My client's father died and the heirs formed a firm to carry on his business. Can the firm use his brought-forward loss, or does s.78(2) stop it?
It can, if the succession is by inheritance — s.78(2) denies the carry forward only where a business is succeeded to otherwise than by inheritance. The Supreme Court declined to interfere with the finding that heirs who executed a partnership deed within a month of the death and carried on the identical speculation business, in the same name, at the same premises, with the same constituents, had succeeded to the deceased's business by inheritance for the purposes of s.78(2).
Decided by the Supreme Court (S.C. Agrawal J and D.P. Wadhwa J) on 1997-04-29, reported as Civil Appeals Nos. 94-100 (NT) of 1982; the copy read carries the citation [2001] 247 ITR 805 (SC). It bears on section 78, section 72, section 73, section 75 of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
Succession is the exception written into s.78(2), and whether it is made out is treated as a question of fact — which cuts both ways. Where the record shows continuity, the Revenue will struggle to disturb a favourable finding on appeal; where it does not, the assessee will struggle equally. The features that carried the day here were continuity in substance rather than any transfer of assets: no assets or liabilities of the deceased were transferred to the firm at all, and that did not defeat the claim. The Revenue's argument that a firm, being a distinct entity, cannot succeed by inheritance was rejected on the footing that a partnership is a collection of persons rather than a legal person and that the business of the firm is the business of the partners. That reasoning was developed in a year when a registered firm's losses were treated very differently from today, so the second limb of the case, on s.75(2), is historical.
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Madhukant M. Mehta carried on a proprietary speculation business in shares, cotton and commodities. He died intestate on 23 March 1964, leaving a widow, a son and a daughter. On 22 April 1964, within a month of the death, the three heirs executed a partnership deed reciting that they were his heirs and continuing the identical speculation business. The set-off of the deceased's business loss was claimed against the firm's income for assessment years 1965-66 onwards. The Income-tax Officer disallowed it on the footing that there had been no succession. Before the High Court the Revenue argued that no assets or liabilities had been transferred to the firm, that a registered firm is a distinct entity from its partners and cannot succeed by inheritance, that succession by inheritance requires the heirs to carry on the business as individuals rather than through a contractual partnership, and that s.75(2) in any event prevented a registered firm from carrying forward the loss. The Tribunal found succession by inheritance and the High Court answered the reference against the Revenue. Two questions were referred: whether there was succession by inheritance as contemplated by s.78(2) so as to entitle the assessee to carry forward and set off the deceased's business loss, and whether s.75(2) prevented the assessee from claiming the set-off.
The Revenue's appeals were dismissed, with no order as to costs. The Supreme Court found no ground to interfere with the High Court's acceptance of the Tribunal's finding that the partners, as heirs, had succeeded to the business of the deceased and that there was inheritance for the purposes of s.78(2), so that the loss of the deceased's proprietary speculation business could be carried forward and set off against the firm's income.
The Tribunal's finding rested on a cluster of facts: the partnership deed was executed within a month of the death and identified the parties as heirs; the business was of the identical nature, speculation in shares and commodities; the name of the business was unchanged; the premises were the same; the same telephone continued in use; the constituents were the same; and the legal heirs plainly intended to continue the deceased's business. The High Court, whose view the Supreme Court accepted, held that succession by inheritance does not require the heirs to take the business as individuals rather than through a firm, because a partnership is a collection of separate persons and not a legal person notwithstanding that it has some attributes of personality under the income tax law, and the business carried on by the firm is the business of the partners themselves. The absence of any transfer of assets or liabilities did not negate succession on these facts, there having been nothing to transfer: outstanding recoveries were settled by the heirs, assets were applied towards tax demands, and subsisting transactions were cleared independently. Before the Supreme Court, senior counsel for the Revenue cited Saroj Aggarwal v. CIT [1985] 156 ITR 497 for the proposition that whether there has been succession is a question of fact, and the Court proceeded on that footing, declining to disturb concurrent findings.
The Tribunal held that the partners, as heirs, had succeeded to the business of the deceased and there was inheritance for the purpose of Section 78(2) of the Act.
