Section 170 of ITA, 1961 : Section 170: Succession To Business Otherwise Than On Death

Explanation using Example

Imagine that Mr. Sharma has been running a garment manufacturing business for several years. On July 1, 2022, he decides to retire and sells his business to Ms. Gupta, who continues to operate the business without any major changes. The financial year in India is from April 1 to March 31, which means the previous year for tax purposes is April 1, 2021, to March 31, 2022.

In this scenario:

• Mr. Sharma, the predecessor, will be responsible for paying income tax on the profits of the business from April 1, 2021, to June 30, 2022, the date of succession.
• Ms. Gupta, the successor, will be responsible for the income tax on the profits from July 1, 2022, to March 31, 2023.

If Mr. Sharma cannot be located or for some reason does not pay the tax due for the period he was in charge, the Income Tax Department can assess and demand the tax from Ms. Gupta. If she pays Mr. Sharma's tax liability, she is legally entitled to seek reimbursement from Mr. Sharma.

Additionally, if Mr. Sharma's business was part of a Hindu Undivided Family (HUF) that was partitioned after Ms. Gupta took over, the tax liability for the period before the succession would be handled as per the specific rules for HUFs under Section 171 of the Income-tax Act, without affecting the general rules of succession outlined in Section 170.