RAMACHANDRA IYER J. - Free Press of India (Madras) Ltd., a Private limited company (hereinafter referred to as the Free Press Company) was carrying on business as printers and publishers of certain newspapers, namely, the Indian Express, Dinamani and Andhra Prabha at Madras, and Eastern Express and Bharat at Calcutta. During the course of the year 1946, the company also acquired rights in respect of the Sunday Standard and Morning Standard at Bombay. There were only two shareholders in the company, and their holdings were as follows :
Ramnath Goenka (managing director)
242 shares of Rs. 12,100
Mahadeolal Dalmia (director)
2,489 shares of Rs. 50 each
On April 22, 1946, another private limited company named the Express Newspapers Ltd., (to be referred to hereafter as the Express Company) was formed with the following shareholders.
Ramnath Goenka (Mg. Director)
1,179 shares of Rs. 1000 each
Mahadeolal Dalmia (Director)
758 shares of Rs. 1000 each
Bhagwandas Goenka (son of Ramnath Goenka, director)
1 share of Rs. 1,000
Basantilal Bhagwandas (Mrs. Goenka)
62 shares of Rs. 1000 each
The object of the new company was to acquire and take over the newspapers, the Indian Express Dinamani and Andhra Prabha at Madras, and Eastern Express and Bharat at Calcutta and all or any of the assets and liabilities of the Free Press of India Ltd., Madras. There was no reference in the memorandum of association to the Sunday Standard or Morning Standard, as the latter company had not acquired the right to publish those papers by then, but there can be no doubt that the Express Company was formed with the specific object of taking over the entire business of the Free Press Company. It was admitted before the Income-tax Officer that Mahadeolal Dalmia who is the cousin of Ramnath Goenka was not the real owner of the shares in either of the two companies. but held them merely benami for the benefit of Mr. Ramnath Goenka. But the same thing cannot be said of Bhagwandas Goenka or Basantilal Bhagwandas who should be treated as holding, ding their respective shares in the Express Newspapers Ltd. in their own right. On August 31, 1946, the Free Press Company passed the following resolutions :
'1. Resolved to give the right of printing and publishing our dailies and other publications in Madras, Bombay, and Calcutta to Express Newspapers Ltd., from September 1, 1946.
2. Resolved to let the machinery and assets to Express Newspapers Ltd., on a lease of Rs. 10,000 per month till the sale of these assets.
3. Resolved that Express Newspapers Ltd., do collect the book-debts and pay off the liabilities on our behalf.'
It is not disputed that the Express Company took possession of the machinery, assets and liabilities of the Free press Company, and started publishing the newspapers from September 1, 1946. The staff and management continued as before. Mr. Ramnath Goenka was the managing director of both the concerns. He had a dominating, if not, the sole voice in the management of the two concerns.
Nearly two months after the lease of the machinery etc., on October 31, 1946, the was a general body meeting of the Free Press Company. It was resolved that the company should be wound up voluntarily. Mr. N. V. B. Sankar Rao, an advocate practicing at Madras, was appointed the liquidator and he was invested with all the powers as such liquidator, in addition to those granted under clauses (b), (e) and (h) of section 179 of the Indian Companies Act. One of the resolutions passed on that date stated :
'Resolved further that the liquidator shall not carry on business for any purpose and that the business of the Free Press of India (Madras) Ltd., be and the same is hereby discontinued with effect from this day.'
Mr. Sankar Rao, who appears to have taken charge immediately wrote a letter to the Express Company on the following day (November 1, 1946) thus :
'I am the liquidator of the Free Press Of India (Madras) Ltd., (in voluntary liquidation). I find that you have been negotiating for purchase of the assets at the value noted in the directors letter if August 31, 1946, and signified your acceptance in your of September 1, 1946.'
The liquidator also intimated that the balance of the assets book-debts bank balance etc. over the liabilities taken over by the Express Company was ascertained to be a sum of Rs. 19,36,000, and that the sum should be distributed to the two directors of the former company thus :
Mr. Ramnath Goenka..
Mr. Mahadeolal Dalmia.
These sums were duly credited in the books of the Express Company, as directed by the liquidator, and with the consent of the two directors.
The valuation of assets and the sale thereof which resulted in the Free Press Company getting a sum of Rs. 19,36,000 secured for it a profit of Rs. 6,08,666. That represented the difference between the written down value and the sale price of the machinery. That sum would be distributed as follows :
Original cost price over the written down value of the machinery....
Excess over the original cost price, that is, the difference between the sale price and original cost price....
The liquidation of the Free Press Company was duly published in the dailies and in the Fort St. George Gazette in January, February, 1946. The notice of dissolution of the Free Press Company was filed with the Registrar of Joint Stock Companies on April 12, 1948. The company was struck off the rolls of joint stock companies of July 12, 1948.
