Successor assessment under Section 26(2) extends to computation of profits, while only interest and not capital repayment is taxable.

Section 26(2) was construed to require assessment of a successor in a foreign business as if he had carried on the business throughout the previous year and received the full profits, so the provision governed both computation and liability for assessment. On the taxability issue, the repayment was treated as received in British India, but only the interest component formed taxable income; the principal sum was a return of capital and remained outside the charge to tax.

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Issues: (i) whether Section 26(2) governed not merely liability but also the computation of tax on the successor in a foreign business; and (ii) whether the sum of Rs. 1,00,000 represented capital not chargeable to tax, while the balance amount represented taxable interest.

Issue (i): whether Section 26(2) governed not merely liability but also the computation of tax on the successor in a foreign business

Analysis: The provision was read as requiring assessment of the successor as if he had carried on the business throughout the previous year and as if he had received the whole of the profits of that year. On that construction, the section affected the method of computation and not merely the incidence of liability. The successor was therefore to be treated as standing in the place of the predecessor for assessment purposes, including the computation of profits chargeable to tax.

Conclusion: Section 26(2) applied to the computation of tax as well as to liability, and the assessee was treated as the successor for assessment purposes.

Issue (ii): whether the sum of Rs. 1,00,000 represented capital not chargeable to tax, while the balance amount represented taxable interest

Analysis: The repayment was treated as having been received by the assessee in British India. Since the amount comprised both principal and interest, only the interest element could be brought to tax. The principal sum was a return of capital and did not constitute taxable income.

Conclusion: The principal amount of Rs. 1,00,000 was not taxable, but the interest component was taxable.

Final Conclusion: The reference was answered by holding that Section 26(2) applied to the computation of the assessment, but only the interest component of the repayment was liable to tax, the principal remaining outside the charge.

Ratio Decidendi: Under Section 26(2), a successor is assessed as if he had carried on the business throughout the previous year, so the provision governs the computation of profits chargeable to tax, but only income and not return of capital is taxable.

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