A firm in it's simplest term is where people come together as partners and
work. However, at times things do not go as planned, and the partnership comes
to an end along with the firm. Hence dissolution of a partnership firm basically
mean breaking up or extinction of the relationship subsisted between all
partners of the firm, and that the firm no longer stands. This dissolution of a
firm can be through a multiple ways, this papers mainly deals with the
dissolution and it’s judicial background, to determine the practicability of
The paper will further deal with what are the ways by which
the dissolution occurs and liabilities of a partner for acts after dissolution,
rights of partner after dissolution, suit for account, concept of receivers and
few other related subjects. Although the rules for the dissolution of
partnership firms is widely applied in India, problem arises in when they have
to be applied, where complexities are present, especially when the obligation of
a partner are co joined with fiduciary duties of other kinds, as often happens
many a times.
Further the paper would also go on to explain the concept of dissolution and
reconstitution and continuation of partnership. In addition to this the author
would further proceed to discuss a firm's liability in income tax laws.
Therefore, the present article will cover almost all the aspects related to the
dissolution of partnership firm, and will provide judicial background for each.
Dissolution of A Partnership Firm
Dissolution of a partnership firm is not said to be dissolved by the fact of
one or more partner ceasing to be a partner. But in cases where there are only
2 partner, and one partner decides to cease his right to be a partner, the firm
In the CWT West Bengal v. M/S A.W Figgis &Co
. the supreme court held
that The law with respect to retiring partners are enacted in the
partnership act is to a certain extent a compromise between doctrine of English
law and mercantile usage which recognizes the firm as a distinct person or quasi
The process of dissolution culminates winding up , account settlement, taking
over goodwill and assets and imposing restrictions on outgoing partners. In the
winding up, process firm does not dissolve even though it has no legal entity.
The provisions of section 39,42 and 46 deal with the concept and consequences of
dissolution of the firm and do not abrogate the terms of contract between
Modes of Dissolution
A partnership firm may be dissolved by various modes:
- By consent
- By agreement
- Compulsory dissolution or dissolution by operation of law
- Contingent Dissolution or automatic dissolution.
- Dissolution by notice or optional Dissolution.
- Dissolution by court or Judicial Dissolution.
The question whether the firm has been dissolved by the partners or is being
succeeded by another partnership, depends on the contention of the partners.
Section 40 of the The Partnership Act gives right to partners to dissolve the
partnership by agreement with the consent of all the partners or in accordance
with the contract between the partners.
This also provides the right to a
partner to not dissolve the partnership when it is voted in majority, and hence
no partnership can be dissolved if even one of the partner do not agree or
dissent from such opinion. And hence repudiation of the partnership by one or
more partners which is accepted by all partners would indicate an implied
agreement to dissolve as was held in the case of Hitchman v. Crouch Butler
Dissolution may also be held where the services by a
partner or his partners of an invalid notice to determine the partnership is
accepted by the co-partners as a valid notice or where the conduct of the
partner is inconsistent with the continuance of partnership as was held in the
case of Both v. Amos .
In the case of Kali Ram v. Ram Rattan where in a
partnership at will, notice of dissolution was given or partnership business for
about 3 years after the notice, it was held that failure to do anything amounted
to consent for dissolution.
In fact mere assignment of a party to an interest
in the partnership to a stranger does not and cannot lead to disruption
of partnership business as was held in the case of Mangilal v. Bharwarlal. In
the law of partnership stoppage of the partnership business is different from
dissolution of partnership.
Carrying on a business is the purpose of the a
partnership and mere stoppage , ordinarily puts it on discontinuous. The same
has been supported in the case of V.V.P Thangaraju v. K.B. Perumal .
there is an arbitration clause in a partnership deed on the death of a partner
under section 85 of the Arbrtration and conciliation act 1996 are maintainable,
same has been held in the case of Sunderlal v. Bhagwati Devi .In absence of
any statutory provisions permitting assessment of dissolved firm, assessment
proceedings cannot be maintained against a dissolved firm same was held in the
case of Chief Commr., S.T V. R.K. Goyal.
