Succession to Business and Discontinued Business: Tax Rules Under the Income Tax Act 2025

When a business or profession changes hands or stops, the Income-tax Act, 2025 decides who is assessed for which part of the year. Section 313 covers succession otherwise than on death: the predecessor is assessed up to the date of succession and the successor after it. Section 314 covers court or tribunal ordered reorganisations (a modified return within six months), section 320 covers a discontinued business (notice to the Assessing Officer within 15 days) and section 321 covers a dissolved association of persons.

This guide explains each section in plain language, with worked examples. The text is the Act as amended by the Finance Act, 2026, and the one rule involved is rule 177 of the Income-tax Rules, 2026. Examples use tax year 2026-27. It is information, not advice on a specific case.

What happens to tax when a business is succeeded by another person?

Section 313(1) applies when a person carrying on a business or profession (the predecessor) is succeeded by another person (the successor) who continues that business or profession. Two assessments follow:

• the predecessor is assessed on the income of the tax year in which the succession took place, up to the date of succession (section 313(1)(a));
• the successor is assessed on the income of the tax year after the date of succession (section 313(1)(b)).

"Income" for this section includes any gain from transferring the business or profession as a result of the succession (section 313(6)(a)). So the sale consideration side of the deal is not left out of the predecessor's period.

Section 313 corresponds to section 170 of the repealed 1961 Act, which dealt with the same subject. Use the 2025 numbering for all tax years from 2026-27.

Example 1: Ravi sells his proprietorship to Meena

Ravi runs a trading proprietorship. On 1 October 2026 he hands it over to Meena, who continues the same business. Assumed profits for tax year 2026-27: Rs 8,40,000 from 1 April to the date of succession and Rs 9,60,000 for the rest of the year.

Period	Assessed on	Profit (assumed)	Basis
1 Apr 2026 to date of succession	Ravi (predecessor)	Rs 8,40,000	Section 313(1)(a)
After date of succession to 31 Mar 2027	Meena (successor)	Rs 9,60,000	Section 313(1)(b)
Whole year	Rs 8,40,000 + Rs 9,60,000 = Rs 18,00,000, split between two assessees

Any gain Ravi makes from transferring the business to Meena is also treated as his income (section 313(6)(a)). The Act gives no profit-split formula in these sections, so the figures above depend on how the books are closed on the date of succession.

Can the successor be taxed for the predecessor's dues?

Yes, in two situations.

Predecessor cannot be found. The successor is assessed for the income of the succession year up to the date of succession and for the tax year before it, in the same manner and to the same extent as the predecessor would have been (section 313(2)).

Predecessor's tax cannot be recovered. If tax assessed on the predecessor for the succession year up to the date of succession, or for the preceding tax year, cannot be recovered from him, the Assessing Officer records a finding to that effect. The sum then becomes payable by and recoverable from the successor, who can claim it back from the predecessor (section 313(4)).

Example 2: unrecovered tax after a takeover

Continuing the case above, suppose tax of Rs 3,50,000 is assessed on Ravi for his period and Rs 1,00,000 is recovered from him. The Assessing Officer records a finding that the remaining sum cannot be recovered from him.

1. Tax assessed on predecessor: Rs 3,50,000
2. Recovered from Ravi: Rs 1,00,000
3. Balance unrecoverable: Rs 3,50,000 − Rs 1,00,000 = Rs 2,50,000
4. This Rs 2,50,000 is payable by Meena under section 313(4), and she may recover it from Ravi.

What if assessment is already pending when the succession happens?

Under section 313(3), any assessment, reassessment or other proceeding made or started on the predecessor during the pendency of the succession is deemed to have been made or started on the successor. "Pendency" runs from the date of filing the succession application before the High Court or tribunal, or the date of admission of a corporate insolvency resolution application by the Adjudicating Authority, until the order is received by the jurisdictional Principal Commissioner or Commissioner (section 313(6)(b)).

What if the business belongs to a Hindu undivided family that partitions?

If an HUF business is succeeded to and the joint family property is partitioned between members or groups of members, at or after the succession, tax on income up to the date of succession is assessed and recovered in the manner given in section 315 (section 313(5)). For how that works, see taxation after an HUF partition. This post does not cover section 315 itself.

What is a modified return after a business reorganisation?

A "business reorganisation" means amalgamation, demerger or merger of the business of one or more persons. It takes effect through an order of a High Court, tribunal or Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 (section 314(4)). The "successor" is every resulting company, whether or not it existed before (section 314(4)(c)).

If a return was already furnished under section 263 for a tax year to which the order applies, the successor must furnish a modified return within six months from the end of the month in which the order was issued. The modified return is "in accordance with and limited to" the order (section 314(1)).

• Form: ITR-A, filed electronically under digital signature (rule 177(1) and (2)).
• If assessment or reassessment for that year is complete, the Assessing Officer passes an order modifying the total income (section 314(2)(a)).
• If it is pending, the Assessing Officer assesses or reassesses as per the order and the modified return (section 314(2)(b)).
• All other provisions apply and tax is charged at the rates applicable to that tax year (section 314(3)).

Example 3: a merger order and the filing deadline

The High Court sanctions the merger of Alpha Traders Pvt Ltd into Beta Retail Pvt Ltd by an order issued on 12 August 2026. Alpha had already filed its return for a year the order applies to.

