Thus, the income of the year in which the succession occurs is to be apportioned between the predecessor and the successor according to the share of each. The predecessor and the successor would each be liable to tax at the rate applicable to each.

The income of the predecessor and the successor must be computed separately, and each must be granted the deductions and allowances appropriate to his case. The assessment on each must be separate and distinct.

The successor cannot claim to carry forward and set off the losses incurred by his predecessor. He has no right to carry forward the unabsorbed depreciation allowance of the years prior to his succession to the business.

Nor can the predecessor carry forward his loss, because the right of carry- forward is conditional upon the continuance (by the assessee who incurred the loss) of the business in which the loss was incurred (section 72(1)).

The exception to the above principle is contained in section 72-A. Where one company merges into another, section 72-A permits, on fulfillment of certain conditions, the latter company to set off and carry forward the unabsorbed loss and depreciation allowance of the former.

In a nutshell, the conditions are as follows : the amalgamating company must own an industrial undertaking or ship ; the amalgamated company must continue to hold atleast 75 per cent of the book value of fixed assets of the amalgamating company for a period of five years; the amalgamated company must continue the business of the amalgamating company for five years; and n the amalgamated company should fulfill such other conditions as may be prescribed to ensure survival of business of the amalgamating company and to ensure that amalgamation is for genuine business purpose.

Rule 9-C of the Income-tax Rules, 1962, prescribes the following conditions: (1) the amalgamated company owning an industrial undertaking of the amalgamating company by way of amalgamation, should achieve the level of production of atleast 50 per cent of the installed capacity of the said undertaking before the end of four years from the date of amalgamation and continue to maintain the said minimum level of production till the end of five years from the date of amalgamation. For this purpose, installed capacity means the capacity of production existing on the date of amalgamation.

(2) the amalgamated company should furnish to the assessing officer a certification, duly verified by an accountant, with reference to the books of account and other documents showing particulars of production, alongwith the return of income for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for subsequent assessment years relevant to the previous years falling within five years from the date of amalgamation.

The word "succession" connotes a transfer of ownership and the person who succeeds another should have by such succession become the owner of the business which his predecessor was carrying on and which he after the succession carries on in such capacity, that is, the capacity as owner.

This point recently came up before the Delhi High Court in the case of Oriental Fire and General Insurance Co. Ltd v. CIT (244 ITR 631). The facts in this case were that B was a company carrying on business of general insurance till May 13, 1971. With effect from May 13, 1971, the management of B vested in the central government in terms of the General Insurance (Emergency Provisions) Act, 1971. Pending appointment of a custodian of the undertaking of B, there was a management arrangement under which the persons in charge of the management of B prior to May 13, 1971, were to be in charge of the management of the undertaking for and on behalf of the central government. In terms of section 6(1) of the 1971 Act, every insurer was given by the central government compensation for the vesting in it, under section 3 of the Act, of the management of the undertaking of the insurer.

Subsequently a scheme was framed by the central government under the General Insurance Business (Nationalisation) Act, 1972, under which, with effect from January 1, 1974, the undertaking of B stood transferred to, and vested in, the assessee-company. By applying section 170 of the Income-tax Act, 1961, assessment for the assessment year 1972-73 was made holding that the assessee was the successor of B and the management compensation paid was included in the total income of the assessee.

The Delhi High Court on a reference held that the provisions of section 170 of the Act came into operation only when there was an effective transfer of ownership of business. A mere agreement to effect the transfer was not enough. Managing a business on behalf of another did not involve transfer of ownership. The crucial date was the date of succession, i.e. January 1, 1974. Prior to that date there was no succession and merely because the assessee was stated to be in management, was of no consequence and did not alter the date of succession. Hence, the assessment for the assessment year 1972-73 was unsustainable.

The Court further held that succession implies that there is an end of an entity carrying on the business, and its place has been taken by an entirely new entity to run in continuity and as a going concern, the same business.

Substantial identity and continuity of the business must be preserved. The tests of change of ownership, integrity, identity and continuity of a business have to be satisfied before it can be said that a person "succeeded" to the business of another.

It is important to point out that in the case of amalgamation or demerger, the depreciation allowance is to be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.

To conclude, succession to a business attracts far-reaching implications under the tax law. However, the recent amendment to the tax statute has not only made the law more liberal but also progressive, with the avowed objective of promoting restructuring of businesses.

(The author is a Supreme Court advocate)