The question when a firm was
dissolved is a mixed question of law and fact. The question as to when the firm
was dissolved depends on the contentions of the parties which is necessarily a
question of fact. But the conclusion drawn on such facts is always question of
law as in the case of L Shyamlal v. Shyamlal . The question whether there
was reconstitution on dissolution of the firm and whether there
was settlement of account of the firm at any times are the questions of facts
and as such findings on such questions are not impeachable in the second
appeal , this was later held in the case of M. Vallimmal v. Ramanathan .
addition to a dissolution in partnership deed, there is a reference to the
application of the partnership act in other cases, it cannot be said that a
partner is not entitled to ask for a dissolution of firm under the provision of
the act as was declared in the case of Sheonarain v. Shree Kripa
Shankar where there is a clause in partnership agreement to refer to
arbitration all disputes relating to the dissolution to the arbitration.
An agreement for dissolution of partnership most of necessity cover not only the
mere fact of dissolution and fixing the date of dissolution, but also matter,
which arise directly out of the fact of dissolution, such as settlement of
amounts found due on such settlement closing downer continuation of
business, collection of outstanding and payment of liabilities.
purpose, a power of attorney and indemnity clause would also ordinarily be
necessary. Each clause of the agreement of dissolution cannot be read separately
so far as to find out what it attracts under the relevant same act. It would act
as a great hardship and violate the principles that a fiscal statute must be
interpreted in a manner which is beneficial to the subjects.
Dissolution By Agreement
A firm may be dissolved with the consent of all the partners or in accordance
with a contract between the partners, this is what has been stated under section
40 of partnership act. The first clause of section 40 provides for dissolution
of firm by consent of all partners. This is consensual dissolution of
partnership. It applies to specific partnership and partnership at will both.
In Harish Kumar v. Bachan Lal
Punjab and Haryana High court held that A
dissolution was held to have taken place in the case of the firm from agreed
date. The period of limitation for filing a case for renditions of account
commenced from that date and was not permitted to be prolonged by a partner
subsequently giving a notice of dissolutions. In a firm of qualified solicitors
incurred disqualification and resultantly the firm was dissolved with the
consent of all the partners.
A suit for the dissolution of firm cannot be filed
in absence of cause of action.
Partners may create partnership via agreement and by same agreement it can also
be dissolved. The contract providing for dissolution maybe contained in the
partnership deed itself or in a separate agreement.
Dissolution by agreement is
different from dissolution by consent in former partners have to adhere the
existing articles of firm while in later case irrespective of the articles the
firm may be dissolved by consent of all partners.
In Carmichael v. Evans
the court observed that Any circumstances such as unsoundness of mind, physical
incapacity, incompatibility of temperament or dishonesty even outside business
maybe by an express clause in the article be a ground for dissolution of firm.
Section 41 of the partnership act talks about compulsory
dissolution of firm , it states that it can be dissolved by adjudication of all
the parties but one as insolvent, or by happening of any event , which
makes its unlawful for the business of the firm to be carried on or of the
partners to carry it forward. A firm can do only legal business only which is
clear by sector 23 and 24 of Indian contract act 1872, as an agreement for
unlawful objects and consideration is void. Section 41 envisages illegality of
business subsequently which may be a case of subsequent impossibility under
section 56 of Indian contract act 1872.
The provision of section 41(b) states
that id firm has more than one undertaking doing diversified business then if
one business is declared unlawful, it does not affect the operation and legality
of other business and those would not be dissolved. In the case of event of war,
the ancient notion is that an alien enemy cannot sue in queen’s court, but now
the alien company is also governed under the same terms and conditioning and
hence simplifying the rules.
Contingent Dissolution Or Automatic Dissolution
A firm may be dissolved upon certain contingencies , automatic in the sense,
whenever it happens, it must dissolve itself. Section 42 of the partnership act
provides for certain contingencies, it states various contingencies , which
could result in dissolution of a firm:
- If constituted for a fixed term, b expiry of that term, y the expiry of
- If constituted to carry out one or more adventure or undertaking , the
- By death of partner and;
- By the adjudication of a partner as an insolvent.
