GENTLE, J. - Prior to the month of March, 1938, a firm named Jaidayal Sagarmal carried on a business of jute, hemp press, oil mills and iron foundry in Benares. The applicants, Krishna Hydraulic Press Ltd., were incorporated on March 3, 1938, the main purpose of the company being to take over and purchase as a going concern the business of Jaidayal Sagarmal together with land, buildings, machinery, and other appurtenances attached thereto. After the companys incorporation a sale deed was executed on March 4 , 1938, by which, in vonsideration of a sum of one lac of rupees, the company obtained immovable properties consisting of land, buildings, fixed machinery and other immovable properties of the mill and press and other legal incidents together with the good will of the business and the right to use the name of Krishna Mills and Press and benefit of all contracts and all legal incidents of the Krishan Mills. The company has carried on that business ever since it was acquired on March 4, 1938.
On June 10, 1939, a notice was served upon the company under Section 34(1) of the Income-tax Act in respect of an assessment which should have been made in the year 1938-39. On August 20, 1940, the assessment was completed and the company was assessed in a sum of Rs. 14,723. The assessment was made upon the profits of the concern form September 29, 1936, to October 8, 1937. It has been held by the Appellate Tribunal the the company is the successor to the firm of Jaidayal Sagarmal and alone is liable to be and had been assessed in respect of the profits during the year, the subject of assessment.
Two questions which now come for consideration are : (i) Whether on the facts found by the Appellate Tribunal a case of succession as contemplated by Section 26(2) has been made out ?
(2) Whether the assessment for the year 1938-39 made in 1939-40 was correctlyu made on the basis of Section 26(2) as it stood before it was amended by the Income-tax Act of 1939 ?
So far as succession is concerned the only point in the argument on behalf of the company that it did not succeed and is not the successor of the business of the old firm is by reference to one entry in a profit and loss account which was supplied by the company and is attached to the application under Section 66(1) of the Act. In this profit and loss account the total receipts of the firm amount to Rs. 41,446-9-3, the expenses amount to Rs. 8,860-15-9 and the difference between the expenses and the receipts is the sum of Rs. 32,580-14-9. Among the receipts under the heading 'Hemp a/c,' is a sum of Rs. 5,353-8-3. In the assessment a deduction has been made, under the head of 'Profit from dealing with hemp (not taken by this company),' of Rs. 5,354/-. From this it is argued that the company did not succeed to the firs as it did not take over its hemp business. What the reasons were for this sum being deducted does not appear.
By the sale deed of March 4, 1938, which was executed by the company and in respect of which according to the deed, one lac of rupees was paid, the company acquired all the immovable properties including land, buildings, machinery, and so on, together with the good-will of the business and the right to use the name of Krishna Mills and Press and the benefit of all contracts and legal incidents. Whilst one item of gross profit was omitted, in my view that is not sufficient to show that the company are not the successors to the firm. But the matter does not rest there. Fifteen months after the company was incorporated and obtained by means of a sale deed the assignment of the assets of the firm, its managing agents wrote on June 30, 1939, as follows :-
'The present business of Krishna Hydraulic Press Ltd., was taken over form Messrs. Jaidayal Sagarmal of Nandsah Mohalla, Benares, on the March 3, 1938, as a running concern and this company is working the press on and from the same date, i.e., March 3, 1938.
It has been conclusively shown that the company are the successors to the firm and that the business which the company conducts is that which was previously carried on by the firm prior to the incorporation of the company.
The next question which arises is in regard to the provisions of Section 26 (2) of the Income-tax Act. By the Amending Act of 1939 a substitute was made in this Section. The 1939 Act came into force on March 31 of that year. Section 26(2) originally provided that when one person succeeded to the business of another person, the person succeeding was liable for the whole of the Income-tax ascertained from the profits of the year previously whilst the person succeeded was carrying it on. The substituted Section provided that the succeeding person and the person succeeded shall respectively be assessed for their actual shares, if any, of the income, profits and gains of the previous year.
On behalf of the applicant company it was argued that since the assessment was made in the year 1940-41, although it is in respect of the year 1938-39 , and since the substituted Section 26(2) was in force at the time the assessment was made, its provisions should apply. Consequently the applicant company should only be assessed in respect of the period during which it carried on the business and should not be assessed in respect of the whole of the profits for the year prior to the year 1938-39.
It is conceded that the assessment has been made under Section 34(1) of the Income-tax Act, which is known as the escaping section. So far as is material, the Section provides as follows :-
'If in consequence of definite information which has come into his possession the Income-tax Officer discovers that income, profits or gains chargeable to income-tax have escaped assessment in any year... the Income-tax Officer may, in any case in which he has reason to believe that the assessee has concealed the particulars of his income....serve.... in the case of a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of Section 22, and may proceed to assess or re-assess such income, profits or gains, and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under that sub-Section.'
The words which require particular attention are 'have escaped assessment in any year.' The assessment which was made in August 1940 was in respect of the year 1937-39 and it was made because in the year of assessment the company escaped assessment in that year and the provisions of the Section can only be called into effect when, as is material, the Income-tax Officer has reason to believe the assessee has concealed the particulars of his income. This section enables an assessment to be made in a subsequent year when the assessee has escaped from being assessed. From wdat has he escaped He has escaped from an assessment which would have been made upon him during an earlier year. The object of the Section is to overcome the result of an assessee escaping from an assessment which should have been made upon him. Another object, of course, is that there may be recovery from him of income-tax which he should have paid had the assessment been made during the correct period. From this, in my view, it must follow that the assessment made in a subsequent year must be the same as the assessment would have been, had it been made in the correct year. The fact that legislation has changed meanwhile does not in my opinion alter the circumstances. The assessment from which the company escaped in 1938-39 was an assessment in respect of the whole of the profits of the business to which it succeeded and which were made during the year of account, namely, the Income-tax year immediately prior to year 1938-39.
Attention has been drawn by the learned Advocate on behalf of the company to the concluding words of Section 34(1) that the 'Income-tax Officer may proceed to assess' and 'the provisions of this Act shall, so far as may be, apply as if the notice were a notice issued under Section 22(2).' It was argued that at the time when the assessment in fact was made the provisions of the Act which were in force at that period should be applicable. In my view the assessment is to be made as if it were one which was effected in the year in which escapement has been obtained, in this case in the year 1938-39, and the provisions of the Act do not apply since they would not have applied at the time the assessment should have been made.
For these reasons, in my view, the answers to the two questions should both be in the affirmative. There will be no order as to costs.
DERBYSHIRE, C.J. - I agree.
Reference answered in the affirmative.