In the meanwhile, the proceedings for assessment of the Free Press company for the assessment year 1947-48 were initiated. The year of account of the company ended with December 31, 1946. General notice contemplated under section 22(I) was published in May, 1947. On June 14, 1947, the Income-tax Officer, Second Circle, Madras issued a notice to the Free Press Company under section 22(2) of the Act. That notice was accepted by the manager of the Express Newspapers, purporting to be a manager of the Free Press Company. It may be noticed that, by that time, the latter company had been voluntarily wound up. It is not clear from the materials available whether the Free Press Company which went into liquidation had a manager, and whether that manager had any authority to receive or accept notice we under section 22(2) of to appoint an auditor. The liquidator, who was in charge of the affairs of the company did not submit a return, though he was bound to do so. Nor was any notice under section 22(2) served upon him, But, on January 3, 1948, Mr. Ramnath Goenka submitted a return on behalf of the Free Press Company, disclosing a profit of Rs. 2,50,818. The return specifically referred to the fact that the company was in voluntary liquidation, but there was not indication therein that Mr. Goenka had the authority to submit the return. The return was prepared by auditors, Messes. Subramania Iyer and Co, who had been engaged in connection with the assessment proceedings. The assessment proceedings appear to have undergone several adjournments at the request of the auditors and the enquiry was completed in April 1948. The liquidation proceedings had, however, been duly communicated to the Income-tax Officer by the manager of the Free Press Company on September 15, 1947. There was another communication by the Express Company to the same effect on April 4, 1949. No notice, however, appears to have been taken of these communications, not of the fact that the company had been struck off the rolls on July 12, 1948. Perhaps the Income-tax Officer was misled by the prompt submission of the return for the assessment year 1947-48 by Mr. Ramnath Goenka, by the appearance of the auditor before him during the enquiry, the payment of the tax under section 18A and there being no dispute about the liability to to pay the tax. On February 28, 1950, the Income-tax Officer assessed the Free Press Company Ltd., on a total income of Rs. 6,44,802. that amount was made up as follows :
Profits during the year of account...
Profits under proviso 2 to section 10(2) (vii), viz., written down value of the machinery ...
Capital gains under section 12 B that is, excess profits of the prices obtained on sale over the original cost price...
The assessment order was served on Mr. Goenka who, however, returned the same on March 27, 1950, repudiating his liability to pay the tax. It will be seen that, by that time, the company had been struck off from the register of companies.
Thereupon, the Income-tax Officer, Second Circle, Madras, who had by then succeeded the officer who made the assessment initiated (with the previous approval of the Commissioner) proceedings under section 34 read with section 26(2) against the Express Company. The notice was issued on the footing that there had been a succession to the business of the Free Press Company by the Company, and that the latter would, as the successor, be liable to be assessed to tax for the assessment year.
That there was a succession by the Express Company to the Free Press Company by the sale of the business cannot be seriously disputed. But the express Company denied the liability. Overruling the objection, the Income-tax Officer held, by his order dated April 4, 1951, that the Express Company would be liable to pay the Tax under section 26(2) of the Act, as the person succeeded, namely, the Free Press Company, was not in existence, and could not be found. Following the order under section 26(2), the officer made an assessment of the taxable income at Rs. 6,44,802, the amount being made up of the three heads mentioned above. In doing so, the officer purported to act under section 34 read with section 26(2) of the Act, as the income of the former company had escaped assessment. The assessee, the Express Company, appealed to the Appellate Assistant Commissioner against the two orders, viz., that relating to the initiation of the proceedings under section 26(2) as well as that in regard to assessment under section 34. The appeals failed. There were further appeals to the Appellate Tribunal. Various contentions were raised before the Tribunal. They were : (1) The Express Company did not succeed to the business of the Free Press Company. (2) The notice issued under section 34 of the Act to the Express Company was invalid, inasmuch as the assessment made by the Income-tax officer on the Free Press Company on February 28,1960, was subsisting. (3) The second proviso to section 10(2)(vii) of the Act did not apply to the case and therefore, the portion of the profit, viz., Rs. 2,44,000, should not be treated as the business profit of the Free Press Company, namely, Rs. 3,94,576, on the transfer of its assets to the Express Company were not liable to tax under the third proviso to section 12B (1). (5) Even if such capital gains were assessable to income-tax, the successor under section 26(2) could not be made liable for the same, as the profits of the business which was transferred.
The appeal was first heard by two members of the Tribunal namely Messrs. Malhotra and Karkhanis. They agreed that the sum of Rs. 2,14,090 which represented the difference between the cost price and the written down value of the machinery sold to the Express Company. should not be assessed to tax, as the proviso 2 to section 10(2) (vii) would not apply where the sale of assets was not made when the company was carrying on business, but only after cessation of such business. There was a difference of opinion between them on two questions, The former held that it would be open to the Income-tax Officer, in the circumstances of the case, to initiate proceedings under section 34 read with section 26(2) but that the capital gains of Rs. 3,94,576 would not be liable to be included in the assessment against the successor under section 12B of the Act. He, therefore, directed that the sums of Rs. 2,14,090 and Rs. 3,94,572 should be excluded from the assessment of the successor company. Mr. Karkhanis, however, dissented from that view. In his opinion, the capital gain would be liable to tax, but that the proceedings under section 34 read with section 26(2) was not properly initiated, and that the entire assessment proceedings were null and void. The matter was then referred to the President who agreed with Mr., Malhotra on the propriety of the initiation of the proceedings under section 34 read with section 26(2). He also held that the capital gain of Rs. 3,94,576 was liable to be taxed. The following questions were, thereupon, referred to this court under section 66(1) of the Act.
