NOTHING IS CERTAIN – EXCEPT DEATH AND TAXES!

CA Vinay Kawdia has explained in a comprehensive manner the entire law relating to the implications arising out of the death of an income-tax assessee with reference to the pending and impending assessment, recovery, penalty, prosecution and appeal proceedings. All important judgements relevant to the issue have been referred to

Introduction:

“Nothing is certain except death and taxes.”Thus spake Benjamin Franklin in his letter of November 13, 1789 to Jean Baptiste Leroy. To tax the dead is a contradiction in terms. Tax laws are made by the living to tax the living. What survives the dead person is what is left behind in the form of such person’s property.” [Supreme Court in Shabina Abraham Vs. CCE, Civil Apeal No. 5802 of 2005]

The dead person’s property, in the form of his or her estate, can not be taxed without the necessary machinery provisions in the concerned tax statute. So what’s the position under Income Tax Act, 1961?

A. Legislative History:

The Act has to contain appropriate provisions for continuing an assessment and collecting tax from the estate of a deceased person which was found to be absent in the 1922 Act before it was amended by insertion of Section 24B. However, S. 24B made the legal representative liable only for the tax assessed on, or payable by, deceased without casting any personal liabilities on the legal representatives.
Pursuant to the 12th Law Commission Report, a new Income Tax Act was passed in 1961 which contained elaborate provisions for assessment of deceased persons after they die. The anomalies left by Section 24B of the 1922 Act, as pointed out in the various Supreme Court judgements from time to time, were sought to be rectified in the new provisions contained in the 1961 Act. [Section 159 and section 168 of the Income Tax Act, 1961].

Section 159 of the Act reads as follows:
“159. (1) Where a person dies, his legal representative shall be liable to pay any sum which the deceased would have been liable to pay if he had not died, in the like manner and to the same extent as the deceased.

(2) For the purpose of making an assessment (including an assessment, reassessment or recomputation under section 147) of the income of the deceased and for the purpose of levying any sum in the hands of the legal representative in accordance with the provisions of sub-section (1),—

(a) any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased;
(b) any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative; and
(c) all the provisions of this Act shall apply accordingly.

(3) The legal representative of the deceased shall, for the purposes of this Act, be deemed to be an assessee.

(4) Every legal representative shall be personally liable for any tax payable by him in his capacity as legal representative if, while his liability for tax remains undischarged, he creates a charge on or disposes of or parts with any assets of the estate of the deceased, which are in, or may come into, his possession, but such liability shall be limited to the value of the asset so charged, disposed of or parted with.

(5) The provisions of sub-section (2) of section 161, section 162, and section 167, shall, so far as may be and to the extent to which they are not inconsistent with the provisions of this section, apply in relation to a legal representative.

(6) The liability of a legal representative under this section shall, subject to the provisions of sub-section (4) and sub-section (5), be limited to the extent to which the estate is capable of meeting the liability.”

[Term legal representative is defined in section 2(29) of the Act which in turn, adopts the definition as per section 2(11) of the Code of Civil Procedure, 1908:  “legal representative” means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued;]

Thus, if assessee dies, his legal representative shall be liable to pay any tax which would have been liable to be paid by such person if he had not died. Section 159 enables an assessment being made and tax recovered in respect of income of the natural assessee who was alive during a previous year but died before the assessment proceedings were set in motion or completed. However, the liability of such representative is limited only to the extent to which the estate left by the deceased is capable of meeting the tax liability subject to the contingencies mentioned in sub-sections (4) and (5) of Section 159.

