Successor liability: company treated as firm successor; escaped-assessment under Section 34(1) governed by law of escapement year.

Company succession to a firm was established by a conveyance of property, goodwill, business name and contracts plus post-transfer conduct, and therefore the company succeeds to the firm's liabilities under the pre-amendment successor-liability rule; consequently the company is liable on the whole of the profits. An assessment under the escaped-assessment provision must be made as if in the year in which income escaped assessment, so intervening legislative amendment does not alter the applicable substantive law and the pre-amendment successor-liability rule governs the Section 34(1) assessment.

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Issues: (i) Whether the company is the successor to the firm of Jaidayal Sagarmal within the meaning of Section 26(2) of the Income-tax Act, 1922; (ii) Whether an assessment made under Section 34(1) in a subsequent year must be determined according to the law as it stood in the year in which the assessee escaped assessment (i.e., whether the pre-amendment Section 26(2) applies).

Issue (i): Whether the company succeeded to the business of the firm and is therefore liable as successor under Section 26(2) of the Income-tax Act, 1922.

Analysis: The court considered the March 4, 1938 sale deed conveying immovable property, machinery, goodwill, the right to use the business name and the benefit of contracts to the company, together with post incorporation conduct including the managing agents' written confirmation that the company took over and has been operating the press as a running concern from March 3, 1938. The omission of a single item of gross profit in the firm's profit and loss account was examined and found insufficient to rebut the documentary transfer and subsequent conduct evidencing succession.

Conclusion: The company is the successor to the firm and succeeds to the business for the purposes of Section 26(2) of the Income-tax Act, 1922 (decision against the assessee).

Issue (ii): Whether an assessment under Section 34(1) made in 1940 should be governed by the substituted Section 26(2) (Income-tax Act amendment of 1939) or by the provisions in force in the year in which the assessee escaped assessment (1938-39).

Analysis: Section 34(1) permits assessment in a subsequent year where income "has escaped assessment in any year" and directs that the officer may proceed as if the notice were issued under Section 22(2). The court held that the assessment under Section 34(1) must be the same as the assessment that would have been made had it been effected in the year in which escapement occurred. Accordingly, intervening legislative changes do not alter the character of the assessment; the law applicable is that which prevailed in the year of escapement (1938-39), not the law at the later date of assessment.

Conclusion: The assessment under Section 34(1) must be made as if in the year 1938-39 and accordingly the pre-amendment provision of Section 26(2) applies; the assessment against the company on the whole of the profits is valid (decision against the assessee).

Final Conclusion: Both issues are answered in the affirmative against the company: the company is the successor to the firm, and an assessment under Section 34(1) is to be made in accordance with the law applicable in the year in which assessment escaped (pre-amendment Section 26(2)), upholding the assessment made.

Ratio Decidendi: Where an assessee has escaped assessment, an assessment under Section 34(1) must be conducted as if made in the year of escapement, and therefore the substantive provisions applicable in that earlier year (including successor liability under the pre-amendment Section 26(2) of the Income-tax Act, 1922) govern the assessment notwithstanding subsequent legislative amendment.

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