P.D.DESAI,J. - (1.) THE assessee, a registered partnership firm, carried on business in the name and style of M/s Madhukant M. Mehta at the material time. The three partners who constituted the firm were: (1) Mr. Mayur M. Mehta, (2) Mrs. Nirmalaben M. Mehta, and (3) Mrs. Bhavna D. Shah. The three partners were the legal heirs of one Mr. Madhukant M. Mehta, who died on 23rd March, 1964, being the son, widow and daughter respectively, of the deceased. The deceased, in the capacity of a proprietor, was carrying on business of speculation in shares cotton and other commodities. Within about one month of his death, the three legal heirs executed a partnership deed on 22nd April, 1964, whereunder they agreed to carry on the business of speculation. We shall presently examine in detail the terms of the said partnership deed. Suffice it to say, for the present, that the partnership deed, in terms, contains recitals to the effect that the three legal heirs had succeeded to the speculation business carried on by the deceased and that they had decided to continue and carry on the said business on the terms and conditions agreed upon between them and recorded in the partnership deed.
(2.) IN the course of the assessee's assessment to income tax for asst. yrs. 1965 66 to 1969 70, the relevant previous years being S.Ys. 2020 to 2024, a common contention was advanced before the ITO, namely, that the three partners had succeeded by inheritance to the business of speculation carried on by late Mr. Madhukant M. Mehta and that, therefore, the assessee was entitled to carry forward and set off the losses incurred by the deceased in his business against the income from speculation business of the partnership firm. The contention, which was based on the provisions of s. 78(2) of the IT Act, 1961 (hereinafter referred to as "the Act"), was rejected by the ITO on the ground that there was no succession to the business of the deceased as neither the assets nor the liabilities of the said business were taken over by the partnership firm and, in any case, the firm could not have succeeded by inheritance. On appeal by the assessee, the AAC directed the ITO to find out certain facts and make a report, on the bass of facts so found, on the question of succession to the business. The additional facts found by the ITO pursuant to the said direction were as follows : (1) None of the assets, including cash balance, and liabilities of late Mr. Madhukant M. Mehta as on the date of his death were taken over by the new firm. (2) The outstanding recoveries of the business of the deceased were recovered to the extent possible by his heirs and the amounts realised were paid to the creditors. The remaining assets of the business, namely, shares, unrealised book debts, bank balance, insurance policies, etc., were surrendered to the TRO against the income tax demands outstanding against the deceased. (3) The outstanding transactions in speculation business of the deceased as on the date of his death were also not taken over by the new firm and they were allowed to be continued for settlement for a fortnight or so and cleared on the subsequent dates of settlement. (4) Even after the adjustment of all the assets of the deceased against the income tax demands, there was still an outstanding income tax demand to the tune of Rs. 1,50,000 and there were no assets of the deceased left from which the same could be fully satisfied. (5) The legal heirs had also not inherited anything from the deceased. On the strength of those findings, the ITO reported that the speculation business carried on by the deceased was not at all succeeded to by the new firm and that the speculation business carried on by the firm was an altogether different business.
(3.) THE AAC, having considered the matter on the basis of the entire material on record, held that though the partnership deed contained recitals to the effect that the three legal heirs had succeeded to the speculation business carried on by the deceased, such recitals, which were in the nature of "self serving statements", could not ipso facto conclude the issue. Such recitals were not only "strictly unnecessary for the purposes of partnership" but also appeared to have been inserted "with a view to achieve the result of carry forward and set off his loss in the hands of his successors". The AAC further held that since none of the outstanding assets or liabilities of the deceased were taken over by the assessee firm and no link or nexus between the business carried on by the deceased and the assessee firm was established, there was no succession. Mere similarity of business was not sufficient to establish the link. The AAC also held that the succession by inheritance was also not established because when legal representatives become partners by virtue of a contract between them, there can be no question of inheritance. The appeals preferred by the assessee were, therefore, dismissed.;