Arijit Pasayat, C. J.
These two references under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), are closely interlinked and are disposed of by this common judgment.
Both the assessed and the revenue felt aggrieved by the order of the Income Tax Appellate Tribunal, Delhi Bench 'A', Delhi (hereinafter referred to as the 'Tribunal'), and moved for reference. The following questions have been referred for opinion of this court :
'(i) Whether. on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessment made on Oriental Fire and General Insurance Co. Ltd. in respect of the income for the assessment year 1972-73 as a successor of Bharat General Insurance Corporation Ltd. was bad in law
(ii) Whether, on the facts and in the circumstances of the case, the sum of Rs. 2,85,838 being the amount of management compensation, was includible in the total income of the insurance company for the assessment year 1972-73 under section 28(ii)(d) of the Income Tax Act, 1961
(iii) Whether in view of section 44 of the Income Tax Act, 1961, and the First Schedule thereto, the provisions of section 28(ii)(d) would not be applicable to the management compensation of Rs. 2,85,838 in computing the income of the assessee-insurance company ?'
The first question was referred at the instance of the revenue while the rest were referred at the instance of the assessee.
2. The factual position as indicated in the statement of the case is as follows :
For the assessment year 1972-73, the assessed was assessed as successor in business of Bharat General Re-Insurance Co, Ltd. (hereinafter referred to as the 'old company'). The old company was carrying on business of general insurance until and before 13-5-1971. On and with effect from 13-5-1971, the management of the old company vested in the Central Government in terms of section 3(1) of the General Insurance (Emergency Provisions) Act, 1971 (hereinafter referred to as 'the 1971 Act'). The old company held a license issued under the Insurance Act, 1938 (hereinafter referred to as the 'the Insurance Act'). Pending appointment of a custodian of the undertaking of the old company, persons in charge of the management of that undertaking immediately before 13-5-1971, were to be in charge of the management of the undertaking for and on behalf of the Central Government. So far as the period from 13-5-1971, onwards was concerned, 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 old company insurer. The rate of compensation payable varied depending on whether the insurer was one referred to in clause (a) of sub-section (9) of section 2 of the Insurance Act or one referred to in clause (b) of sub-section (9) of section 2 of the said Act. In the latter case, the rates varied depending on whether the insurer concerned had or had not declared dividend during at least one of the three calendar years 1967, 1968 and 1969. A scheme was framed by the Central Government under section 16(1) of the General Insurance Business (nationalization) Act, 1972 (hereinafter referred to as the 'nationalization Act'). The said scheme was operative from 1-1-1974, and described as the Oriental Fire and General Insurance Co. Ltd. (Merger) Scheme, 1973 (hereinafter referred to as 'the Scheme'). As provided under clause 4(1) of the Scheme, on and from 1-1-1974, the undertaking of every merged company stood transferred to and vested in the transferee company. In the instant case, the old company was the merged company, and the assessed was the transferee company.
3. By applying section 170 of the Act assessment was made by the assessing officer holding that the assessed was a successor of the old company. The assessment was assailed before the Appellate Assistant Commissioner of Income Tax (hereinafter referred to as 'the Appellate Assistant Commissioner'), who affirmed the views of the assessing officer. The matter was carried in appeal before the Tribunal which held that the crucial date was 1-1-1974, and only with effect from that date, the assessed came into the picture. Merely because at an earlier point of time, there was a management arrangement on behalf of the Central Government. that did not render the assessed a successor to bring in application under section 170 of the Act. While holding so the Tribunal observed that a sum of Rs. 2,85,838 paid as management compensation was includible in the total income of the assessed for the assessment year 1972-73 under section 28(ii)(d) of the Act. Being aggrieved by the order of the Tribunal, both the revenue and the assessed filed applications for reference and as indicated at the outset, the questions have been referred for our opinion.
4. Section 170 of the Act on which reliance has been placed by learned counsel for the revenue , so far as relevant, reads as follows :
'170. Succession to business otherwise than on death.- Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession-
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession ;
(b) the successor shall be assessed in respect of the income of the previous year after the date of succession.
(2) Notwithstanding anything contained in sub-section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly.'
Section 170(2) has been referred to contend that at least from 13-5-1971, the assessed was to be treated as a successor. Learned counsel for the assessee, on the other hand, submitted that the operation of the scheme as referred to above became operative only with effect from 1-1-1974, and from that date the assessed became the transferee company.
Sub-section (2) of section 170 postulates that notwithstanding anything contained in sub-section (1) when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place to the date of succession and of the previous year preceding that year shall be made on the successor in a like manner and to the same extent as it would have been made on the predecessor, and all the provisions of the Act, so far as may be, shall be applicable. Succession implies that there is 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. In Reynolds Sons Co. Ltd. v. Ogston (1930) 15 TC 501 , Lord Hanworth M. R. concurred with Rowlatt J., to observe that the following was the true test (page 527):
'You want to measure the income of the successor by the past history of the business; it is, thereforee, essential that there should be a very close identity between the business in the former proprietorship and the business in the present proprietorship.'
5. Succession has a recognised connotation. 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 (see CIT v. K. H. Chambers : [1965]55ITR674(SC) . Section 170(1) of the Act prescribes not merely for liability to tax, but also the process of computation of tax. Along with the recording of a finding regarding the identity of the predecessor and successor, the assessing officer has to record the date from which succession has come into effect and also indicate the reasons for such conclusion. The provisions of section 170(2) override those contained in section 170(1) upon the happening of the prescribed condition, viz., that after the succession having been effected, the predecessor cannot be found. The provisions of section 170 come into operation only when there is an effective transfer of ownership of a business. A mere agreement to effect a transfer is not enough, managing a business on behalf of another does not involve transfer of ownership. It involves the concept of agency. That is not sufficient to attract application of section 170 of the Act.
6. In the instant case, the crucial date to bring in the application of section 170 of the Act is the date of succession, i.e., 1-1-1974. Prior to that date there was no succession and merely because the assessed is stated to be in management, that is of no consequence and does not alter the date of succession. That being the position the assessment as made for the assessment year 1972-73 was clearly unsustainable. The Tribunal has recorded positive findings that succession took place on 1-1-1974, and, in our opinion, rightly. We answer the question referred at the instance of the revenue in the affirmative, and in favor of the assessed and against the revenue . So far as the questions referred at the instance of the assessed are concerned, it is conceded that they have become academic in nature. That being the position we decline to answer them.
References are accordingly disposed of.