When mergers, acquisitions and takeovers are taking place in relatively large numbers, the acquirers must take note of a peculiar set of provisions in the tax law. Under these provisions, they would be made liable for up to two years of the predecessor's tax liabilities as also for the tax liability on the profits on transfer of the business.

Ordinarily, when a business changes hands, the business liabilities such as trade creditors, loans, etc. also move to the acquirer who considers these while valuing the price to be paid to acquire the business.

However, tax liabilities relating to the business are often not considered since these are assumed to be thepersonal liability of the seller. In fact, these may not be even reflected in the books of the business.

Section 170 of the Income-tax Act, 1961, however, states that if the tax liability of the seller for the period ending with the date of transfer of the business and for the immediately preceding year cannot be recovered from the seller, the acquirer will have to bear it. Same goes for the tax liability on the profits on the transfer of the business.

Of course, if the acquirer is required to pay the tax, he can recover such sum from the seller. There is certainly a rationale for this provision. The tax department may come to know of the transfer of business much later. By that time, the seller may either disappear with the proceeds or may fritter it away.

Thus, effectively, the acquirer is put in the position of the Assessing Officer and he will have to thoroughly satisfy himself that the seller has duly met the tax liabilities stated earlier. Section 170 applies to all types of succession ofbusinesses or professions.

In other words, only those types of transfers which are succession would be covered. The most obvious transfers are outright acquisition of businesses. Amalgamation of companies would also seem to be covered. However, succession requires simultaneous existence of the transferor and the transferee.

Amalgamation usually entails simultaneous dissolution of the transferor company and, hence, there may be some scope for doubt. Take-overs of companies would be excluded for two reasons. Firstly, succession implies change of ownership of business while take-over involves change of ownership of shares of the company.

Secondly, the tax liability for all past periods continues on the company taken over and hence there need be no worry by the tax department. Note that to attract this provision, the business as a whole should be succeeded and not merely its assets (Babulal Raj Gurhia, In re (1936) 4 ITR 148 (Cal.)).

At the same time, it is not mandatory that all the assets andliabilities should be taken over so long as, in substance, the business is taken over (Chambers v. CIT 47 ITR 80 (Mad.).

Further, the whole of the business must be succeeded to and not just a part of it (Sait Nagjee Purushottam & Co. v. CIT (1964) 51 ITR 849 (SC)). In other words if the business is broken up and a part is transferred, it is not a succession of the business. In the same way, if a partial ownership of the business is transferred, it, again, would not be succession.

There should be no unreasonable break in the carrying on of the business in the sense that if the seller had discontinued the business and the acquirer re-establishes it or creates it anew (Industrial Development & Investments v. CEPT 31 ITR 688 (Bom.)).

This is particularly relevant in case of acquisition of businesses from liquidators or for acquisition of sick units. The liability on the acquirer arises under two circumstances. First is when the seller simply cannot be found. Secondly, though he can be found, tax cannot berecovered from him, whatever the reason may be.

The period of liability consists, as pointed out earlier, of two parts. The first is the period starting with the financial year ending with the date of succession. The second is the financial year preceding such period. Note, however, that the liability of the acquirer extends only to the tax liability in relation to such business acquired and does not extend to the liability in respect of other income of the seller.

The acquirer must particularly note that, nowadays, because of the age old tax system which does not properly take into account complex issues arising out of mergers and acquisitions, sellers of businesses resort to tax planning which can only be described to be adventurous. Should it finally happen that this is not accepted and the seller cannot meet the liabilities, the acquirer may have to bear it. In conclusion, it must be said that acquirer of a business needs to be particularly careful of the tax liability of the predecessor as well asthe tax treatment adopted for the gains on sale.

One solution that can be suggested is that a provisional assessment could be made by the Assessing Officer on the request of the acquirer and if he ensures that the seller provides for the amount so worked out, the acquirer should be made free of any future liabilities. Otherwise, the acquirer may have to face undue anxiety for an indefinite period of time.

(The author is a Mumbai-based chartered accountant)