Partnership may be for fixed terms as we know them as particular
partnership wherein the lifespan of firm as it gauged by the partners in limine and
partner fix out a time period for the firm and then on expiry the firm will
In the case of Saligram Rupal Khanna v. Kanwar Rajnath
 it was
held by the supreme court observed the proposition in our opinion cannot be
disputed that after dissolution the partnership subsist merely for the purpose
of completing pending transactions, winding up of business and adjusting the
rights of partners ., that a firm constituted for a fixed term shall stand
dissolved in the absence of contract to the contrary on the expiry of that term,
similarly in the case of Kuriachan Chacko v. Registrar of firm
Completion of Business
The firm automatically stand dissolved if the business of firm , for which it
was constitutes , is completed as was held in Ramnarayan v. Kashinath
court observed that there was no evidence on record to show that the partnership
continued even partnership does not appear to have subsisted thereafter.
Obviously enough, the partnership was formed only for a single venture.
If in a
fixed term , a partner dies early it would dissolve the firm early than its
term. This is a mode of dissolution of partnership firm too. This is provided
for in section 33 of the partnership act, and in section 253 of the Indian
contract act. Even where there is a term the death of one partner dissolves the
partnership. Section33 overrides section 32 and if the death is earlier, the
partnership is dissolved.
Death of a partner may also terminate the existence of a firm. However
contrary to the effect can be made by providing in the deed that partnership
will continue so long there are two partners then in such cases of death of
partner will not cause dissolution of partnership. This gain has been
strengthened by the case of Kesrimal v. Dalichand
A firm may be dissolved in case of insolvency of a partner, however, it is
subject to contract contrary to this effect. Moreover, such an agreement shall
be subject to provisions of compulsory dissolution contained in section 41.
Dissolution By Notice
Section 43 says that in the case of partnership at will, the firm may be
dissolved by any partner giving a notice in writing to all the partners of his
intention to dissolve the firm. The date of dissolution may be given in the
notice itself and if no date is given then date of communication of notice shall
be date of dissolution.
In case of Dhukia Amlaner MT v. Raychand
, it was
held that a notice that accounts be rendered and that ascertain work must not be
proceeded , is not a notice of dissolution.
In A Gopal Reddy v. E. Jaya Rami Reddi
a fixed period of firm was attempted to dissolve by notice which was rejected by
the court that any of the ground enshrined in section 44 as ‘ just and
equitable’ has to be proved for dissolution of such firms.
Dissolution By The Court
Section 44 empowers the court , at a suit of a partner, to dissolve the firm on
the happening of any one of the grounds enumerated in clauses(a) to (g). This
declaration of the ground for judicial dissolution corresponds , with verbal
variation and additional provisions adapted to Indian procedure.
In the case of Gur Dayak
Prsad v. L Rahunath Prasad and others
 it was held that where partners
offered their own shares to the firm under the stipulation contained in the
partnership deed, but no resolution was passed on the notice though included in
the agenda , it was held that the dissolution could not be enforced under
section 44 as under the deed of the partnership it was open to the plaintiffs to
have sold their shares privately if the firm did not purchase them.
in the case of Daggumati v.Yedalapalli Govindu
. Moreover there are further
grounds through which dissolution of partnership firm can be guaranteed.
Insanity can be a ground for dissolution of firm. The dissolution on the grounds
of insanity is useful for both the insane and other partners, in the case of Willam
, it was observed that one of the partners of the firm had gone
insane, the court therefore rejected the appeal to appoint a receiver, and
ordered for dissolution of the firm.
In the case of Show v. Milford
, a partner of the firm committed adultery and
his wife left him and other partners applied for dissolution on this
ground , the court held that there us no doubt of misconduct, but in the case of
bankers how can the court say that a man’s money is less safe because one of the
partners committed adultery and hence rejected the plea. Hence, only in cases
where the misconduct of the concerned individual affects his professional life,
only in those cases shall the firm be dissolved.
Persistent Breach of Agreement
If a partner willfully commits breach of agreement relation to the management of
the affair of the firm, that is not right, then the other partners may apply
for the dissolution of the firm before the court. In the case of V.H Patel and
company v. Hirubha Himabhai Patel
 , any conduct which breaches mutual trust
and confidence between the partners is sufficient to invoke this clause for
dissolution of firm.