'(1) Whether, the assessment made by the Income-tax Officer on February 23, 10950, was valid in law ?
(2) Whether the notice under section 34(I) of the Act issued by the Income-tax Officer on April 4, 1951, was validly issued ?
(3) Whether the assessment made by the Income-tax Officer on July 17, 1951, is valid assessment ?
(4) Whether the Free Press Company made a business profit of Rs. 2,14,090, under the proviso to section 10(2)(vii) of the Act ?
(5) Whether the capital gain of Rs. 3,94,576, is not liable to tax in view of the third proviso to section 12B (1) of the Act ?
(6) Whether the capital gain made by the Free Press Company is liable to be assessed in the hands of the Express Company under section 26(2) of the Act ?'
The questions referred substantially fall under three groups. Questions 1 to 3 cover practically the same ground, namely, the validity of the initiation and final assessment under section 34 read with section 26(2). Question 4, raised at the instance of the Department, relates to the assessability of the sum of Rs. 2,14,090 under the second proviso to section 10(2)(vii). Questions 5 and 6 relate to the taxability of the capital gain made by the Free Press Company as against the successor, the Express Company.
That the Express Company, the assessee, succeeded to the business of the Free Press of India (Madras) Ltd., is no longer in dispute. There was, however, some controversy on the question as to what exactly was the date of succession, the contention for the assessee being that the succession was only on November I, 1946, a day after the sale of the machinary and assesement; this matter does not present much difficulty, as the sucession by the assessee to the business of the former company as by virtue of the sale and would, therefore, be conterminous with it.
On behalf of the assessee, it was contended that the assessment of the Free Press Company on February 28, 1950, was a valid one, and there could be no justification for proceedings under section 34 for any escape of assessment, as there was none. It was further contended that the non-existence of the former company could not invalidate an assessment lawfully commenced by a valid return made on behalf of the Free press Company. Even assuming that such an assessment was invalid. it was contended that the Income-tax Officer had no jurisdiction to go behind his own order of assessment and initiate proceedings under section 34 read with section 26(2).
It has, therefore, to be considered whether the proceedings under section 34 were properly initiated. The power to assess under section 34(I) would exist where there has been no assessment or where there has been an escape of assessment during the relevant assessment year. An invalid assessment would mean that there was no assessment at all. Such invalidity may be the result of there being no valid return, but the assessment thereon being illegal or void. A case where there is no return at all by the assessee will be covered by the terms of section 34 itself. A return which is purported to be filled on behalf of an assessee by a person not entitled so to act would be no return in the eye of law, and the assessment thereon would be equally invalid. Such a case will have to be treated as one where the assessee had failed to make a return. Has there been a valid return in the present case ?
Mr. Ramnath Goenka was the managing director of the Free Press Company and there can be no doubt that he could represent the company in the matter of submission of return for income-tax for the company, so long as it was in existence. But, on the liquidation of the company, the liquidator alone could represent it. The liquidator unfortunately did not file the return, No notice, as stated already was served on him under section 22(2). Whether the notice served on a director of the company would be valid or whether a director could (when the company was in the process of voluntary liquidation) either voluntarily or in response to a notice under section 22(2) served on him or the company submit a return would depend on his authority to do so either under the companies Act or under any power expressly reserved to him by the general body or delegated to him by the liquidator. Section 208A sub-clause (2) of the Indian Companies Act (VII of 1913) stated :
'On the appointment of a liquidator all the powers of the directors shall cease, except so far as the company in general meeting, or the liquidator, sanctions the continuance thereof.'
The resolution of the Free Press Company dated October 31, 1946, which effected a voluntary winding up of the company does not indicate that any power was reserved with a director or managing director to act on behalf of the company. Not is it the case of the assessee that there was a delegation of any power by the liquidator in favour of Mr. Ramnath Goenka. But Mr. Karkhanis has stated in his order thus :
'Before the return filed by Sri. R. N. Goenka could be said to be an invalid one it must be found as a fact that the liquidator had not sanctioned the continuance of the powers of Sri R. N. Goenka for the purpose of filing the return. This is purely a question of fact. On going through the record I find that no evidence was recorded by the Income-tax authorities on this point. It would not have been difficult for the Income-tax authorities to examine either Sri. R. N. Goenka or the liquidator. Therefore before the assessment made on the Free Press of India (Madras) Ltd., was dubbed as nullity the Income-tax authorities should be considered all these facts.'
