Inherited partnership succession allows carried-forward loss set-off when heirs join a fresh firm after a partner's death.

Where surviving partners continue a firm after a partner's death by admitting the deceased partner's heirs into a fresh partnership, the succession remains by inheritance if the deed and surrounding facts show devolution of the deceased partner's share. On that footing, the successor is not treated as coming in otherwise than by inheritance and may claim the carried-forward loss benefit under section 24(2)(iii)(e) of the Indian Income-tax Act, 1922. The execution of a new partnership deed does not, by itself, defeat the inherited character of the succession. The assessee was therefore entitled to set off the deceased father's proportionate partnership losses.

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Issues: Whether the assessee, having succeeded to his deceased father's share in the partnership firms by inheritance and been taken in under a fresh partnership arrangement after the father's death, was entitled to set off the proportionate share of the father's earlier losses under section 24(2)(iii)(e) of the Indian Income-tax Act, 1922.

Analysis: The relevant proviso denies the benefit of carried-forward loss where the successor to a business or partnership interest comes in otherwise than by inheritance. On the facts, the surviving partners chose to continue the firms by taking the deceased partner's heirs into the new partnership, and the recitals in the fresh deed showed devolution of the deceased partner's share by inheritance. The Court held that execution of a new deed did not detract from the inherited character of the succession where the surviving partners had elected to continue the business with the heirs of the deceased partner. The earlier decision in Bai Maniben was applied as supporting authority for allowing the set-off where succession was by inheritance.

Conclusion: The assessee was entitled to the set-off of one-fourth share of the losses attributable to the deceased father's partnership interest, and the answer was in favour of the assessee.

Ratio Decidendi: Where, on the death of a partner, the surviving partners continue the firm by admitting the deceased partner's heirs into a fresh partnership and the succession is in substance by inheritance, the successor is entitled to the benefit of carried-forward loss under section 24(2)(iii)(e) of the Indian Income-tax Act, 1922.

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