1. The Income-tax Appellate Tribunal, Bangalore Bench, has referred the following two questions under s. 256(1) of the I.T. Act for the opinion of this court :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assesses company is not entitled to carry forward any loss and unabsorbed depreciation allowances of Hindustan Aircraft Ltd.
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assesses company has not succeeded M/s. Hindustan Aircraft Ltd., by inheritance ?'
2. The essential facts behind the legal formulation are as follows :
There are two companies incorporated under the Indian Companies Act, 1913, in the public sector, the Hindustan Aircraft Ltd. and the Aeronautics India Ltd., and engaged in the manufacture and production of aircraft, aero-engines accessories and missiles. The Government of India decided to amalgamate these two companies into a single company called Hindustan Aeronautics Ltd. That was given effect to by order dated September 28, 1964, called 'The Aircraft Companies Amalgamation Order, 1964.' Under clause 4 of the said order, it was provided as follows :
'4. Transfer of certain items of property.-For the purposes of this Order, all the profits and/or losses, if any, if the dissolved company for the year 1963-64 and for the period from the 1st day of April, 1964, to September 30, 1964, and the revenue reserves and/or deficits, if any, of the dissolved company, when transferred to the company resulting form the amalgamation under the provisions of this Order, shall respectively form part of the profits and/or losses, if any, and revenue reserves and/or deficits of the company resulting from the amalgamation for the said year and the said period.
Dissolved company was defined under clause 2 to mean the 'Hindustan Aircraft Ltd.'
3. A return was filed by the assessee, the Hindustan Aeronautics Ltd., the petitioner herein, for the assessment year 1965-66 including the loss of Hindustan Aircraft Ltd. for the period April 1, 1964, to September 30, 1964, and claimed set off under s. 78(2) of the I.T. Act, 1961.
4. The ITO held that the loss of that period of Hindustan Aircraft Ltd. could not be assessed in the hands of the Hindustan Aernaitics Ltd. and he excluded the same from assessment.
5. That assessment order was affirmed by the AAC and also by the Income-tax Appellate Tribunal. The Tribunal, on a consideration of the various clauses in the said Government Order and applying the ratio of the decision of the Privy Council in Indian Iron & Steel Company Ltd. v. CIT  11 ITR 328, held that the Explanation to clause 3 of the Amalgamation Order could not be taken advantage of by the assesses company to carry forward the losses and unabsorbed depreciation of Hindustan Aircraft Ltd., and that s. 78(2) also does not enable the assessee company to carry forward such losses and unabsorbed depreciation allowance of Hindustan Aircraft Ltd. since it was not a case of succession by inheritance.
6. The view taken by the Tribunal is challenged in this reference.
7. Section 78(2) of the Act provides :
'78. (2) Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this Chapter shall entitle any person other than the person incurring the loss to have it carried forward and set of against his income.'
8. It is clear feim the above provision that the successor company has no right ti carry forward and set off any loss incurred by its predecessor, unless it is a case of succession by inheritance. The principal is that the successor is business must be treated as if it has commenced or set up a new business.
9. In Indian Iron & Steel Co. Ltd. v. CIT  11 ITR 328 the Judicial Committee of the Privy Council observed that when there is an amalgamation of two companies, the unabsorbed depreciation allowance of the one company could not be carried forward by the successor company and set off against such successor's profits in any year subsequent to the change in ownership. similar was the view taken by the Houses of Lords in United steel Companies Ltd. v. Cullington (Inspector of Taxes)  9 ITR (suppl.) 20.
10. The term 'inheritance' used in s. 78(2) of the Act, in our opinion, must mean only a transmission of the assets or liabilities of one person to another by the personal law applicable to them and not in any other mode of transfer known to law. The section is in the nature of a corollary to the broad principle underlying ss. 72 to 74 of the I.T. Act and that should be strictly construed.
11. In this view, our answers to the questions are in the affirmative and against the assesses company. ]
12. In the circumstances of the case, we make no order as to costs.