Great reliance is placed on behalf of the assessee on the above observations., We cannot, however, accept the argument. The normal rule is that on liquidation, all the powers of the directors cease, and that is is necessary that a director, while acting on behalf of the company should either have been authorised by a resolution of the company or, at least by the liquidator. It is, no doubt, true that the authority of the liquidator need not be in writing. But the existence of such authority can never be a matter of assumption. The Appellate Assistant Commissioner held that Mr. Ramnath Goenka had no power to act on behalf of the defunct company in any manner whatsoever, and his submission of the return for the company after it had gone into liquidation was totally unauthorised, There is really no material for coming to any contrary conclusion. The contention that it was for the Department to prove that the return was invalid cannot be accepted, particularly when the person who could have given evidence is himself the managing director of the assessee company, and he could, if he so chose, have given evidence on the matter. On that conclusion, it follows that there was no valid return to support the assessment made on February 23, 1950, on the Free Press Company.
Mr. R. Venkataraman, the learned counsel appearing for the assessee, contended that, independent of the validity of the return, the Income- tax Officer would have jurisdiction to assess the Free press Company by reason of the publication of notice under section 22(1) of the Act, and that, notwithstanding the invalidity of the return submitted by Mr. Ramnath Goenka, the assessment should be held to be valid. The learned counsel sought to base his contention on the decision of the Privy Council in Maharajadhiraj of Darbhanga v. Commissioner of Income-tax  2 .I.T.R. 345 where their Lordship of the Privy Council held that the word 'assessment', was not confined in the Act to the definite act of making an order of assessment, but would refer to the course of any assessment and that words 'at the time of making an assessment' in section 26(2) would mean 'in the course of the process of assessment'. A public notice under section 22(1) was, therefore, claimed as the starting point of an assessment, so as to render all assessments as properly intimated and once there was a proper assumption of jurisdiction, it was contended, subsequent illegality of the assessment would entail only a fresh assessment under section 23 and not warrant proceeding under section 34 as if there had been an escape of assessment. The two assumptions on which the argument was based are (1) that assessment proceedings with respect to an individual commence with the publication of a public notice under section 22(1), and (2) that once there has been a proper assumption of the jurisdiction to assess, any illegality in the final order of assessment could only invalidate that portion of the assessment proceedings so as to entitle the officer to start the assessment over again and not to initiate proceedings under section 34, whatever be the nature of the illegality. We shall consider the validity of these assumptions seriatim.
It has been held that the word 'assessment' has been sometimes used in the Act as comprehending the entire procedure prescribed for imposing the tax liability on the assessee. But when does an assessment proceeding actually start Section 22(1) enjoins on the Income-tax Officer to issue a public notice in the first month of each financial year requiring every person who had received the minimum taxable income in the previous year to submit return. The failure on the part of an individual having a taxable income to submit a return within the period allowed will expose him to a penalty under section 28(1) or to a punishment under section 51(e). That, however, has nothing to do with the jurisdiction of the Income-tax Officer to assess an individual. For instance, he cannot assess an individual immediately after the time limited in the notice, unless there is a return or there has been an individual notice under section 22(2). What, therefore, invests the officer with a jurisdiction is the existence of a voluntary return by the assessee or the service of a notice under section 22(2) on the individual concerned. In Commissioner of Agricultural Income-tax v. Sultan Ali Gharami : 20ITR432(Cal) a Beach of the Calcutta High Court was concerned with the interpretation of a similar provision in the Bengal Agricultural Income-tax (Act) (IV of 1944). The learned judges held that the effect of a general notice under section 24(1) (corresponding to section 22(I) of the Income-tax Act) was not to commence the assessment. There was a further question in that case, viz., whether, in the absence of an individual notice, under a provision similar to section 22(2), the officer could initiate proceeding on the footing of there having been an escape of assessment as under section 34. That question was answered in the negative. This answer to the latter question is not in accord with the decision of this court in Govindarajulu Iyer v. Commissioner of Income-tax : 16ITR391(Mad) . It is unnecessary to consider which of the two views is correct for the purpose of the decision of this case. The decision of the Calcutta High Court that a mere publication of a general notice under section 22(1) could not be held to commence assessment proceedings against an individual is, with great respect to learned judges, in our opinion, correct.
The question then arises whether there has been in this case a proper initiation of the assessment proceedings either by reason of the service of notice under section 22(2) or the submission of a voluntary return. We have held earlier in this judgment that there has been no proper return which could be said to be a voluntary return on behalf of the Free Press company. The learned counsel for the assessee contended that, there having been an issue of a notice under section 22(2), that notice would give sufficient jurisdiction to the Income-tax Officer to make the assessment that he did on February 28, 1950. That notice, as we have already stated, was not served on the liquidator. Nor was it proved that the manager of Express Company, who accepted the notice, had the authority of the liquidator. There can be no proper assumption of jurisdiction, unless there is service of notice on the assessee; a mere issue of notice would not be sufficient. It may be that the procedure relating to the assessment of an individual can be said to commence from time of issue of the notice. But service of notice being an essential prerequisite for an authority to assess an individual to tax, the absence of such service would nullify the entire assessment proceedings as one without jurisdiction. The case cannot be treated either as one where there was a voluntary return on behalf of the company, as the only return that was purported to be filed on its behalf was that by Mr. Goenka, who, as we held, is not shown to have the necessary authority. There having been no proper initiation of proceedings, the individual concerned should be deemed to have escapee assessment. This conclusion is sufficient to dispose of the contention that there was no jurisdiction in the Income-tax Officer to start assessment proceeding on the footing that there had been an escape of assessment.
