Succession to Business Otherwise Than on Death
Introduction
When a person carrying on a business or profession is succeeded by another, two separate tax assessments are made for the year of succession:
- On the predecessor– For income earned up to the date of succession.
- On the successor– For income earned from the date of succession to the end of the financial year.
If proceedings were initiated or completed against the predecessor before succession, they are deemed to have been made on the successor.
Assessment Rules in Case of Succession
- Before Succession:Predecessor is liable for past year assessments.
- During Succession:
o Predecessor is taxed on income up to the date of succession.
o Successor is taxed on income after the date of succession.
- If the Predecessor Cannot Be Found:The successor is liable for pending tax assessments of the predecessor.
Validity of Proceedings and Notices
- Proceedings completed or initiated on the predecessor during the pendency of succession shall be deemed to have been made or initiated on the successor.
- If the Assessing Officer is notified of the succession, any further notices in the predecessor’s name are void.
Modified Return by Successor Entity
- The business reorganisation often takes place from a preceding date because the adjudicating authority, tribunal, or the High Court takes time in approving such a scheme and passing the final order.
- To address this time gap, the Income-tax Act requires the successor entity to file a modified return of income for the intervening period, i.e., from the effective date of reorganisation to the date of the final order.
- Modified return shall be furnished in the prescribed form and manner within 6 months from the end of the month in which the order is issued.
Recovery of Tax
- If tax dues from the predecessor cannot be recovered, they can be collected from the successor.
- The successor can recover such payments from the predecessor.
HUF Business Succession
- If a Hindu Undivided Family (HUF) business is succeeded and later partitioned, tax liability is apportioned among members based on their share in the partition.
Appeals Against Recovery Orders
- If the tax department passes a recovery order asking a successor to pay the tax dues of a predecessor (other than in case of death), the successor has the right to challenge it. Such a challenge can be made either by filing an appeal before the Commissioner of Income-tax (Appeals) or by filing a revision application before the competent authority.