Transfer of Interest
A firm may be dissolved on the application of a partner by the court, if the
partners other than the one suing has transferred the whole interest in the firm
to a third party.
If a business of the firm cannot be carried on save at a loss only then the firm
may be dissolved by the court at the application of partners. In the case of Chandrika
Parsad v. Vishnu Chandra
it was held that what is required to be proved under
this clause is that the business of the firm cannot be carried on save at a
loss. It is not unusual to find a manufacturing business suffering loss in the
initial years, but in cases , as the mentioned one, where losses are
being regular , and there is no scope of profit, in such cases the firm can be
dissolved on an application by the partners.
Dissolution And Settlement of Accounts
In the case of K. Gopal Chetty v. Vijayaraghavachariar
, a question arose as
to the settlement of account after dissolution, it was held that where a partner
files a suit for recovery of sum against the fellow partner and relief is
capable of being granted without taking account the general account of the firm
then account may be settled without dissolving the firm, however n recent
case it was held that in he present cases too, the accounts can be settled by
assuming the continuance of the partnership. In cases where there is a property,
the property should be partitioned and granted.
]In the case of Jagdish Chandra v. Hari Narain
, the main question raised was
whether am arbitrator can decide dissolution of the firm. The court said that
where a clause in articles of partnership per the agreement provides that all
the differences between the partners will be referred t the arbitrator, the
arbitrator will have power to decide in such cases whether or not such
partnership shall be dissolved.
The Court, however, did not decide as to
whether an arbitrator will be bound by the grounds mentioned in section 44 or go
beyond these ground and award dissolution of the firms. Further shall the
liability of the firm and individual after the dissolution of the firm be stated
in the next chapter.
After Dissolution of The Partnership Firm
Dissolution is the termination of the firm .It includes a variety
of activity like winding up, settlement of account, management of goodwill,
disbursement of assets, ranking and satisfaction of claims of creditors and
other. Section 45 to 55 deal with what happens after a partnership firm.
Section 45 declares the continuing liabilities of the partner to third parties
until public notice is given of the dissolution. The object is to enable the
third party to know of the retirement. This provision also provides security to
any party contracting with the firm , and also defines liability and rights of
the partner after the dissolution. In the absence of notice, the result would be
Section 46, states that on dissolution of a firm every partner or his
representative is entitled, as against all the other partners or
representative ,to have the property of the firm applied in payment of the debts
and liabilities of the firm, and have the surplus distributed among thr partners
or their representatives according to their rights.
This was also held in the
case of CIT , Madhya Pradesh v Dewas Cine Corpn
, and in the case of Ravi
Prakash Goel,v. Chandra Prakash Goel, where it was held that the
representative of a deceased partner are equally entitled to file of a suit for
distribution of assets.
Section 47 states that even after the dissolution of the firm the authority of
each partner to bind the firm and the mutual rights and obligation will continue
notwithstanding the dissolution , as it may be necessary to wind up the
business. This clause can further be related, when the assessing officer, assess
the firm for their tax liability.
Including the fact that the firm shall not be
liable for acts of a partner who has been declared insolvent., and also not to
persons who after such adjudication represented themselves as the partners of
the firm. Further in cases such as Ramrichapal v The Bikaner Stores
, it was
explained the need for continuing the partnership for the purpose of winding up.
Partnership: Income Tax Liability
Under the income tax law, the total income of the firm will be determined as a
separate entity and it will be computed under various heads of income. However
while computing taxable profits under head profits and gains of business or
a deduction is allowable to the firm on account of interest and
remuneration payable to the partners. The Income tax Act, 1961, does not define
the term firm
but Section 2(23) of the Act which deals with definition simply
states as under;
- Firm shall have the meaning assigned to it in the Indian Partnership
- Partner shall have the meaning assigned to it in the Indian
partnership Act, 1932 and shall include
i. Any person who, being a minor, has been admitted to the benefits of
partnership ; and
ii. A partner of a limited liability partnership as defined in the Limited
Liability Partnership Act, 2008;
- partnership shall have the meaning assigned to it in the Indian
Partnership Act, 1932, and shall include a limited liability partnership as
defined in the Limited liability Act, 2008.
