Carry forward of predecessor losses denied where bank merger is not succession by inheritance under income tax law.

Section 78(2) of the Income-tax Act permits carry forward and set-off of losses only where succession is by inheritance. A merger or amalgamation of banks is not succession by inheritance, and the successor and predecessor remain distinct for this limited purpose. The successor therefore cannot treat the predecessor's losses as its own merely because the business, assets, and liabilities were taken over or continued. On that reasoning, the assessee was not entitled to carry forward and set off the losses of the merged bank, and the reference was answered against the assessee and in favour of the Revenue.

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Issues: Whether the assessee was entitled under section 78(2) of the Income-tax Act, 1961 to carry forward and set off the brought forward losses of the merged bank on the footing that the succession was by inheritance.

Analysis: Section 78(2) permits carry forward and set off only where the loss is derived by inheritance. The merger of one bank with another does not amount to inheritance for this purpose. The merged entity and the successor entity are distinct persons in law for the limited purpose of this provision, and the loss of the predecessor cannot be treated as the successor's own loss merely because assets and liabilities were taken over or the business continued. The cited authorities on inheritance and succession supported the view that amalgamation is not succession by inheritance.

Conclusion: The assessee was not entitled to carry forward and set off the losses of the State Bank of Jaipur; the reference was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: For the purpose of section 78(2) of the Income-tax Act, 1961, a merger or amalgamation does not constitute succession by inheritance, and therefore the successor cannot claim carry forward and set off of the predecessor's losses.

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