1971 (5) TMI 4 - HC - Income Tax

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

Issues Involved:
1. Entitlement to set-off of speculation losses brought forward from earlier years against speculation profits of the assessment year under appeal.

Detailed Analysis:

Issue 1: Entitlement to Set-off of Speculation Losses

The primary question referred to the court was whether the assessee, Smt. Saroj Agarwal, was entitled to set off the speculation losses incurred by her deceased husband, Prem Shanker, against her speculation profits for the assessment year 1962-63.

Facts:
- Prem Shanker was a partner in three firms and had unabsorbed speculation losses amounting to Rs. 25,914 from the assessment years 1958-59, 1959-60, and 1960-61.
- After his death on July 24, 1959, his widow, Smt. Saroj Agarwal, joined the firms as a partner and her adopted son, Sudhir Kumar, was admitted to the benefits of the partnership.
- The Income-tax Officer denied the set-off of these losses against her speculation profits for the assessment year 1962-63.

Appellate Assistant Commissioner's Decision:
- The Appellate Assistant Commissioner held that there was no succession or inheritance concerning the membership of the firm.
- Smt. Saroj Agarwal joined the firm through a fresh partnership agreement, not by inheriting the right to join the firm.
- Consequently, the speculation losses of Prem Shanker could not be set off against her profits.

Appellate Tribunal's Decision:
- The Tribunal observed that Smt. Saroj Agarwal was admitted to the partnerships because she was the heir of Prem Shanker.
- The firms were not dissolved after Prem Shanker's death but continued with Smt. Saroj Agarwal as a partner.
- The Tribunal concluded that she succeeded to the deceased's position by inheritance and was entitled to set off the losses.

High Court's Analysis:
- The court examined sections 70 to 80 of Chapter VI of the Income-tax Act, 1961, particularly section 78(2), which allows the carry forward and set-off of losses by a successor if the succession is by inheritance.
- For section 78(2) to apply, the assessee must show that:
1. The person carrying on the business was succeeded in such capacity.
2. The succession was by inheritance.

Legal Precedents:
- The court referred to several cases, including Commissioner of Income-tax v. Mansooklal Zaveri, Commissioner of Income-tax v. N. N. Firm, and Executors of the Estate of T. K. Dubash v. Commissioner of Income-tax, to interpret "succession in such capacity."
- The term implies continuity in the business activity with a change only in ownership.

Partnership Deeds and Conduct:
- The partnership deeds dated January 12, 1951, and July 30, 1957, did not mention that the firms would not dissolve upon a partner's death.
- The court found no implied agreement that the firms would continue without dissolution upon the death of a partner.
- Therefore, the firms were dissolved upon Prem Shanker's death, and Smt. Saroj Agarwal's right to carry on the business arose from new partnership agreements dated August 12, 1959, not by inheritance.

Conclusion:
- The court concluded that Smt. Saroj Agarwal did not inherit the right to carry on the business but acquired it through new contracts.
- Hence, she was not entitled to set off the speculation losses incurred by her husband against her profits for the assessment year 1962-63.

Judgment:
- The question was answered in the negative, against the assessee.
- The Commissioner of Income-tax was entitled to costs assessed at Rs. 200, with counsel's fee also assessed at the same figure.

Summary:
The High Court of Allahabad ruled that Smt. Saroj Agarwal was not entitled to set off the speculation losses incurred by her deceased husband against her speculation profits for the assessment year 1962-63. The court found that the firms were dissolved upon her husband's death, and her right to carry on the business arose from new partnership agreements, not by inheritance. The question was answered in the negative, and the Commissioner of Income-tax was awarded costs.

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