If the firm satisfies the conditions laid down u/s 184, the firm shall be
eligible for deduction on account of interest, salary, etc. while computing its
income under the head business and profession.
However, it will be subject to
the maximum of the limit specified under Sec.40(b). On the other hand, if such
conditions are not satisfied, no deduction shall be allowed to the firm on
account of such interest, salary, bonus, etc.
Conditions to be satisfied to be eligible for deduction of interest, Salary,
etc. and to be assessee as Partnership firm:
In the First Assessment year: Partnership is evidenced by an instrument i.e. there is a written
document giving the terms of partnership.
- The individual share of the partners are specified in that instrument.
- A certified copy of the said instrument of partnership shall accompany
the return of income in respect of the assessment year.
The firm shall be assessed in the same capacity for every subsequent year if
there is no change in the constitution of the firm or the share of the partners.
In case any change had taken place in the previous year, the firm shall furnish
a certified copy of the revised instrument of partnership along with the return
of income. In failure to do so, the firm shall not be eligible for deduction on
account of salary, interest, bonus, etc.
Nevertheless, such amount of interest,
salary, bonus etc. shall not be charged to tax in the hands of the
partner. Certified copy of the partnership deed can be submitted along with the
revised return provided the asst. has not been completed based on the original
return filed by the firm.
The section speaks of the filing of the certified copy
of the partnership deed along with the return.
Therefore, return includes the
original return as well as the return submitted under section 139(5).
- Balish Singh & Co. vs. CIT,
- CIT vs. Shrivastava
however be borne in mind that revised return has to be a valid return in terms
of the conditions specified in Sec.139(5). Further according to the decision of
the Apex Court in Kumar Jagdishchandra Sinha vs. CIT, Sec.139(5) can be
invoked only if the original return is filed within the time specified u/s
Also filing of certified copy of the partnership deed is procedural
/ technical requirement and as such the deed can be submitted after the filing
of the original return. This view is supported by the Hon‟ble Supreme Court in
the case of Manglore Chemicals and Fertilizers Ltd. vs. Dy. Commissioner &
Wherein it is held that the stringency and the mandatory nature of a
provision for exemption must be justified by the purpose intended to be served.
The mere fact that it is a statutory condition does not matter one way or the
The conditions which belong to the area of procedure have got to be
constructed liberally. The Delhi Tribunal has considered the issue after the
commencement of the new scheme and held that filing the certified copy of the
partnership deed before completion of the asst. is sufficient compliance with
the provision of Sec.184 [ITO vs. D. M. Enterprise (67 ITD 123) and Ishardas
Interest to partner: Not exceeding 12 percent per annum from 1-06-2002.
Remuneration to Partner:
- Payment to a non-working partner will not be allowed as a deduction
- A working partner is an individual who is actively engaged in
conducting the affairs of the business or profession of the firm.
- Quantum of allowance is to be determined with reference to „book profit‟
which is defined to mean an amount computed in accordance with the
provisions of sections 28 to 44D of the Income-tax Act, as increased by the
amount of remuneration to partners if deducted in determining book profit.
- Maximum permissible deduction for payment of remuneration to working
Rate of tax: Flat rate of 30% on the total income after deduction of interest
and remuneration to partners at the specified rates. (No surcharge for
Assessment Year 2010-11) to be increased by education cess secondary and higher
education cess @ 3% on Income-tax.
Losses: Unabsorbed loss including depreciation in respect of A.Y. 1993-94
onwards of the firm will not be apportioned amongst the partners and will be
carried forward by the firm only. In case of change in constitution of firm,
following treatment will be given:
- Calculate the share of profit of the retiring/ deceased partner in the
year in which there is a change in the constitution due to such retirement /
- Compute the share of loss of the retiring/ deceased partner in the
brought forward loss of the firm.
- Set off the share in the brought forward losses of the retiring/
deceased partner from his share of the profit of the current year.
This set off of share of brought forward loss will be allowed to the extent
of share of profit of such partner. The balance loss, if any, will not be
allowed to be carried forward either to such partner or to the firm. On the
other hand, if in the current year also the share of the partner is a loss,
then share of the brought forward loss along with the share of loss of current
year will not be allowed to be set off and carried forward.