But will the exercise of the powers under section 34 be valid even if one were to assume that the return submitted by Mr. Goenka was authorised ?
To answer that question it is first necessary to consider whether the assessment on the basis of the return was valid. The learned counsel for the assessee urged that the assessment could not be held to be invalid for the mere reason that the Free Press Company was not in existence on the date of assessment, and that the rules of abatement of suits under the Civil Procedure Code would not apply to assessment proceedings under the Income-tax Act, as the Income-tax Officer was not a court; and that, even if it were to be held that the rules as to abatement would apply to such proceedings, the enquiry in this case having been concluded on April 3, 1948, the company then being in existence, the assessment would be valid on the principle recognised in Order 22, rule 6, of the Civil Procedure Code. We agree that the rules as to abatement laid down by the Civil Procedure Code will not apply to the proceeding before the Income-tax Officer. But the principle of representation applicable to regular suits and proceedings under the Civil Procedure Code would well apply to such proceedings. Vide Alfred v. Income-tax Officer : 32ITR401(Mad) . That apart, the existence of an assessee is essential for an assessment. There cannot be an assessment of nonexistent person. The definition of the word 'assessee' in section 2(2) would obviously apply to a living person. The rule contained in Order 22, rule 6, cannot, therefore, apply to the assessment proceedings. The assessment in the instant case was made long after the Free Press Company was stuck off from the register of the companies, and it could not be valid.
The contention on behalf of the assessee was then directed to the procedure to be adopted in case the assessment was found to be invalid. It was said that the Department should first get the Free Press Company restored to the register of companies, and start assessment proceedings fresh; and if, on account of the law of limitation or otherwise, that could not so be done, there was no remedy for the Department. As a basis for the argument, reliance was placed on Sir Rajendranath v. Commissioner of Income-tax  2 I.T.R. 71. In that case, Messrs. Burn & Co. had submitted a return of their income for a certain year. The income-tax authorities thought that M/s. Martin and Co. had purchased Burn & Co., and made assessment on Martin and Co. in respect of income of not merely of that company but of Burn and Co. as well. In the subsequent proceedings against the assessment of Martin and Co., it was held that the two companies should have been separately assessed, with the result that the income of Burn and Co. was eliminated from that of the assessable income of Martin and Co. Subsequently, proceedings were started under section 34 against Burn and Co. The Privy Council held that the income which had been duly returned for assessment could not be said to have escaped assessment, though such income had not been taxed within the assessment year. In Ranchhoddas Karsondas v. Commissioner of Income-tax : 26ITR105(Bom) a notice under section 22(1) for the assessment year 1945-46 was published on May 1, 1945. However, no notice was issued to the assessee under section 22(2). Nearly 4 1/2 years thereafter, the assessee made a return on January 5, 1950, showing less than the taxable income. There was no assessment on that return within the year. The income-tax Department initiated proceedings under section 34 on the ground that certain monies standing in the name of his wife were not included in the return. It was held that two clear options were open to the Department : (1) to issue a notice under section 22(2), and if no return was made within the time fixed by that notice, to proceed under section 23(4); and (2) if no return was made within the time prescribed under the notice under section 22(1), to proceed under section 34. But if the Department took no action at all and permitted the assessee to make a voluntary return under section 22(3), it was not open to it to proceed under section 34, and the voluntary return which had been made must be disposed of and the income of the assessee must be assessed, as laid down under section 23. In Mannalal Modi v. Commissioner of Income-tax : 29ITR30(Orissa) the assessee made a return of income as an individual to the territorial income-tax Officer. That officer transferred the assessment papers to the Income-tax Officer, Special Circle, as the joint family to which the assessee once belonged was being assessed by that officer, and as the partition in the family of the assessee had not been recognised. The partition in the assessees family was, however, recognised later, and the assessees individual assessment papers were sent back to the officer from whom it came. In the meanwhile, the time within which the assessment could be made had run out. Thereupon, a notice was issued under section 34. It was held that the return filed by the assessee was was still pending, that it could not be said that the income had escaped assessment, and that, therefore, the Income-tax Officer had no jurisdiction to initiate proceedings under section 34. On the strength of these decisions, it was contended that the effect of the finding that the assessment was invalid not necessarily mean that there had been an escape of assessment. It is, however, unnecessary, for the purpose of the present case, to consider the principle laid down in the cases mentioned above, in view of the fact that a fresh assessment is not possible on the original return, as the company itself had ceased to exist. Further the proceedings initiated in this case is against the successor company, and its liability depends on the terms of section 26(2), to which we shall presently refer. It is undisputed that there has been a succession to the business of the Free Press Company, by the Express Company and if there is succession section 26(2) would come into operation. Section 26(2) states :
'Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of sub-section(4) of section 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year :
Provided that, when the person succeeded in the business, profession or vocation cannot be found, the assessment of the profits of the year in which the succession took place up to the date of succession, and for the years preceding that years shall be made on the person succeeding him in like manner and to the same amount, as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him, it shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid.'
