’s PAN due to administrative error, cannot be taxed in the hands of the dissolved entity if the same income is duly declared and taxed by the surviving proprietor. This decision prevents double taxation and affirms the substance-over-form doctrine in income tax assessment.
Background & Facts
The Dispute
The appellant, Assam Logistics, was a partnership firm with four partners. On 28.04.2015, the firm was formally dissolved pursuant to a dissolution deed executed on that date. Three partners - Shri Taranjeet Kaur, Shri Deepak Kumar, and Shri Harinder Singh - retired. The surviving partner, Shri Raja Singh (PAN: AONPS1502G), continued the same business under the same name and style as a proprietary concern, also named Assam Logistics.
Key Facts
- The partnership firm received contractual receipts of Rs. 18,37,94,110 from M/s Maruti Suzuki Ltd. during the financial year 2016-17 (Assessment Year 2017-18).
- TDS under Section 194C was deducted and deposited against the PAN of the dissolved partnership firm (PAN: AALFA0452B).
- No income tax return was filed by the dissolved partnership for AY 2017-18.
- The Assessing Officer (AO) reopened the case under Section 147 read with Section 148 on 22.07.2022.
- The AO treated the Rs. 18,37,94,110 as income of the dissolved firm and added Rs. 1,47,03,528 (8% of receipts) as presumed profit.
- Interest income of Rs. 75,723, subject to TDS under Section 194A, was also added.
- The surviving proprietor, Shri Raja Singh, filed his return for AY 2017-18 declaring total turnover of Rs. 4,28,39,469.45, which included the same receipts from Maruti Suzuki Ltd. as part of his gross receipts.
- The proprietor’s bank account (HDFC, A/c No. 50200012485111) showed all receipts from Maruti Suzuki credited to his proprietary firm.
- The proprietor’s audited financial statements for AY 2017-18 disclosed gross freight receipts of Rs. 37,97,33,136, with net profit of Rs. 4,28,39,469 after deducting freight charges of Rs. 33,68,93,667.
- Emails sent to Maruti Suzuki Ltd. (PB pp. 197 - 206) requested correction of TDS records to reflect the proprietorship as the actual recipient.
- An affidavit by Shri Raja Singh (PB pp. 209 - 210) confirmed that the receipts were never received by the dissolved firm and were always accounted for in his books.
Procedural History
- 28.04.2015: Partnership dissolved via deed.
- 31.03.2017: End of financial year under appeal (AY 2017-18).
- 22.07.2022: Notice under Section 148 issued to dissolved firm.
- 17.05.2023: AO’s order under Section 147 r.w.s. 144 making additions of Rs. 1,47,03,528 (profit) and Rs. 75,723 (interest).
- 29.05.2025: CIT(A) confirmed additions but reduced profit rate from 8% to 5.76%, resulting in addition of Rs. 1,05,86,540.
- 04.02.2026: Hearing before ITAT Delhi.
- 24.04.2026: Judgment pronounced.
Relief Sought
The assessee sought deletion of the addition of Rs. 1,05,86,540 and Rs. 75,723, arguing that the income was never received by the dissolved firm and was already taxed in the hands of the surviving proprietor.
The Legal Issue
The central question was whether income received by a surviving proprietor after dissolution of a partnership firm, and duly declared in his books and returns, can be taxed again in the hands of the dissolved partnership firm merely because TDS was erroneously deducted against its PAN.
Arguments Presented
For the Petitioner
The assessee argued that the partnership ceased to exist on 28.04.2015 and had no legal capacity to receive income thereafter. The receipts were physically received by the proprietor’s bank account, recorded in his books, and taxed in his return. The TDS mismatch was purely administrative, caused by Maruti Suzuki Ltd.’s failure to update its records. The affidavit and bank statements were uncontroverted. Reliance was placed on the principle that income cannot be taxed twice and that substance must prevail over form.
For the Respondent
The Department contended that since the TDS was deducted and deposited against the PAN of the dissolved firm, and no return was filed by the firm, the income must be deemed to have accrued to the firm. The AO relied on the TDS statement (Form 26AS) and the letter from Maruti Suzuki Ltd., which stated payments were made to "Assam Logistics" without distinguishing between the partnership and the proprietorship.
The Court's Analysis
The Tribunal emphasized that the dissolution deed was valid and effective from 28.04.2015. The firm ceased to exist as a legal entity for all purposes, including receipt of income. The fact that Maruti Suzuki Ltd. continued to make payments to the same name and style, and that TDS was deducted against the old PAN, did not revive the dissolved firm.
"The effect of dissolution of partnership firm M/s Assam Logistics was not recorded by the company M/s Maruti Suzuki Ltd, it had recorded the payments and corresponding TDS on the PAN of erstwhile partnership firm with same name & style as was of the proprietorship firm of Shri Raja Singh."
The Tribunal noted that the affidavit of Shri Raja Singh, corroborated by bank statements, audit reports, and email correspondence, established beyond doubt that the receipts were never received by the dissolved firm. The lower authorities failed to appreciate that the income was already taxed in the hands of the person who actually earned it - the surviving proprietor.
The Tribunal held that taxing the same income in two hands - once in the dissolved firm and again in the proprietorship - would amount to double taxation, which is contrary to the fundamental principles of income tax law. The mere existence of a TDS mismatch due to administrative oversight cannot override the actual economic reality of receipt and ownership.
The Verdict
The appeal was allowed. The Tribunal directed the Assessing Officer to delete the addition of Rs. 1,05,86,540 upheld by the CIT(A), and also to delete the addition of Rs. 75,723 on account of interest. The Tribunal held that the income was correctly taxed in the hands of the surviving proprietor and no further tax liability arose in the dissolved firm. No further directions were issued as the matter was fully resolved by deletion of the additions.
What This Means For Similar Cases
Double Taxation Cannot Be Permitted on Account of TDS Mismatch
- Practitioners must argue that TDS deduction against a dissolved entity’s PAN does not create a tax liability for that entity if the income is received and taxed by the successor.
- The burden shifts to the Department to prove actual receipt by the dissolved entity - not merely reliance on Form 26AS.
Substance Over Form Applies to Partnership Dissolution
- Courts and tribunals will examine actual receipt, accounting, and declaration rather than formalities like PAN or name continuity.
- A surviving proprietor continuing business under the same name does not revive the dissolved partnership.
Procedural Compliance Must Reflect Economic Reality
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Tax authorities must verify whether the entity named in TDS records is the actual recipient of income.
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Where a business transitions from partnership to proprietorship, taxpayers should proactively notify clients and request TDS corrections to avoid disputes.
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Always retain dissolution deeds, bank statements, affidavits, and correspondence with clients as evidence.
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Ensure successor entities file returns disclosing all receipts, even if initially credited to the predecessor’s PAN.
