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TMI Blog1984 (1) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of her husband by inheritance and that the loss amounting to Rs. 2,01,344 sustained in that business should be set off. The Income-tax Officer allowed only a sum of Rs. 4,338 as set off, being the prior year's business loss and disallowing the balance, completed the assessment. Aggrieved by this, the assessee went on appeal before the Appellate Assistant Commissioner contending that she was entitled to set off the loss of her deceased husband, as she had succeeded to her husband's interest in the partnership. The Appellate Assistant Commissioner viewed the matter as one falling under section 78(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and relying upon the decision in CIT v. Bai Maniben [1960] 38 ITR 80 (Bom) allowed the appeal, directing the set off of the loss of Rs. 2,01,344 against the income and the carry forward of the balance. The Revenue carried the matter on further appeal to the Tribunal. On a consideration of the provisions in the deed of partnership dated February 23, 1972, the Tribunal took the view that the assessee had become a partner only by a fresh contract with the erstwhile partner and that she did not succeed to her husb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the business of the erstwhile partnership, such succession was by another partnership which came into being subsequently consisting of the assessee and another partner of the dissolved partnership and not by inheritance and, therefore, section 78(2) of the Act will be inapplicable. A further submission made by learned counsel for the Revenue was that in this case the erstwhile partnership consisted of only two partners and that on the death of one of them, the partnership stood dissolved and that would be the position even if the terms of the partnership deed provided for the contra and the assessee in such a situation could only work out her rights in the net surplus assets of the dissolved partnership, but that she cannot claim to have become a partner in the partnership by inheritance. Our attention in this connection was drawn to the decisions in M T Sughra v. Babu [1952] AIR 1952 All 506 ; M S V Narayanan Chettiar v. M S M Umayal Achi [1959] 1 ML.J 282 and CIT v. Seth Govindram Sugar Mills Ltd [1965] 57 ITR 510 (SC). CIT v. Madhukant M Mehta [1981] 132 ITR 159 (Guj) relied on by the assessee was distinguished by the learned counsel for the Revenue on the ground that that de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (4) of the deed of partnership dated February 23, 1972, provided that the amount that stood to the credit of the deceased, Subramania Pillai, in his capital account in the books of the dissolved partnership as on February 19, 1972) shall be placed to the credit of the assessee as her share of capital under the partnership deed of February 23, 1972. It is in the backdrop of the aforesaid provisions in the partnership deed that the applicability of section 78(2) of the Act and the claim of the assessee to set off and carry forward the loss have to be considered. Section 78(2) of the Act 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." The underlying general principle is that the right of carry forward and set off of loss is confined only to the person who has actually suffered the loss and not others. Section 78(2) of the Act recognises an exception. That enables the legal representatives of a deceased person succeeding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or heirs of a deceased partner; but that would again be a new partnership based on contract and not referable to inheritance. Section 31 of the Partnership Act provides that no person shall be introduced as a partner into a firm without the consent of all the existing partners and this again is subject to a contract between the partners and the provisions of section 30 of the Indian Partnership Act, 1932. The concept of introduction of a third party into a partnership contemplates the subsistence of a partnership. With reference to a partnership of two persons which stands dissolved on the death of one of them, it can have no application, for there is no partnership into which a new partner can be inducted without the consent of the other partners. Bearing in mind these considerations flowing from the provisions of the Indian Partnership Act, 1932, it would at once be obvious that or, the death of Subramania Pillai on February 19, 1972, intestate, the partnership which consisted of Ramalingam Pillai and Subramania Pillai stood dissolved. The subsequent taking in of the assessee as a partner under the terms of the partnership deed dated February 23, 1972, was only as a result of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners, even after the death of a partner. It follows that in order that the exception to the general rule may apply, the original partnership must consist of more than two partners. In the case of a partnership consisting of only two partners, no partnership remains on the death of one of them and, therefore, it is a contradiction in terms to say that there can be a contract between the two partners to the effect that on the death of one of them, the partnership will not be dissolved, but will continue. Nor is the position affected by bringing in the heirs of the deceased partner on the scene. One partner, cannot, by his own contract, impose a partnership upon his heirs or legal representatives. Partnership is not a matter of status ; it is a matter of contract. No heir can be said to become partner with another person without his own consent, express or implied. When, however, there are more than two partners and when there is contract between the partners that the partnership will not be dissolved by the death of one of them, the old partnership continues as between the surviving partners and the heirs, if they come in, may come in place of the deceased partner and become pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies, but the High Court was of the opinion that the Tribunal and the other authorities had misdirected themselves in reaching the conclusion that the parties could not be regarded as partners and that the status of the assessee for assessment year 1949-50 was that of a firm within the meaning of section 16(1)(b) of the Indian Income-tax Act, 1922. It was contended before the Supreme Court that on the death of one of the two partners, the firm of Seth Govindram Sugar Mills was dissolved and, therefore, the income of the said business could be assessed only as that of an association of persons. Dealing with this question, after referring to the specific provisions in the deed of partnership, to the effect that the death of any of the parties shall not dissolve the partnership and that the heir or nominee of the deceased partner shall take the place of a deceased partner in the partnership, the Supreme Court referred to the views expressed by the Allahabad High Court in M T Sughra v. Babu [1952] AIR 1952 All 506 and in M. S. V Narayanan Chettiar v. M. S M Umayal Achi [1959] 1 MLJ 282 ; AIR 1959 Mad 283 and also the view expressed by the Calcutta High Court in Hansraj Monant v. Gorak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partnership deed that the business of the partnership shall continue despite the death of one of the two partners of the partnership, the Supreme Court held that the partnership will not survive on the death of one of them. The position would be fortiori in this case, where there is no provision to the effect that the partnership would continue despite the death of one of the partners, therefore, on the death of Subramania Pillai on February 19, 1972, the partnership business which was carried on by Ramalingam Pillai and Subramania Pillai under the terms of the deed of partnership dated July 22, 1945, stood dissolved. Thereafter, the assessee was taken in as a partner pursuant to the deed of partnership entered into between the surviving partner, Ramalingam Pillai and the assessee Indeed, clause (4) of the deed of partnership dated February 23, 1972, proceeded on the basis that the earlier partnership constituted under the deed dated July 22, 1945, had been dissolved on the death of Subramania Pillai. Viewed in the light of the terms of the deeds of partnership, the provisions of the Indian Partnership Act, 1932, and the decisions referred to earlier, the conclusion is inescapa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, but that the assessee had been taken in as a partner in a new business under the terms of a deed of partnership dated February 23, 1972. In other words, there is no nexus between the partnership business earlier carried on and the business carried on by the assessee in partnership with Ramalingam Pillai. These distinguishing features would exclude the applicability of the ratio of the decision in CIT v. Madhukant M Mehta [1981] 132 ITR 159 (Guj). Equally, the decisions in CIT v. Bai Maniben [1960] 38 ITR 80 (Bom) and CIT v. Shamsunder Juthalal [1978] 112 ITR 927 (Bom) do not advance the case of the assessee. In CIT v. Bai Maniben [1980] 38 ITR 80 (Bom), the effect of the death of one of two partners in a partnership consisting of only two partners had not at all been adverted to or considered. This aspect has also been referred to in CIT v. Smt. Saroj Agarwal [1972] 83 ITR 875 (All) at page 886 thus: "It may be noticed that in this case the question whether on the death of partner the firm stands dissolved and the right of the representative to inherit the business that was being carried on by the deceased partner was not considered." CIT v. Shamsunder Juthalal [1978] 112 I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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