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Handle my notice → Ask a CA on WhatsAppIt can, if the succession is by inheritance — s.78(2) denies the carry forward only where a business is succeeded to otherwise than by inheritance. The Supreme Court declined to interfere with the finding that heirs who executed a partnership deed within a month of the death and carried on the identical speculation business, in the same name, at the same premises, with the same constituents, had succeeded to the deceased's business by inheritance for the purposes of s.78(2). This was decided by the Supreme Court (S.C. Agrawal J and D.P. Wadhwa J) and bears on section 78, section 72, section 73, section 75 of the Income Tax Act 1961. It is reported as Civil Appeals Nos. 94-100 (NT) of 1982; the copy read carries the citation [2001] 247 ITR 805 (SC). Succession is the exception written into s.78(2), and whether it is made out is treated as a question of fact — which cuts both ways. Where the record shows continuity, the Revenue will struggle to disturb a favourable finding on appeal; where it does not, the assessee will struggle equally. The features that carried the day here were continuity in substance rather than any transfer of assets: no assets or liabilities of the deceased were transferred to the firm at all, and that did not defeat the claim. The Revenue's argument that a firm, being a distinct entity, cannot succeed by inheritance was rejected on the footing that a partnership is a collection of persons rather than a legal person and that the business of the firm is the business of the partners. That reasoning was developed in a year when a registered firm's losses were treated very differently from today, so the second limb of the case, on s.75(2), is historical. If it applies to you, the first step is this: Build the succession record at the time, not later: execute the deed promptly after the death and recite the inheritance in it, as was done here within a month.
Madhukant M. Mehta carried on a proprietary speculation business in shares, cotton and commodities. He died intestate on 23 March 1964, leaving a widow, a son and a daughter. On 22 April 1964, within a month of the death, the three heirs executed a partnership deed reciting that they were his heirs and continuing the identical speculation business. The set-off of the deceased's business loss was claimed against the firm's income for assessment years 1965-66 onwards. The Income-tax Officer disallowed it on the footing that there had been no succession. Before the High Court the Revenue argued that no assets or liabilities had been transferred to the firm, that a registered firm is a distinct entity from its partners and cannot succeed by inheritance, that succession by inheritance requires the heirs to carry on the business as individuals rather than through a contractual partnership, and that s.75(2) in any event prevented a registered firm from carrying forward the loss. The Tribunal found succession by inheritance and the High Court answered the reference against the Revenue. Two questions were referred: whether there was succession by inheritance as contemplated by s.78(2) so as to entitle the assessee to carry forward and set off the deceased's business loss, and whether s.75(2) prevented the assessee from claiming the set-off. The matter was decided on 1997-04-29 by the Supreme Court (S.C. Agrawal J and D.P. Wadhwa J). On those facts the Supreme Court held as follows. The Revenue's appeals were dismissed, with no order as to costs. The Supreme Court found no ground to interfere with the High Court's acceptance of the Tribunal's finding that the partners, as heirs, had succeeded to the business of the deceased and that there was inheritance for the purposes of s.78(2), so that the loss of the deceased's proprietary speculation business could be carried forward and set off against the firm's income.
The Tribunal's finding rested on a cluster of facts: the partnership deed was executed within a month of the death and identified the parties as heirs; the business was of the identical nature, speculation in shares and commodities; the name of the business was unchanged; the premises were the same; the same telephone continued in use; the constituents were the same; and the legal heirs plainly intended to continue the deceased's business. The High Court, whose view the Supreme Court accepted, held that succession by inheritance does not require the heirs to take the business as individuals rather than through a firm, because a partnership is a collection of separate persons and not a legal person notwithstanding that it has some attributes of personality under the income tax law, and the business carried on by the firm is the business of the partners themselves. The absence of any transfer of assets or liabilities did not negate succession on these facts, there having been nothing to transfer: outstanding recoveries were settled by the heirs, assets were applied towards tax demands, and subsisting transactions were cleared independently. Before the Supreme Court, senior counsel for the Revenue cited Saroj Aggarwal v. CIT [1985] 156 ITR 497 for the proposition that whether there has been succession is a question of fact, and the Court proceeded on that footing, declining to disturb concurrent findings. In the words reproduced by the source cited on this page: "The Tribunal held that the partners, as heirs, had succeeded to the business of the deceased and there was inheritance for the purpose of Section 78(2) of the Act." The decision followed or applied Saroj Aggarwal v. CIT [1985] 156 ITR 497 — cited by the Revenue for the proposition that succession is a question of fact.
