1997 (4) TMI 73 - SC - Income Tax

Whether the Tribunal was right in law in holding that there was succession by inheritance in this case as contemplated by section 78(2) of the Act and therefore the assessee is entitled to carry forward and set off the deceased Shri Madhukant M. Mehta s loss in business against the income for these years? Whether the Tribunal was right in law in holding that section 75(2) of the Act does not prevent the assessee from claiming the set off of losses in question? Held that - Having regard to the finding recorded by the Tribunal after taking into consideration the facts and circumstances that the partners as heirs had succeeded to the business of the deceased which finding has been accepted by the High Court in the present case thus in the facts of these cases no ground is made out for interference with the impugned judgment of the High Court. Appeal dismissed.

Summary

Issues: Entitlement to set-off under section 78(2) of the Income-tax Act, 1961 in respect of losses sustained in proprietary business against income of a registered partnership firm.

The judgment deals with appeals by the Revenue regarding the entitlement to set-off under section 78(2) of the Income-tax Act, 1961, in relation to losses sustained in the proprietary business of a deceased individual against the income of a registered partnership firm for the assessment years 1965-66 to 1971-72. The matter was previously considered by the Gujarat High Court, where questions regarding succession by inheritance and the applicability of section 75(2) of the Act were answered in favor of the assessee, allowing the set-off of losses. The Revenue filed Civil Appeals against these decisions. The deceased individual was carrying on a proprietary business of speculation in shares, cotton, and other commodities, and after his death, his widow, son, and daughter formed a partnership to continue the business. The Income-tax Officer initially disallowed the set-off, but the Tribunal allowed it, finding that there was a succession to the deceased's business based on various circumstances. The High Court upheld the Tribunal's finding, emphasizing the continuity of the business and the intention of the legal heirs to carry it forward. The Supreme Court, considering the factual findings and legal precedents, dismissed the Revenue's appeals, stating that no grounds for interference were established.

The judgment references the decision in Saroj Aggarwal v. CIT and CIT v. Bai Maniben, highlighting that the question of succession by inheritance is a factual determination. The Supreme Court, based on the Tribunal and High Court's findings, concluded that the partners, as heirs, had succeeded to the deceased's business, justifying the set-off of losses against the income of the partnership firm. The continuity of the business, use of the same business name and premises, and the intention of the legal heirs to continue the business were crucial factors in establishing the succession. The Court held that the factual findings supported the allowance of set-off under section 78(2) of the Act, and thus, upheld the decisions of the lower courts, dismissing the Revenue's appeals.