Business succession under tax law requires continuity, not mere similarity of activity, when applying the Excess Profits Tax Act.

For succession to business under section 8(3) of the Excess Profits Tax Act, 1940, identity of the business is not enough; continuity must also be shown. A later concern cannot be treated as the predecessor's successor if the original business had ended or been discontinued, even where the new activity is similar. The Tribunal misapplied the legal test by focusing only on whether the assessee carried on the same business and by treating a short closure or suspension as irrelevant without first determining whether the business sold by the receiver was a going concern. The reasoning on succession was therefore legally flawed.

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Issues: Whether the Tribunal misdirected itself in law in holding that the assessee had succeeded to the business of the predecessor concern and in applying section 8(3) of the Excess Profits Tax Act, 1940, for computation of capital and depreciation allowance.

Analysis: For the purposes of section 8(3), a succession to business must be established by reference not merely to identity of the business but also to its continuity. If the original business had come to an end or had been discontinued, a later business, even if similar in nature, could not be treated as its successor. The Tribunal proceeded on an incomplete legal approach by asking only whether the assessee carried on the same business as its predecessors, without determining whether the business sold by the receiver was a going concern or a discontinued business. The Tribunal also treated any short closure or suspension as immaterial, which was an erroneous statement of law. Since the legal test was misapplied, the finding of succession could not stand on the reasoning adopted.

Conclusion: The Tribunal misdirected itself in law; the answer to the first question was in the affirmative, in favour of the assessee.

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