1985 (9) TMI 6 - SC - Income Tax

On the death of partner, widow joined as partner three days later - hold that though there was no formal deed for four days, there was no vacuum in the succession. The wife, the assessee, of the deceased partner, could not get out of the obligation to share in the partnership and she had indeed the right to a share in the partnership. Similarly, the other partners did not have any right to deny her that right - widow is entitled to set off the share of speculation loss of the deceased husband

Issues Involved:
1. Whether the assessee was entitled to the set-off of speculation losses brought forward from earlier years against the speculation profits of the assessment year under appeal.
2. Whether the assessee succeeded to her husband's partnership by inheritance or by entering into a fresh deed of partnership.

Issue-Wise Detailed Analysis:

1. Set-off of Speculation Losses:

The primary issue was whether the assessee could set off the speculation losses incurred by her deceased husband against her own speculation profits for the assessment year 1962-63. The Income-tax Officer had included the share income and interest earned by the minor adopted son in the assessee's total income under section 64 of the Income-tax Act, 1961. The assessee contended that the speculation losses of her deceased husband should be allowed to be set off against her speculation profits, invoking section 78(2) of the Income-tax Act, 1961.

Section 78(2) stipulates that only in cases of succession by inheritance can the person succeeding carry forward and set off the losses incurred by the predecessor. The Appellate Assistant Commissioner rejected the assessee's contention, stating that there could be no succession or inheritance in respect of membership of a firm. However, the Tribunal accepted the assessee's contention, noting that the partnership deed and the conduct of the parties indicated that the assessee had succeeded by inheritance.

The Allahabad High Court, on a reference, set out the facts and concluded that the assessee was not entitled to the set-off. The Supreme Court, however, found that the facts supported the assessee's claim of succession by inheritance, thereby entitling her to the set-off of her deceased husband's speculation losses against her profits.

2. Succession by Inheritance or Fresh Deed:

The second issue was whether the assessee succeeded to her husband's partnership by inheritance or by entering into a fresh deed of partnership. The Tribunal and the High Court had differing views on whether the assessee's entry into the partnership was by inheritance or a fresh agreement. The Tribunal concluded that the assessee and her minor adopted son were admitted to the partnership due to their relationship with the deceased partner, indicating succession by inheritance.

The High Court, however, noted that the new partnership deed was executed after the death of Prem Shankar, suggesting a fresh agreement. The Supreme Court analyzed the facts, including the timing of the new partnership deed and the conduct of the parties, and concluded that the business was a family concern, and the assessee had a quasi-legal right to join the partnership by inheritance. The Court emphasized that the conduct of the parties and the familial relationship supported the inference of succession by inheritance.

The Supreme Court referred to the case of CIT v. Bai Maniben [1960] 38 ITR 80, where the Bombay High Court held that the widow had succeeded by inheritance to her husband's partnership. The Court found significant similarities between the present case and Bai Maniben's case, supporting the conclusion that the assessee had succeeded by inheritance.

Conclusion:

The Supreme Court held that the assessee was entitled to set off the speculation losses of her deceased husband against her speculation profits for the assessment year under appeal. The Court concluded that the assessee had succeeded to her husband's partnership by inheritance, not by entering into a fresh deed of partnership. The appeal was allowed in favor of the assessee, and the question was answered in the affirmative.

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