It was decided by the Supreme Court on 1997-04-29 and is reported as Civil Appeals Nos. 94-100 (NT) of 1982; the copy read carries the citation [2001] 247 ITR 805 (SC). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 78, section 72, section 73, section 75, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeals were dismissed, with no order as to costs. The Supreme Court found no ground to interfere with the High Court's acceptance of the Tribunal's finding that the partners, as heirs, had succeeded to the business of the deceased and that there was inheritance for the purposes of s.78(2), so that the loss of the deceased's proprietary speculation business could be carried forward and set off against the firm's income. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 78, section 72, section 73, section 75 of the Income Tax Act 1961, and was decided by S.C. Agrawal J and D.P. Wadhwa J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Preserve every indicium of continuity — same trade, same firm name, same premises, same telephone, same constituents and customers — because these are the facts the Tribunal relied on and the Supreme Court would not go behind. Do not be deterred by the absence of any transfer of assets or liabilities; on these facts there were none to transfer and succession was still found. Meet the argument that a firm cannot inherit by pointing to the reasoning that a firm is not a legal person and that the business it carries on is the business of the partners. Check the year before using the s.75 limb of the case: the registered-firm regime it discusses no longer exists, and the present s.75 deals with the partner's share of loss on retirement or death, so that part of the reasoning cannot be carried across.
Validity check could not be completed. Validity check could not be completed. No citator search for decisions doubting, distinguishing or overruling this judgment was run. What was found is that the operative sentence continues to be quoted by Tribunal benches — Pratap H. Desai and Ors. (HUF) v. ACIT (ITAT Patna, 13 April 2007) and Narshi Nenshi & Sons v. ITO (ITAT Mumbai, 10 January 2020) — but citation is not the same as approval and neither order was read. Two matters of statutory context the reader must handle separately. First, s.78(2) itself: the departmental text confirms that it still denies the carry forward where a person carrying on a business has been succeeded in that capacity by another otherwise than by inheritance, but I did not retrieve the amendment footnotes for s.78 and cannot say from what I read whether either sub-section has been altered since 1997. Second, s.75: the case was decided when a registered firm and its partners were assessed on a different footing, and the present s.75 is not the provision the second question was argued under, so the s.75(2) limb of the judgment should be treated as historical and the current provision read for any live year. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
There is a date oddity in the report. The copy read carries the citation [2001] 247 ITR 805 (SC) but gives the date of the judgment as 29 April 1997, in Civil Appeals Nos. 94-100 (NT) of 1982. The 1997 date is the one on the judgment and is the one recorded here; anyone quoting the ITR citation should be aware of the gap. The Supreme Court judgment is short and largely records the concurrent findings below, so the fuller reasoning set out in the 'reasoning' field comes from the Gujarat High Court judgment under appeal, CIT, Gujarat v. Madhukant M. Mehta, decided 12 August 1980 by P.D. Desai J, which I read separately at https://indiankanoon.org/doc/189473/?type=print for assessment years 1965-66 to 1969-70. The retrieval layer offered a sentence from that High Court judgment beginning 'Succession involves change of ownership' and then produced four different, progressively shortened versions of it when pressed on length; none of them is reproduced here and none should be treated as the Court's words. The key quote given is from the Supreme Court judgment and is the Court's own sentence recording what the Tribunal had held, not an independent statement of law by the Supreme Court — it is labelled accordingly. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeals were dismissed, with no order as to costs. The Supreme Court found no ground to interfere with the High Court's acceptance of the Tribunal's finding that the partners, as heirs, had succeeded to the business of the deceased and that there was inheritance for the purposes of s.78(2), so that the loss of the deceased's proprietary speculation business could be carried forward and set off against the firm's income.
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