The substantive part of the section lays down the rule that the successor is not liable to tax in respect of the business transferred, anterior to the date of transfer. This is but a recognition of the principle that a person is liable for tax only on the profits made by him. If, therefore, there has been a succession to the business during the year of account, the transferor or the person succeeded to will be liable on the account, the transferor or the person succeeded, and the transfer or the person succeeding for the profits made thereafter. The proviso, however, recognises two exceptions to the rule : (a) when the predecessor cannot be found; in such a case the statute makes it mandatory that the assessment shall be made on the successor for the entire year and the previous year. This would obviously refer to a case where there had been no assessment (valid assessment on the predecessor); (b) where the tax assessed on the predecessor cannot be recovered from him, there is similar liability. It is now well settled that whenever there is succession to business, the provisions of section 26(2) would apply. Vide Commissioner of Income-tax v. Ramaswami Iyengar : 11ITR610(Mad) . But in order that the first part of the proviso could apply, it should be shown that the person succeeded could not be found. A company which is struck off from the register is one which could not be found. The company, unlike a partnership, has a legal existence independent of its share-holders. In the case of a partnership, a mere dissolution of the firm cannot mean that the assessee could not be found so long as the partners could be found. It would be different in the case of a company; if the company is struck off the register it will be a person who could not be found notwithstanding the fact that its members exist. On the date of the notice under section 22(2), the Free Press company was in existence, though in liquidation. When, however, it was struck off the register, it had ceased to exist, and the only person on whom the assessment could be made, or should be made under section 26(2), was the Express Company.
This was, however, not what was done on February 28, 1950. The Income-tax Officer proceeded to assess the predecessor company contrary to the mandatory provisions of section 26(2) proviso, whereunder the assessment is to be made only on the successor. The successor, thus, escaped assessment.
The learned counsel for the assessee contended that the Income-tax Officer had no jurisdiction to set aside his own order of assessment made on February 28, 1950, and initiate proceedings under section 34. According to the learned counsel, the Department should have set aside the order of assessment by taking appropriate proceedings under section 33 and 22A, before starting proceedings under section 26(2), and that, in any event, the officer could not himself proceed on the basis that his earlier assessment order was invalid. The order of assessment made on February 28, 1950, is contrary to section 26(2), and, therefore, invalid. We are of opinion that the invalidity of that kind could be taken note of by the officer himself to initiate proceedings under section 34. Further, the liability of the successor arises on the disappearance of the person succeeded. That is a statutory liability, independent of the liability of the latter. If it is found that the successor in such a case has not been assessed, it would be a case of an escape of assessment. The Income-tax Officer would, therefore, have jurisdiction to initiate Proceedings under section 34. Our answer to question No. 1 is in the negative, and questions Nos. 2 and 3 in the affirmative.
The next question to be considered is the extent to which the assessee is liable to be taxed under the provision of section 26(2) of the Act. There is no doubt that the Express Company would be liable for the actual income or the profits of the business earned by the Free Press company in the year of account. Earlier in the judgment we have referred to the fact that, in addition to the actual profits of the business, the predecessor company made a profit of Rs. 6,08,666 by the sale of the machinery to the assessee company. That profit included an item of Rs. 2,14,090 the difference between the written-down value and the original cost price of the machinery. The liability of this amount to be taxed would depend upon the construction of the provision of the second proviso to section 10(2)(vii). The balance of the profits, viz., a sum of Rs. 3,94,576, would represent the excess of the price realised by the sale of machinery over the original cast price to the Free Press Company. This sum is a capital gain, and would come within the privations of section 12B of the Act.
Section 26 only prescribes who, in case of a succession to business, is liable to pay the tax and provides for a vicarious liability in certain cases, the mode of computation of such income being left to be determined under section 10. In the computation of income from business under that section, certain allowances are made. One such is the depreciation allowance in respect of building, machinery, plant etc. Where, however, there has been a sale of machinery, a balancing allowance representing the deficiency of the sale price over the written down value is allowed as a deduction; per contra where the sale results in an excess over the written-down value, that excess up to the limit of the cost price would as a profits. The allowance or assessment is subject to the conditions laid down in section 12(2) (vii). That provision, as it existed during the year of assessment, runs as follows :
'(1) The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowance, namely :.... (vii) in respect of any machinery or plant which has been sold or discarded, the amount by which the written down value of the machinery or plant exceeds the amount for which the machinery or plant is actually sold or its scrap value :
Provided that such amount is actually written off in the books of the assessee :
Provided further that where the amount for which any such machinery or plant is sold exceeds the written down value, the excess shall be deemed to be profits of the previous year in which the sale took place.'
