Notice u/s 148 of Income Tax Act to a dissolved firm after all partners' death is invalid and nullifies reassessment: ITAT Jodhpur - 2025-05-01

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Notice to a Non-Existent Firm is a Jurisdictional Flaw, Vitiates Entire Reassessment: ITAT Jodhpur

Jodhpur: The Income Tax Appellate Tribunal (ITAT), Jodhpur Bench, has delivered a significant ruling, quashing reassessment proceedings initiated against a partnership firm that had ceased to exist following the death of all its partners. The Tribunal held that a notice issued under Section 148 of the Income Tax Act, 1961, to a non-existent entity is invalid, and this fundamental jurisdictional defect cannot be cured.

The bench, comprising Accountant Member Dr. Mitha Lal Meena and Judicial Member Dr. S. Seethalakshmi, allowed the appeals filed by Kanak Kumar Jain, the legal heir of a partner of the erstwhile M/s. Keshariyaji Filling Station.

Background of the Case

The case pertains to the assessment years 2011-12 to 2015-16. M/s. Keshariyaji Filling Station, a partnership firm, had three partners. The first partner passed away in 2010, the second in 2011, and the last surviving partner, Shri Shyam Sunder Jain, died on October 2, 2017. With the death of the last partner, the firm was dissolved by operation of law.

Subsequently, on March 8, 2018, the Income Tax Department issued a notice under Section 148 to initiate reassessment proceedings against the firm for alleged escaped income. The assessing officer (AO) ultimately passed an assessment order, fixing the liability on Kanak Kumar Jain, the legal heir of only one of the deceased partners. The Commissioner of Income Tax (Appeals) upheld this order, prompting the present appeal before the ITAT.

Appellant's Arguments

The appellant, represented by Shri Rakesh Lodha (CA), advanced several key arguments challenging the validity of the proceedings:

• Notice to a Non-Existent Entity: The primary contention was that the notice under Section 148 was issued to a non-existent firm, as all its partners had already passed away. Such a notice is null and void from the outset.
• Failure to Address Objections: The appellant had raised specific objections before the AO regarding the validity of the notice. However, the AO proceeded with the assessment without passing a mandatory speaking order to dispose of these objections.
• Non-Compliance with Section 189(3): It was argued that the AO failed to follow the procedure laid down in Section 189(3) of the Act. This section mandates that for a discontinued firm, the liability is joint and several upon every person who was a partner at the time of dissolution and their legal representatives. The AO erred by foisting the entire liability on the legal heir of just one partner, without impleading the legal heirs of the other deceased partners.

Tribunal's Analysis and Ruling

The ITAT conducted a thorough analysis of the facts and legal precedents, ultimately siding with the appellant. The Tribunal's decision was anchored on the principle that a valid notice is a condition precedent for assuming jurisdiction for reassessment.

"a valid service of a valid notice under section 148 of the Act, is not a mere procedural requirement, but is a condition precedent to the validity of any assessment... if no notice under section 148 is issued or if the notice so issued is shown to be invalid... the learned Assessing officer cannot proceed with the subsequent proceedings," the Tribunal noted in its order.

The bench highlighted several critical lapses by the revenue authorities:

1. Invalid Notice: It was an undisputed fact that on the date of issuance of the notice (08.03.2018), the firm was non-existent. Relying on landmark Supreme Court judgments in CIT v. Spice Infotainment Ltd. and PCIT v. MARUTI SUZUKI INDIA LTD. , the Tribunal reiterated that a notice to a non-existent entity is without jurisdiction.

2. Violation of Natural Justice: The AO's failure to pass a speaking order on the appellant's objections was deemed a fatal procedural flaw and a violation of the principles of natural justice.

3. Incorrect Application of Law: The Tribunal found a "gross violation" of Section 189(3). It held that the AO had a duty to implead all legal heirs of all deceased partners to correctly assess the liability of the dissolved firm.

Concluding its order, the ITAT stated, "Under these facts and circumstances we are of the view that ld. CIT (A) was required to consider the application of the Appellant u/s 154 of the Income tax Act, 1961 in true spirit of law in which she failed."

Final Decision

The Tribunal set aside the order of the CIT (Appeals) and quashed the notice issued under Section 148 and all subsequent assessment proceedings. The decision, applicable to all five appeals for the concerned assessment years, reinforces the legal sanctity of issuing a valid notice to the correct legal entity before initiating any tax proceedings.