Change in constitution of firm:
In case of a change in the firm's constitution, any loss proportionate to the share of a retired or deceased partner that remains unabsorbed cannot be carried forward by the firm.
However, unabsorbed depreciation is allowed to be carried forward.
Succession by inheritance:
In the event of succession by inheritance, the legal heirs have the right to offset the predecessor's business losses. This carryforward and offsetting are permissible even if the legal heirs establish themselves as a partnership firm, allowing the firm to carry forward and offset the predecessor's business losses.
Succession otherwise by inheritance:
If another person succeeds someone conducting a business or profession in that capacity, not through inheritance, the successor cannot carry forward and offset any losses incurred by the predecessor against their income.
Relevant case laws relating to Carry Forward of losses in case of change in constitution:
-CIT v. Madhukant M. Mehta (2001) 247 ITR 805 (SC), the sole proprietor had expired and after his death, the heirs succeeded the business as a partnership concern. Therefore, the losses suffered by the deceased proprietor was allowed to be set-off by the partnership firm since the case falls within the exception mentioned u/s 78(2), i.e., a case of succession by inheritance.
-Saroj Aggarwal v. CIT (1985) 156 ITR 497 (SC), upon death of a partner, his legal heirs were inducted as partners in the partnership firm. The partnership firm was not dissolved on the death of the partner. The partnership firm which suffered the losses continued with induction of the legal heirs of the deceased partner. This, being a case of succession by inheritance, the benefit of carry forward of losses was given to the re-constituted partnership firm.
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