Successor liability and winding-up tax treatment: reassessment upheld, but closing-down sale gains and capital gains stayed outside tax.

A company assessment made after liquidation was invalid because a return filed by an unauthorised person could not sustain assessment of a non-existent entity, but reassessment proceedings against the successor were valid under section 34 read with section 26(2) since the successor could be proceeded against when the predecessor could not be found. A closing-down sale of machinery during winding up was not a sale in the course of carrying on business, so the excess realised was not assessable as business profit under the proviso to section 10(2)(vii). Section 26(2) extended only to business profits and gains of the transferred business, not to capital gains, so the successor was not liable for the predecessor's capital gain.

---

---

Issues: (i) Whether the assessment made on the predecessor company was valid and whether proceedings under section 34 read with section 26(2) of the Indian Income-tax Act, 1922, were validly initiated against the successor company; (ii) whether the sum of Rs. 2,14,090 was assessable as business profit under the proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922; (iii) whether the capital gain of Rs. 3,94,576 was taxable in the hands of the successor company under section 26(2) of the Indian Income-tax Act, 1922.

Issue (i): Whether the assessment made on the predecessor company was valid and whether proceedings under section 34 read with section 26(2) of the Indian Income-tax Act, 1922, were validly initiated against the successor company?

Analysis: A return filed by a person who had no authority to represent the company after liquidation could not support a valid assessment. Once the company had ceased to exist, assessment on that non-existent entity was invalid. The mere issue of a general notice under section 22(1) did not commence an assessment, and service of notice on the proper person was essential. Since the predecessor could not be found after its disappearance, the proviso to section 26(2) fastened liability on the successor, and the earlier invalid assessment did not prevent recourse to section 34.

Conclusion: The original assessment was invalid, but the notice under section 34 and the subsequent assessment proceedings against the successor were valid.

Issue (ii): Whether the sum of Rs. 2,14,090 was assessable as business profit under the proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922?

Analysis: The proviso to section 10(2)(vii) applied only where the sale of machinery occurred in the course of carrying on business. Here, the sale formed part of the process of winding up and realisation of assets, not an operation in furtherance of business. A closing down sale of machinery did not attract the statutory fiction treating the excess over written-down value as business profit.

Conclusion: The amount of Rs. 2,14,090 was not assessable as business profit.

Issue (iii): Whether the capital gain of Rs. 3,94,576 was taxable in the hands of the successor company under section 26(2) of the Indian Income-tax Act, 1922?

Analysis: Section 26(2) imposes liability on the successor only for the profits and gains of the business transferred. Capital gains are a distinct head of income and cannot be treated as business profits merely because they arose on a transaction connected with the business. The successor's statutory liability under section 26(2) could not be extended to capital gains earned by the predecessor.

Conclusion: The capital gain of Rs. 3,94,576 was not taxable in the hands of the successor company under section 26(2).

Final Conclusion: The reference was answered partly for the Revenue and partly for the assessee. The reassessment proceedings against the successor were upheld, but the disputed sums of Rs. 2,14,090 and Rs. 3,94,576 were held not taxable as business profit or as successor-liable capital gain, respectively.

Ratio Decidendi: A successor under section 26(2) is liable only for the predecessor's business profits, not for a distinct capital gain, and a closing down sale of machinery during winding up does not attract the business-profit fiction in section 10(2)(vii).

---