The rest of the section is omitted as being unnecessary for the present purpose. The principle underlying the second proviso to the section is that, depreciation to the limit of the written down value of the building or machinery having been claimed in previous years and relief from taxation obtained, it is but proper that, if ultimately it were found that there had been actually no such depreciation but something more than the written down value was obtained on the sale of the machinery, that excess over the written down value should be made liable to tax. As pointed out by Mr. Kanga in his commentaries on the Income-tax Act, at page 355 : 'The Revenue takes back what it had given by way of depreciation allowance in preceding years, for otherwise the result would be to recoup the assessee an amount in excess of his original cost.' When therefore, a building or machinery belonging to a business is sold, the excess of the price obtained in such over the written down value would be deemed to be income up to the limit of the original cost price. Anything obtained over and above the original cost price would be deemed to be capital gain. In Crown Flour Mills v. Commissioner of Income-tax the Punjab High Court held that the excess of the sale price of depreciable assets over their written down value to the extent of the depreciation allowed in the past, limited to the original cost price, could not be considered as either casual or non-recurring; but, under the second proviso to section 10(2)(vii), it should be deemed to be assessable income. One contention on behalf of the assessee was that under the proviso of section 10(2)(vii) the sale which resulted in the profit should have taken place while the company was carrying on business, and that condition was not satisfied in the present case, as the Free Press Company had ceased to carry on any business on August 31, 1946. The sale effected on November 1, 1946, being only one after cessation of the business, any profit obtained thereunder could not be said to be income from business or revenue profit, but a capital one. It was said that the only business of the Free Press Company was to print and publish dailies, and that activity had stopped from August 31, 1946. The company had, on that date, no doubt, leased its machinery to the new company; what it could do and did do thereafter was only to collect the rents. This, it was contended, would not amount to the carrying on of the business. Reference was made to the decision in Narain Swadeshi Weaving Mills v. Commissioner Of Excess Profits Tax : 26ITR765(SC) , to show that letting out of plant and machinery by an assessee could not be held to fall within the definition of the term 'business' under section 2(5). That may be so. But in the present case the sale of the machinery took place during the year of account, and it was used by the Free Press Company for at least a part of the year. This would be sufficient to attract the liability. The learned counsel for the assessee is on a firmer ground when he contended that the sale being made in process of winding up of the company section 10(2) (vii) will not apply. The second proviso to section 10(2)(vii) would be invoked only where the sale was one made in the course of business carried on by the predecessor. Where the sale is a closing down sales, that profit could not be brought to tax. In Liquidators of Pursa Ltd. v. Commissioner of Income-tax : 25ITR265(SC) the Supreme Court held that where in a case the sale of machinery and plant was a step in the process of winding up of its business, such a sale was not an operation in furtherance of the business carried on by the company, but was only a realisation of its assets in the process of gradual winding up of its business which eventually terminated in the voluntary liquidation of the company, and provision 10(2)(vii) would not apply. In the present case, the formation of the new company was to take over the business of the old company. The lease of the machinery, the transfer of the right to carry on the business of publishing newspapers, and the ultimate sale of the machinery were part of the same scheme for winding up the Free Press Company. The sale of machinery was undoubtedly a closing down sale the profit earned therein could not come in for assessment under section 10(2)(vii). We therefore answer question No. 4 in the negative.
Question 5 and 6 relate to the profit of Rs. 3,94,576 made by the Free Press Company by the sale of machinery, the amount being the excess of the sale price of the machinery over its original cost price. The Tribunal ultimately held that it was taxable. The question whether the successor company would be liable to be assessed on the capital gain made by the company to whom it succeeded would depend largely on the construction of section 26(2). Under section 26(2), the liability to tax is in respect of profits or gains in the business, profession or vocation, to which there has been succession. The learned counsel for the assessee contended that, where capital gains arose to the predecessor as a result of succession, i.e. by reason of the sale which itself caused the succession, the profit being one which was obtained by giving up the business rather than by doing it. Another reason urged was that, as the profits accrued long after the cessation of business, it could not be a business profit. Incidentally it was also contended that the date of succession was October 31, 1946, while the actual sale of the machinery took place on November 1,1946, and the capital profit being a post succession one, the successor company would not be liable to be taxed thereon. The Appellate Assistant Commissioner held that the succession was on November 1,1946; this was not challenged before the Tribunal. Question No. 6 is, no doubt wide enough to cover this point as well. It is, however, unnecessary to pursue this matter, as admittedly succession is the result of the sale, being conterminous with it. The profit arose by reason of succession.
