H.N. Seth, J. - (1.) THIS is a reference under Section 256(2) of the Income-tax Act, 1961. At the instance of the Commissioner of Income-tax, the Appellate Tribunal has referred the following question for the opinion of this court: " Whether, on the facts and in the circumstances; of the case, the assessee was entitled to the set-off of speculation losses brought forward from earlier years against the speculation profits of the assessment year under appeal ? "
(2.) ASSESSEE in this case is Smt. Saroj Agarwal and the assessment year in question is the year 1962-63. One Prem Shanker was a partner in three partnership firms styled as (1) Hari Shanker Gauri Shanker, (2) M/s. Hari Shanker Gauri Shanker Rice and Dal Mills and (3) Hari Ram Mahadeo Mills. He died on 24th of July, 1959, leaving behind his widow, Smt. Saroj Agarwal, as his heir and legal representative. On 27th July, 1959, Smt. Saroj Agarwal adopted one Sudhir Kumar as her son. It is said that, on the same date, she joined the afore-mentioned firms in place of Prem Shanker as partner and Sudhir Kumar was admitted to the benefits of partnership in those firms. Prem Shanker, while he was a partner, had an unabsorbed loss of Rs. 25,914 (from speculative business) suffered by him as a partner in the two firms, M/s. Hari Shanker Gauri Shanker and M/s. Hari Shanker Gauri Shanker Rice and Dal Mills, as per orders of the Income-tax Officer passed under Section 35 of the Income-tax Act, 1922, for the assessment years 1958-59, 1959-60 and 1960-61. During the assessment year 1962-63, the assessee was found entitled to a share in the speculation profits of the two firms M/s. Hari Shanker Gauri Shanker and M/s. Hari Shanker Gauri Shanker Rice and Dal Mills. She claimed that the speculation losses suffered by her husband in the earlier years should be set off against her speculation profits of the assessment year in question. The Income-tax Officer, however, did not accept the contention raised on behalf of the assessee and declined to adjust the unabsorbed losses suffered by Prem Shanker in speculation business, amounting to Rs. 25,914, in the assessee's share of speculation profits for the assessment year 1962-63. The assessee went up in appeal before the Appellate Assistant Commissioner and claimed that she was entitled to have the speculation losses of the earlier years set off against her share of speculation profits from the firm for the assessment year 1962-63 as per provisions of Section 78(2) of the Income-tax Act, 1961. The Appellate Assistant Commissioner held that there could be no succession or inheritance in respect of the membership of a firm arid that on the death of Prem Shanker, Smt. Saroj Agarwal was made a partner in the firm by the remaining partners not because she inherited the right to join the firm but because she entered into fresh partnership agreement. On the death of Prem Shanker, Smt. Saroj Agarwal might have inherited the capital left by the deceased in the firm but she did not inherit any right to join the partnership on the basis of that capital. In the circumstances, the Appellate Assistant Commissioner held that the assessee was not entitled to adjust the speculation losses suffered by Prem Shanker in earlier years in her share of speculation profits, earned during the year 1962-63.
(3.) THE assessee then went up in appeal before the Appellate Tribunal. THE Appellate Tribunal observed that the circumstances appearing in the case indicated that Smt. Saroj Agarwal was admitted to various partnerships after the death of Sri Prem Shanker because she was his heir. After the death of Prem Shanker, various firms in which he was a partner were not dissolved but they were continued. In the end, it held that Smt. Saroj Agarwal succeeded to the deceased, Prem Shanker, in her capacity as partner by inheritance. THE Appellate Assistant Commissioner, therefore, was not right in holding that the speculation losses suffered by Prem Shanker when he was a partner in the respective firms could not be carried forward and set off against speculation profits of the assessee and/ or of the minor son for the assessment year under appeal. The Commissioner of Income-.tax then moved an application under Section 256(i)of the Income-tax Act, 1961, and got the aforesaid question referred to this court.;