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Issues Involved:
1. Entitlement to set off business loss under Section 78(2) of the Income-tax Act, 1961. 2. Succession to business by inheritance versus by contract. 3. Applicability of partnership laws upon the death of a partner. Issue-wise Detailed Analysis: 1. Entitlement to Set Off Business Loss Under Section 78(2) of the Income-tax Act, 1961 The primary issue in this case is whether the assessee is entitled to claim a set off of business loss incurred by her deceased husband under Section 78(2) of the Income-tax Act, 1961. The assessee claimed a loss of Rs. 2,01,344 for the assessment years 1969-70 to 1972-73 against the income of Rs. 88,977 for the assessment year 1973-74. The Income-tax Officer allowed only Rs. 4,338 as set off, disallowing the balance. The Appellate Assistant Commissioner allowed the appeal, but the Tribunal reversed this decision, holding that the assessee did not succeed to her husband's business by inheritance but by a new contract, making Section 78(2) inapplicable. 2. Succession to Business by Inheritance Versus by Contract The court examined whether the assessee succeeded to her husband's business by inheritance or by a new contractual arrangement. The partnership deed dated February 23, 1972, between Ramalingam Pillai and the assessee indicated that the partnership was dissolved upon the death of Subramania Pillai. The court noted that the assessee, her son, and daughter inherited the deceased's interest, but the new partnership formed was a result of a fresh contract, not inheritance. Section 78(2) allows for the carry forward and set off of losses only if the succession is by inheritance. The court emphasized that the right to carry forward and set off losses is confined to the person who incurred the loss unless succeeded by inheritance. 3. Applicability of Partnership Laws Upon the Death of a Partner The court referred to the Indian Partnership Act, 1932, particularly Section 42(c), which states that a firm is dissolved by the death of a partner unless otherwise contracted. The partnership deed of July 22, 1945, had no clause to continue the partnership upon a partner's death. Therefore, the partnership dissolved upon Subramania Pillai's death. The court cited various precedents, including CIT v. Seth Govindram Sugar Mills Ltd [1965] 57 ITR 510 (SC), which held that a partnership consisting of only two partners dissolves upon the death of one partner, and any subsequent partnership is a new entity. The court concluded that the assessee's new partnership with Ramalingam Pillai was a new business arrangement, not a continuation by inheritance. Conclusion The court held that the assessee did not succeed to her husband's business by inheritance but by a new partnership agreement. Therefore, Section 78(2) of the Income-tax Act, 1961, was inapplicable, and the assessee was not entitled to set off the business loss incurred by her deceased husband. The Tribunal's decision was upheld, and the question of law was answered in the affirmative, against the assessee. There was no order as to costs.
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