Inheritance-based succession in a firm allowed carry-forward and set-off of deceased partner's business losses after reconstitution.

A widow who entered into a fresh partnership after her husband's death was treated as having succeeded by inheritance to his share in the firm, so the deceased partner's business losses could be carried forward and set off under section 24(2). The court read the proviso governing changes in a firm's constitution as allowing the benefit where the facts show succession by inheritance, and it treated that question as one of surrounding circumstances. On that factual basis, the set-off of the husband's losses was held allowable.

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Issues: Whether the widow, having entered into a fresh partnership after the death of her husband, could claim set-off of the deceased husband's business losses under section 24(2) of the Income-tax Act on the footing that she had succeeded to his share by inheritance.

Analysis: The statutory scheme under section 24(2) and proviso (e) permitted carry forward and set-off of business losses, but in the case of a change in the constitution of a firm, the benefit could not be claimed unless the person carrying on the business had been succeeded by another person by inheritance. The partnership deed and surrounding circumstances showed that on the death of the husband the surviving partner did not exercise the option to purchase the deceased partner's share, the business was continued, and a fresh partnership was executed with the widow. The conclusion whether she had succeeded by inheritance to the deceased partner's interest was treated as one turning on the facts and surrounding circumstances.

Conclusion: The widow was held to have succeeded by inheritance to her husband's share in the partnership, and the set-off of the deceased husband's losses was held allowable under section 24(2).

Ratio Decidendi: Where, on the death of a partner, the business is continued and the surrounding facts show that the widow has succeeded by inheritance to the deceased partner's interest in the firm, the losses attributable to the deceased partner may be carried forward and set off under section 24(2), subject to the proviso governing changes in the constitution of a firm.

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