RATNAM J.

The assessee in this case is an individual. One Ramalingam Pillai and Subramania Pillai, the husband of the assessee, entered into a deed of partnership on July 22, 1945, for the purpose of carrying on business in the manufacture and sale of certain medicinal products under the firm name of South India Manufacturing Company and that business was so carried on and conducted. Subramania Pillai died on February 19, 1972. By another deed of partnership dated February 23, 1972, entered into between Ramalingam Pillai and the assessee, the assessee became a partner of the firm "South Indian Manufacturing Company". Her capital contribution was stated to be that amount which stood to the credit of her deceased husband, Subramania Pillai, in the capital account of the firm as on February 19, 1972. For the assessment year 1973-74, the assessee returned a loss of Rs. 1, 52, 098 claiming that she had succeeded to the business of her husband by inheritance and that the loss amounting to Rs. 2, 01, 344 sustained in that business should be set off. The Income-tax Officer allowed only a sum of Rs. 4, 338 as set off, being the prior year's business loss and disallowing the balance, completed the assessment. Aggrieved by this, the assessee went on appeal before the Appellate Assistant Commissioner contending that she was entitled to set off the loss of her deceased husband, as she had succeeded to her husband's interest in the partnership. The Appellate Assistant Commissioner viewed the matter as one falling under section 78(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and relying upon the decision in CIT v. Bai Maniben allowed the appeal, directing the set off of the loss of Rs. 2, 01, 344 against the income and the carry forward of the balance. The Revenue carried the matter on further appeal to the Tribunal. On a consideration of the provisions in the deed of partnership dated February 23, 1972, the Tribunal took the view that the assessee had become a partner only by a fresh contract with the erstwhile partner and that she did not succeed to her husband by inheritance. In that view, section 78 (2) of the Act was held to be inapplicable and the assessee was held not entitled to set off and carry forward the loss of her deceased husband in the partnership, in which he was a partner, till his death. The order of the Appellate Assistant Commissioner was, therefore, set aside and that of the Income-tax Officer was restored Aggrieved by this, the assessee has come up before this court on a reference under section 256(1) of the Act on the following question of law

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to claim set off of business loss of Rs. 2, 01, 344 relating to the assessment years 1969-70 to 1972-73 incurred by the assessee's husband against the business income of Rs. 88, 977 of the assessment year 1973-74 under section 78(2) of the Income-tax Act, 1961 ?" *

The learned counsel for the assessee contended that the husband of the assessee was initially a partner till his death on February 19, 1972, and on his death intestate, his interest in the partnership devolved on the assessee, her son and daughter and the assessee had within about three days after the death of her husband, became a partner of the firm by virtue and in recognition of having inherited, at least in part, her husband's interest in the erstwhile partnership and, therefore, section 78(2) of the Act would be attracted, It was also the further contention of the learned counsel that it would suffice to fulfil the requirements of section 78(2) of the Act if the business was factually carried on by the heir of the deceased partner with a liability to be taxed on its profits. In support of these contentions, learned counsel invited our attention to the decisions in CIT v. Bai Maniben CIT v. Shamsunder Juthalal and CIT v. Madhukant M. Mehta and Execu