Legal heirs entitled to set-off in deceased's business succession: Supreme Court ruling

The Supreme Court dismissed the Revenue's appeals regarding the entitlement to set-off under section 78(2) of the Income-tax Act, 1961, in relation to losses sustained in a deceased individual's proprietary business against the income of a registered partnership firm. The Court upheld the lower courts' decisions, emphasizing the continuity of the business and the legal heirs' intention to carry it forward, concluding that the partners had succeeded to the deceased's business, justifying the set-off of losses. The Court found no grounds for interference and supported the allowance of the set-off under section 78(2) of the Act.

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Issues: Entitlement to set-off under section 78(2) of the Income-tax Act, 1961 in respect of losses sustained in proprietary business against income of a registered partnership firm.

The judgment deals with appeals by the Revenue regarding the entitlement to set-off under section 78(2) of the Income-tax Act, 1961, in relation to losses sustained in the proprietary business of a deceased individual against the income of a registered partnership firm for the assessment years 1965-66 to 1971-72. The matter was previously considered by the Gujarat High Court, where questions regarding succession by inheritance and the applicability of section 75(2) of the Act were answered in favor of the assessee, allowing the set-off of losses. The Revenue filed Civil Appeals against these decisions. The deceased individual was carrying on a proprietary business of speculation in shares, cotton, and other commodities, and after his death, his widow, son, and daughter formed a partnership to continue the business. The Income-tax Officer initially disallowed the set-off, but the Tribunal allowed it, finding that there was a succession to the deceased's business based on various circumstances. The High Court upheld the Tribunal's finding, emphasizing the continuity of the business and the intention of the legal heirs to carry it forward. The Supreme Court, considering the factual findings and legal precedents, dismissed the Revenue's appeals, stating that no grounds for interference were established.

The judgment references the decision in Saroj Aggarwal v. CIT and CIT v. Bai Maniben, highlighting that the question of succession by inheritance is a factual determination. The Supreme Court, based on the Tribunal and High Court's findings, concluded that the partners, as heirs, had succeeded to the deceased's business, justifying the set-off of losses against the income of the partnership firm. The continuity of the business, use of the same business name and premises, and the intention of the legal heirs to continue the business were crucial factors in establishing the succession. The Court held that the factual findings supported the allowance of set-off under section 78(2) of the Act, and thus, upheld the decisions of the lower courts, dismissing the Revenue's appeals.

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