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TMI Blog1971 (5) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... n 24th of July, 1959, leaving behind his widow, Smt. Saroj Agarwal, as his heir and legal representative. On 27th July, 1959, Smt. Saroj Agarwal adopted one Sudhir Kumar as her son. It is said that, on the same date, she joined the aforementioned firms in place of Prem Shanker as partner and Sudhir Kumar was admitted to the benefits of partnership in those firms. Prem Shanker, while he was a partner, had an unabsorbed loss of Rs. 25,914 (from speculative business) suffered by him as a partner in the two firms, M/s. Hari Shanker Gauri Shanker and M/s. Hari Shanker Gauri Shanker Rice and Dal Mills, as per orders of the Income-tax Officer passed under section 35 of the Income-tax Act, 1922, for the assessment years 1958-59, 1959-60 and 1960-61. During the assessment year 1962-63, the assessee was found entitled to a share in the speculation profits of the two firms M/s. Hari Shanker Gauri Shanker and M/s. Hari Shanker Gauri Shanker Rice and Dal Mills. She claimed that the speculation losses suffered by her husband in the earlier years should be set off against her speculation profits of the assessment year in question. The Income-tax Officer, however, did not accept the contention rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y forward and set off " has been dealt with in sections 70 to 80 of Chapter VI of the Act. A perusal of sections 72 to 74 of the Act indicates that the right to carry forward and setoff losses is available only to the person who has suffered the loss and to no one else. Section 78(2), however. runs as follows : " Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this chapter shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income. This section implies an exception to the general rule. According to it if a person who carries on any business or profession is succeeded in such capacity by another person by inheritance, the person so succeeding may claim to have the losses of his predecessor carried forward and to set them off against his income. In order to claim the benefit of this section the assessee has to show that- (1) a person carrying on a business or profession has been succeeded by him in such capacity ; and that (2) the succession has taken place because of inheritance and not otherwise. Learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have by such succession become the owner of the business which his predecessor was carrying on and which he, after the succession, carries on in such capacity. " Similar expression has been used in section 25(4) of the Income-tax Act, 1922, which provides that in certain cases where a person carrying on business is succeeded " in such capacity " by another person no tax will be payable by the first mentioned person in respect of the income, profits and gains for the period between the end of the previous year and the date of such succession. In the case of Commissioner of Income-tax v. A. W. Figgies and Co., the Supreme Court held that where the business that was being carried on by a partnership firm was taken over and run by a limited company, the limited company succeeded the firm in such capacity and that the company was entitled to the benefits of section 25(4) of the Act. In the case of Executors of the Estate of T. K. Dubash v. Commissioner of Income-tax, the Supreme Court had an occasion to consider a case where the assessees were the executors of a will of a person who died on 9th April, 1942. Under the will the executors were directed to carry on the business of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ownership in respect of the business activity is transferred from one person to the other. Section 78(2) will apply to such cases where succession to a person carrying on the business is in such capacity by inheritance and not otherwise. It is in the light of the aforesaid discussion that we have to judge whether, in the circumstances of the present case, the assessee can be said to have succeeded to Sri Prem Shankar in such capacity and to carry forward his unabsorbed losses and to adjust them against the profits earned by her. The two businesses with which we are concerned and in respect of which the assessee claims to have succeeded in such capacity after the death of Prem Shanker were the businesses that were being carried on in the names of (1) Hari Shanker Gauri Shanker and (2) Messrs. Hari Shanker Gauri Shanker Rice and Dall Mills. Under a partnership deed dated November 12, 1951, three persons, namely, Sarvasri Hari Shanker, Gauri Shanker and Prem Shanker, constituted a firm styled as Hari Shanker Gauri Shanker. This deed provided that the partners were to share profits and losses equally, i.e., to the extent of As. 0-5-4 each. It mentioned that the partnership was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 0-2-8 each but only Saroj Agarwal was to share the losses