Reassessment for escaped income applies the law in force for the original assessment year; business succession was also established.

A company was held to have succeeded to the business of the erstwhile firm where the transfer covered the undertaking as a going concern, including immovable property, machinery, goodwill, contracts and related legal incidents; an omission in the profit and loss account did not alter that overall effect. In reassessment for escaped income under Section 34(1) of the Income-tax Act, 1922, the assessment had to be made on the basis of the law in force when the original assessment ought to have been completed, so the unamended Section 26(2) governed the liability. The reference was answered against the assessee and the reassessment was upheld.

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Issues: (i) Whether the company had succeeded to the business of the erstwhile firm within the meaning of Section 26(2) of the Income-tax Act, 1922. (ii) Whether the reassessment made under Section 34(1) of the Income-tax Act, 1922 had to be governed by the unamended Section 26(2) as it stood when the assessment ought originally to have been made.

Issue (i): Whether the company had succeeded to the business of the erstwhile firm within the meaning of Section 26(2) of the Income-tax Act, 1922.

Analysis: The transfer covered the business as a going concern, along with the immovable properties, machinery, goodwill, contracts, and legal incidents. The omission of one item in the profit and loss account did not displace the overall effect of the transfer. The later letter of the managing agents also confirmed that the business had been taken over as a running concern from the specified date. On these facts, the business carried on by the company was the same business previously conducted by the firm.

Conclusion: The company was the successor to the firm and succession under Section 26(2) was established, in favour of Revenue.

Issue (ii): Whether the reassessment made under Section 34(1) of the Income-tax Act, 1922 had to be governed by the unamended Section 26(2) as it stood when the assessment ought originally to have been made.

Analysis: Section 34(1) is an escaping-assessment provision enabling assessment in a later year for income that escaped assessment in the year when it should have been assessed. The reassessment is therefore treated as an assessment for the year of escapement, and the law applicable is the law in force at the time the assessment should have been made. The subsequent amendment to Section 26(2) could not alter the liability arising from the earlier assessment year.

Conclusion: The unamended Section 26(2) applied, and the reassessment was correctly made on that basis, in favour of Revenue.

Final Conclusion: The reference was answered against the assessee on both questions, and the reassessment was upheld under the pre-amendment statutory scheme.

Ratio Decidendi: In a reassessment for escaped income, the assessment must be made as if it had been completed in the year of escapement, so the law then in force governs the liability.

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