6.—Succession to business or profession
Succession to business or profession otherwise than on death.
313(1)
Where a person carrying on any business or profession (herein referred to as the predecessor) has been succeeded therein by any other person (herein 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 tax 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 tax year after the date of succession.
313(2)
Irrespective of anything contained in sub-section (1), when the predecessor cannot be found, the assessment of the income of the tax year in which the succession took place up to the date of succession and of the tax 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.
313(3)
Irrespective of anything contained in sub-sections (1) and (2), where there is succession, the assessment or reassessment or any other proceedings, made or initiated on the predecessor during the course of pendency of such succession, shall be deemed to have been made or initiated on the successor and all the provisions of this Act shall, so far as may be, apply accordingly.
313(4)
When any sum payable under this section in respect of the income of such business or profession assessed on the predecessor,––
- (a) for the tax year in which the succession took place up to the date of succession; or
- (b) for the tax year preceding the year in which the succession took place, cannot be recovered from him, the Assessing Officer shall record a finding to that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from the successor, and the successor shall be entitled to recover from the predecessor any sum so paid.
313(5)
Without prejudice to the provisions of this section, where any business or profession carried on by a Hindu undivided family is succeeded to, and simultaneously with the succession or after the succession there has been a partition of the joint family property between the members or groups of members, the tax due in respect of the income of the business or profession succeeded to, up to the date of succession, shall be assessed and recovered in the manner provided in section 315.
313(6)
In this section,—
- (a) “income” includes any gain accruing from the transfer, in any manner, of the business or profession as a result of the succession; and
- (b) “pendency” means the period commencing from the date of filing of application for such succession of business before the High Court or tribunal or the date of admission of an application for corporate insolvency resolution by the Adjudicating Authority as defined in section 5(1) of the Insolvency and Bankruptcy Code, 2016 and ending with the date on which the order of such High Court or tribunal or such Adjudicating Authority, is received by the Principal Commissioner or the Commissioner.
Section Summary:
Section 313 of the Income Tax Act deals with the taxation implications when a business or profession is transferred from one person (the predecessor) to another (the successor) during the tax year. It outlines how income is to be assessed and taxed for both the predecessor and the successor, and addresses situations where the predecessor cannot be found or where legal proceedings are pending during the succession. It also includes specific provisions for Hindu Undivided Families (HUFs) and defines key terms like "income" and "pendency."
Key Changes:
- Clarification on Assessment Timing: The section clearly divides the tax liability between the predecessor (up to the date of succession) and the successor (after the date of succession).
- Successor Liability in Absence of Predecessor: If the predecessor cannot be located, the successor becomes liable for the predecessor's tax obligations for the year of succession and the preceding year.
- Pending Proceedings: Any ongoing tax assessments or proceedings against the predecessor during the succession process are deemed to apply to the successor.
- Recovery of Tax: If the predecessor cannot pay the tax, the successor becomes liable but can recover the amount from the predecessor.
- HUF-Specific Provisions: Special rules apply when a Hindu Undivided Family (HUF) business is succeeded and partitioned.
- Definition of "Income" and "Pendency": The section explicitly includes gains from the transfer of the business or profession as part of "income" and defines the period of "pendency" for legal proceedings.
Practical Implications:
- For Predecessors: They remain liable for taxes on income earned up to the date of succession. They must ensure proper documentation and reporting of income during this period.
- For Successors: They are responsible for income earned after the succession date. They may also inherit tax liabilities if the predecessor cannot be found or pay taxes, though they can recover such amounts from the predecessor.
- For HUFs: In cases of partition after succession, tax liabilities are assessed and recovered as per Section 315, which deals with partition of HUF property.
- Compliance Burden: Successors must be aware of potential inherited liabilities and ensure proper documentation to avoid disputes with tax authorities.
Critical Concepts:
- Income: Includes not just operational profits but also gains from the transfer of the business or profession due to succession.
- Pendency: Refers to the period from the filing of a succession application (e.g., with a High Court, tribunal, or insolvency authority) until the order is received by the tax authorities.
- HUF Partition: When a Hindu Undivided Family divides its property among members, specific tax rules apply to ensure proper assessment and recovery of taxes.
Compliance Steps:
- Document Succession: Maintain clear records of the succession date and the division of income between the predecessor and successor.
- Assess Tax Liability: Calculate income and tax liability separately for the periods before and after succession.
- Handle Pending Proceedings: If any tax assessments or proceedings are ongoing during succession, ensure the successor is prepared to address them.
- Recovery Mechanism: If the successor pays taxes on behalf of the predecessor, document the payment and establish a process to recover the amount from the predecessor.
- HUF-Specific Compliance: For HUFs, follow the procedures outlined in Section 315 for partition-related tax assessments.
Examples:
- Example 1: Mr. A transfers his business to Mr. B on June 30, 2023. Mr. A will be taxed on income earned from April 1, 2023, to June 30, 2023, while Mr. B will be taxed on income earned from July 1, 2023, to March 31, 2024.
- Example 2: If Mr. A cannot be found after the succession, Mr. B will be liable for Mr. A's taxes for the period up to June 30, 2023, and the preceding year (2022-23). Mr. B can later recover this amount from Mr. A.
- Example 3: A Hindu Undivided Family transfers its business to a successor and partitions its property. The tax liability up to the date of succession is assessed and recovered as per Section 315.
This section ensures a clear framework for tax liability during business succession, protecting both the tax authorities and the parties involved.