1. Month of the order: August 2026, which ends on 31 August 2026.
2. Six months from the end of that month: 28 February 2027.
3. Beta Retail, as the successor, must file ITR-A for the affected year by 28 February 2027, limited to what the order changes.

What does the Act say about a discontinued business?

Section 320(1) applies when a business or profession is discontinued during a tax year. The income from the first day of that tax year up to the date of discontinuance may, at the Assessing Officer's discretion, be charged to tax in that same tax year, irrespective of section 4. Each completed tax year or part of a year in that period is taxed at the rate in force in that year, with a separate assessment for each (section 320(2)).

Key obligations and consequences:

• Notice of discontinuance to the Assessing Officer within 15 days (section 320(3)).
• Returns on short notice. Where section 320(1) applies, the Assessing Officer may issue a notice under section 268 or 280 requiring a return for tax chargeable under any other provision of the Act within a period of not less than 7 days (section 320(7)).
• Notices for the assessment can be served on the person, on any partner of a firm at the time of discontinuance, or on the principal officer of a company, with the requirements of a section 268(1) notice (section 320(6)).
• Tax under this section is in addition to any tax under other provisions (section 320(8)).

What about money received after the business shuts?

A sum received after discontinuance is the recipient's income, taxed in the year of receipt, if it would have formed part of the business owner's total income had it been received before discontinuance (section 320(4)). For a profession discontinued because of cessation, retirement or death of the person carrying it on, section 320(5) applies the same idea.

Example 4: a trader closes in August

Ravi's cousin Anil closes his trading business on 31 August 2026. Assumed profit for 1 April to 31 August 2026 is Rs 4,50,000. In January 2027 two customers pay old bills: Rs 1,80,000 and Rs 1,20,000. These would have been business receipts had they come in earlier.

Step	Working	Result
Notice deadline	31 Aug 2026 + 15 days (section 320(3))	15 Sep 2026
Income that may be charged in 2026-27	1 Apr to 31 Aug 2026 (section 320(1))	Rs 4,50,000 (assumed)
Post-closure receipts	Rs 1,80,000 + Rs 1,20,000	Rs 3,00,000 taxed in the year of receipt (section 320(4))

What if an association of persons dissolves or stops business?

Section 321 deals with an association of persons (AOP). The Assessing Officer assesses its total income as if the discontinuance or dissolution had not happened, and all provisions, including penalty, apply (section 321(1)). Penalty can be imposed or directed by the Assessing Officer, Joint Commissioner (Appeals) or Commissioner (Appeals) if the AOP committed any act listed in Chapter XXI (section 321(2)).

• Every person who was a member at the time of discontinuance or dissolution, and the legal representative of a deceased member (see taxation of deceased persons), is jointly and severally liable for the tax, penalty or other sum (section 321(3)).
• If proceedings had already begun for a tax year, they continue against these persons from the stage they had reached (section 321(4)).
• Section 302(4), which limits a legal representative's liability, is not affected (section 321(5)).

Example 5: two members of a dissolved AOP

Sunita and Kiran ran a joint venture as an AOP. They dissolved it in September 2026, while an assessment for an earlier year was under way. The Assessing Officer continues the assessment from where it stood, against both of them. If a demand of Rs 6,00,000 results, the department can recover the whole sum from either member, and the two then settle between themselves. Sunita cannot say that only half is her share.

Quick reference

Situation	Section	Key time limit or form	Who is liable
Succession (not on death)	313	Split at date of succession	Predecessor, then successor; successor for unrecoverable dues
Court-ordered reorganisation	314, rule 177	ITR-A within six months from end of month of order	Successor (all resulting companies)
Business discontinued	320	Notice within 15 days; return notice not less than 7 days	Person discontinuing; recipient of later sums
AOP dissolved or discontinued	321	Proceedings continue from the stage reached	Members and legal representatives, jointly and severally

Common mistakes

1. Assuming a sale closes the seller's tax file. The predecessor is still assessed up to the date of succession, and any transfer gain counts as income (section 313(6)(a)).
2. Missing the 15-day notice when a business is shut (section 320(3)).
3. Ignoring receipts after closure. Old debtor payments are taxed in the year of receipt (section 320(4)).
4. Filing a full fresh return after a merger order. Section 314(1) asks for a modified return limited to the order, in ITR-A with a digital signature.
5. Thinking dissolving an AOP ends the members' liability. Members stay jointly and severally liable (section 321(3)).
6. Counting the six months from the order date. They run from the end of the month in which the order was issued.

Where this is in the Act

• Section 313: succession to business or profession otherwise than on death; sub-section (6) defines "income" and "pendency".
• Section 314 and rule 177: effect of a business reorganisation order and the modified return in ITR-A.
• Section 320: discontinued business.
• Section 321: association dissolved or business discontinued.
• Related sections referred to: 4, 5, 263, 268, 280, 302 and 315.

For the reorganisation side, see our guide on business reorganisation, amalgamation and the Income Tax Act 2025, and for firms closing down, LLP liquidation and partners' liability.

For a CA firm, a client's succession, closure or merger creates dates that cannot slip: the 15-day notice, the six-month modified return, and the pending proceedings that move to a new entity. Finexo's practice management software lets you track these as client tasks with due dates and reminders. It does not file returns for you.