Nevertheless, unabsorbed deprecation of the firm is not covered u/s 78 and
therefore, the entire unabsorbed depreciation will be allowed to be carried
forward in the hands of the firm, even if there is a change in the constitution
of the firm.
Change in constitution:
Where at the time of making assessment u/s 143 or
Sec.144, it is found that a change has occurred in the constitution of a firm,
the assessment shall be made on the firm as constituted at the time of making
the assessment. In other words, there will not be a separate assessment of firm
even when there is a change in the constitution of the firm. There is a change
in the constitution when:
- if one or more of the partner ceases to be partners.
- one or more new partners are admitted.
- when there is change in their shares.
Dissolution of a firm due to death of any partner will not be considered
as change in the constitution of the firm (proviso to Sec. 187)
Succession by other firm:
Where a firm carrying on a business or profession is
successes by another firm, and the case is not one covered by Sec.187, separate
assessments shall be made on the predecessor firm and the successor firm in
accordance with the provisions of Sec.170.
Dissolution or discontinuance:
Where any business or profession carried on by a
firm has been discontinued or where a firm is dissolved, the assessing officer
shall make an assessment of the total income of the firm as if no such
discontinuance or dissolution had taken place, and all the provisions of this
Act, including the provisions relating to the levy of a penalty or any other sum
chargeable under any provision of this Act, shall apply, so far as may be, to
Every person who was at the time of such discontinuance or
dissolution a partner of the firm, and the legal representative of any such
person who is deceased, shall be jointly and severally liable for the amount of
tax, penalty or other sum payable, and all the provisions of this Act, so far as
may be, shall apply to any such assessment or imposition of penalty or other
- Once tax is paid by firm, no tax will be payable by the partners on
share of income from the firm.
- Amount of Interest and/or remuneration etc. received by a partner will
be taxed in his hands as Business or Professional Income, excluding
the amount disallowed in the hands of the firm being in excess of limits
laid down in S. 40(b) and from A.Y. 2004-05 amount disallowed in the event of any failure as
mentioned in S. 144 or non compliance of S. 184.
Dissolution of partnership, this is a vast topic, to be researched upon, it is
one of the prospective chapters in law, the topic is dynamic in nature and
thus, it does not have a fixed set of rules, the judiciary helps evolve the
dynamics of this subject. The present paper has discussed the dissolution of
partnership firms, its modes, and in brief, what happens after a firm has been
dissolved. With courts being aware of this subject, the paper has
evidenced number of cases that have been cited, to support it's argument. The
topic has a dynamic nature and thus, shall never be limited to the acts itself.
Also, it’s scope has been widened by its legal recognition under the income tax
laws, which has also been incorporated above.
- AIR 1953 SC 455.
- MOH Uduman v. MOH Aslam (1991), 1 SCC ,412 para 13.
- (1983) 80 LS Gaz 550.
- (1946) Fam 46(Partnership between husband and wife).
- AIR 1977 NOC 31(Del)
- AIR 1963 Raj 153.
- AIR 1980 Mad 7.
- AIR 1967 All 400.
- AIR 1982 NOC 11(del )(FB).
- AIR 1935 All 1008.
- AIR 1969 Mad 257
- AIR 1972 Pat 75
- (1904) 1 Ch.D 486.
- Air 1974 SC1094.
- AIR 2014 Ker 109.
- Air 1954 Pat 53.
- AIR 1959 Raj 140.
- AIR 1952 Bom 337.
- (2003) 2 ALD 112 (AP).
- AIR All 141,p 150.
- AIR 1966 AP 192.
- (1861) 31 LJ Ch 265.
- (1869) 18 LT 142.
- (2000)4 SCC 368.
- 1981 All LJ 967.
- AIR 1922 PC 115:ILR 45 Mad 378.
- AIR 2010(NOC) 1005( Raj).
- AIR 1968 SC 676.
- 2008, 13 SCC 667.
- AIR 1966 Raj 187.
- 77 ITR 124.
- 165 ITR 575 Cal
- 170 ITR 556 M.P.
- 220 ITR 67.
- 21 Tax Gazette 193.
- 77 ITD 256.