to the extent of As. 0-5-4 in a rupee. It is significant to note that, although Prem Shanker died on 24th of July, 1959, the two partnership deeds dated August 12, 1959, indicated that the assessee happened to join the two firms on 27th of July, 1959, i.e., she had no concern with the business of the firms between 24th of July, 1959, and 27th of July, 1959. Learned counsel for the assessee argued that, on the death of Sri Prem Shanker on 24th of July, 1959, the two firms constituted under the partnership deeds dated 12th January, 1951, and 30th July, 1957, did not dissolve. They continued to exist. Smt. Saroj Agarwal and Sudhir Kumar succeeded to the interest of Prem Shanker who was carrying on the business in partnership with the other in the name and style of these two firms " in such capacity " by inheritance. The two partnership deeds dated August 12, 1959, merely indicated that Smt. Saroj Agarwal entered into an agreement with other partners of the two firms to carry on the business from 27th July, 1959. He contended that, in the circumstances, the assessee along with her son succeeded to Prem Shanker " in such ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shanker Gauri Shanker Rice and Dal Mills, is concerned, Smt. Saroj Agarwal and her minor son together became entitled to receive almost the same share in the profits to which Prem Shanker, deceased, was entitled. The two businesses were continued even after the death of Prem Shanker with his heirs and legal representatives as partner or person admitted to the benefits of the firm. All these facts went to show that there was an agreement amongst the original partners that on the death of one of them the two firms were not to be dissolved. It is true that the three cases cited by the learned counsel lay down that under the law it is not necessary that the " contract " contemplated by section 42 of the Partnership Act must be in writing. Such a contract can be inferred by conduct of parties. It may, however, be noticed that in none of the three cases cited by the learned counsel was there a partnership deed in existence. In such circumstances, the courts held that the terms of contract may be gathered from the conduct of the parties. In the case before us, the two deeds dated January 12, 1951, and 30th July, 1957, incorporate the points on which there was specific agreement between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(c) of the Partnership Act provides that a partnership is dissolved by the death of a partner. According to section 46 of the Act, on the dissolution of a firm, every partner or his representative is entitled as against all other partners or their representatives to have the property of the firm applied in payment of the debts and liabilities of the firm and then to have the surplus distributed amongst the partners or their representatives. This means that after dissolution of a firm the right which remains in the partners or their representatives is to get the business of the firm liquidated and thereafter to divide the surplus amongst the partners and their representatives according to their rights. It may be that, even after dissolution, it is necessary to carry on certain activity of the firm for the purposes of effectively winding up its affairs. For this purpose, section 47 of the Act provides that, after dissolution of the firm, the authority of the partners to bind the firm and other mutual and like obligations of the partners continues notwithstanding the dissolution, so far as it may be necessary for winding up the affairs of the firm. The partners are further authorised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion is by inheritance. As stated earlier, the right of Smt. Saroj Agarwal to carry on these two businesses is derived from the contract which she entered into with others, as evidenced by the partnership deeds dated 12th August, 1959, and not by inheritance. According to the two deeds dated 12th August, 1959, Smt. Saroj Agarwal became entitled to run the partnership business with effect from 27th of July, 1959. The deed is quite clear that she did not have any such right to run the business between 24th and 27th of July, 1959. This shows that the assessee did not succeed to the right of Prem Shanker to run the two businesses as if she had so succeeded by inheritance, she would have got the right to run the two businesses immediately on the death of Prem Shanker, and the gap of 3 days would not have been there. As a matter of fact whatever right the assessee acquired, it was under the two partnership deeds dated August 12, 1959, and not because she inherited any of the rights of Prem Shanker. Learned counsel for the assessee relied upon a case of the Bombay High Court, Commissioner of Income-tax v. Bai Maniben. In that case H and J carried on business in partnership. H died le ..... X X X X Extracts X X X X X X X X Extracts X X X X
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