It is contended, however, that the only profit that could come in for assessment under section 26(2) is the profit of the business for the previous year of the business transferred, and not any other kind of profit. On the other hand, the case for the Department is that the words 'income, profits and gains' occurring in section 26(2) comprise not only those taxable under that head, but also other income of the profession, all those intimately connected with or related to it, e.g., the capital gains. Under section 6 of the Act, the income of an assessee is classified under six heads according to the character of the source. Income from business, profession or vocation is a distinct head of income dealt with therein. When, therefore, section 26(2) refers to income from business, profession or vocation, it should Prima facie be held to relate to that head of income i.e., that which is referred to in section 6(iv). Capital gain referred to in section 6(vi) is another head of the income independent of profits from business. It is now well settled that income which is chargeable under one head, cannot be so done under a different head, and that the various heads of income specified in section 6 are distinct and mutually exclusive. In United Commercial Bank Ltd. v. Commissioner of Income-tax : 32ITR688(SC) a question arose under section 24(2) as to whether income from securities under section 8 of the Act could be brought under a different head of income, namely, profits or gains in business, profession or vocation under section 10, where the securities formed part of the trading assets in the assessees banking business. The Supreme Court, after reviewing the scheme of the various charging provisions held that, although the income of an assessee is one, and the various sections, i.e., section 7 to 12, are modes in which the income-tax is to be levied, the sections are mutually exclusive, and that income received as interest on securities which would come under section 8 could not come under section 10 which deals with profits and gains of business. In Commissioner of Income-tax v. Chugandas and Co. : 38ITR241(Bom) a similar question fell to be considered for granting relief to an assessee firm under section 25(3) after its dissolution. The assessee was a dealer in securities and as such the securities which it possessed constituted the stock-in-trade of its business. The firm had paid income-tax under the Indian Income-tax Act, 1918. The question was whether the interest received on the securities held by the assessee formed part of the assessees business income for the purpose of claiming relief under section 25(3). There was difference of opinion between Tendolkar and S. T. Desai, JJ. The case was then referred to K. T. Desai, J. The majority of the judges held that the interest on the securities, which formed the stock-in-trade of the assessees business, was part of the income, profits or gains of that business within the meaning of section 25(3), and the assessee was entitled to exemption from tax in respect thereof under that provision. The substantial question in that case was as to what was the exact meaning to be given to the expression 'business' under section 25(3). It was held that the word would refer to the activity which was styled as business, and the interest earned on the securities which constituted the stock-in-trade of that business would include the profits and income made in connection with that activity, i.e., the business under whatever head the same might have to be shown. This decision is relied on as supporting the view that the term 'Profits of business' employed in section 26(2) would comprehend all other profits connected with the business, though such profits might fall under different heads for charge. The learned counsel for the assessee, however, criticised the judgment of the Bombay high court as running contrary to the principles laid down in Kothari v. Commissioner of Income-tax : 20ITR579(Mad) and in United Commercial Bank Ltd. v. Commissioner of Income-tax : 32ITR688(SC) . It is, however, not necessary for the purpose of this case to consider whether that case was rightly decided. Commissioner of Income-tax v. Chugandas and Co.  38 I.T.R. 688 was concerned with the interpretation of section 25(3) of the Indian Income-tax Act in a case where the purchase or sale of securities was as much the assessees business as earning interest on the securities which constituted part of the stock-in-trade. It was held that, where the assessee firm had paid tax on its business under the Indian Income-tax Act of 1918, it would be entitled to relief under section 25(3) on its dissolution, and, for that purpose, the income, profits and gains of a business should include the interest earned on securities, as those securities formed part of the stock-in- trade. It cannot be said that machinery in the present case was a part of the stock-in-trade of the Free Press Company. That company was not a dealer in machinery, could be said to arise out of the business activity of the company. We are not prepared to read the decision in Commissioner of Income-tax v. Chugandas : 38ITR241(Bom) as laying down that the words 'income', profits and gains of a business' would include the profits not merely of the business etc. as such but also those falling under other distinct heads of income for the mere reason that there is some connection between the two. In our opinion, the Income-tax Act designedly classified and used different words or phrases or nomenclatures for expressing the various heads or classification of income. It cannot be assumed that the Legislature had lost sight of the distinction which it made practically at the beginning of the enactment and intended to convey a different or wider meaning for the term 'profits and gains of business' in section 26(2). Those words standing by themselves may perhaps justify an extended meaning, but it is an accepted rule of construction that, in order to ascertain the true meaning, it is right not only to look at the provision, but at similar words employed in the statute which would thrown light on it even show that a more limited meaning was intended. The words 'profits and gains of a business' have a distinct meaning under the Act, and it cannot include another equally distinct concept recognised by the Act, viz., a capital gain. Further, section 26(2) which makes the successor victoriously liable for the profits earned by the predecessor, should be strictly construed.'The income, profits and gains of the business' referred to therein should therefore be limited in their meaning to the head of income referred to in section 6(iv), and cannot include a capital gain. The successor would not be liable to be taxed on the capital gain made by the predecessor company.
Learned counsel for the assessee contended that the sale of machinery by the Free Press Company was effected for the purpose of distribution of its capital assets amongst its members, and that, by virtue of the proviso to section I2B, such sale could not be held to come within that section so as to render the capital gain assessable. The decision in Sri kannan Rice Mills v. Commissioner of Income-tax : 26ITR351(Mad) is against the contention. That point was, therefore, not pursued further; this however must not be undertook as indicating that the learned counsel gave up that point. In view of our conclusion that capital gain could not be deemed as profits from business, profession or vocation, the assessee would not be liable to be taxed on such profits made by the predecessor.
We answer question 5 in the affirmative, and question 6 in the negative. There will be no order as to costs.
Reference answered accordingly.