Whereas section 168 provides that, the income accruing to the estate of a deceased shall be chargeable to tax in the hands of the executor. It further clarifies that, separate assessments shall be made under this section on the total income of each completed previous year or part thereof as is included in the period from the date of the death to the date of complete distribution to the beneficiaries of the estate according to their several interests.
The executor would continue to be chargeable to income-tax u/s. 168 until the estate of the deceased is distributed completely to the beneficiaries thereof (i.e. administration of estate is completed) in accordance with the terms of the Will. [Navneet Lal Sakarlal vs. CIT (1992) 193 ITR 16 (SC)]

Therefore, income upto the date of death shall be assessable u/s 159 of the Act on the legal representatives of the deceased. However, from the date of death till completion of administration of the estate and distribution of the property, it shall be assessable u/s 168 in the hands of the executor or administrator as the case may be. Therefore, for the previous year in which the death takes place, there shall be two assessments : (i) one upto the date of death in the hands of the legal representative u/s 159; and (ii) another in the hands of the executor from the date of death till the end of the previous year, u/s 168, and thereafter on year to year basis. [B.D. Gupta & Sons Vs. ITO [2015] 60 taxmann.com 38 (Delhi)]
 
[Where the assessee has left a Will, the income of the estate of the deceased person becomes chargeable in the hands of the ‘Executor’ – ‘a person to whom the execution of the last Will of the deceased person is, by the testator’s appointment confided’. When there is no executor, administrator is appointed by the Court. If none of these situations are present, section 168 will not be applicable]

B. Issue of notices vis-à-vis completion of assessment /reassessment proceedings – Issues for Consideration:

Sr.	Situation	Remark
B1	Notice issued and assessment completed in the name of dead	Invalid
B2	After issue of notice assessee dies and assessment completed in the name of deceased without bringing the L/R on record	Invalid
B3	Notice issued in the name of dead but assessment completed in the name of legal representative without issuing valid notices to legal representatives	Invalid
B4	After issue of notice assessee dies but assessment completed in the name of some of the legal representative after issue of fresh notices to them	Irregular/ defective
B5	Notice issued in the name of dead and assessment completed in the name of some of the legal representatives after issue of fresh valid notices to them	Irregular/ defective
B6	Valid notices issued and assessment completed in the name of all the legal representatives	Valid

* “Notice” = Valid Notice of assessment / reassessment
What are the hidden mandates in section 159 read with the overall scheme and framework of the Act?

B.1) Notice issued and assessment /reassessment completed in the name of dead:

In case the Assessing Officer [‘AO’] issues assessment /reassessment notice in the name of the deceased assessee, it is for the legal representatives of the deceased to intimate about (i) the death of the original assessee; and (ii) details of all Legal Representatives to the concerned ITO, who in turn should drop the original proceedings and issue fresh notices to legal representatives to proceed further in the assessment, subject to bar of limitation.
If the ITO is well informed about the death of the assessee assessment/reassesment notices must be issued to the executor appointed under the will, if any left by the deceased or all the legal representatives of the deceased.

Notice for assessment/reassessment issued and order passed in the name of dead is invalid. [CIT vs. Amarchand Shroff, 48 ITR 59 (SC), CIT vs. Suresh Chandra Jaiswal (2010) 325 ITR 563(All.)]

Since the notice u/s. 148 was issued in the name of dead person, the notice issued u/s.143(2) on a dead person and the order u/s.143(3) has been passed on a dead person, therefore, the entire proceedings are a nullity. [Avinash Vyas L/H of Late Sita V. Vyas vs. ITO, ITA No. 3538/Mum/2010]
Reassessment—validity of notice—Notice issued in the name of "S" admittedly dead for a long time—ITO in know of death of "S" as also the names of his legal representatives—Notices ought to have been issued in the names of legal representative of "S"—Notice invalid and no assessment can be made on the basis of such a notice [Shaikh Abdul Kadar vs. ITO (1958) 34 ITR 451 (MP)]

Assessment cannot be framed on a dead person; where the assessee had already died and the search was conducted thereafter (warrant issued in the name of dead), s. 159(2) was not attracted and no assessment could be framed on a dead person. U/s. 159, proceedings could be continued against the legal representative of the deceased assessee only if the same had already been started during the lifetime of the assessee. [Late Laxmibai K. through L/H Rajendra vs. ACIT(2011) 135 TTJ 0123 (Indore)]

Conversely speaking, in case of Search and seizure after death of assessee- Warrant issued in the name of mother as legal representative – block assessment in consequence of search on L/R held to be valid [P. Balaji v. Dy. CIT (2012) 75 DTR 06 (Mad.)(HC)]

B.2) After issue of notice assessee dies and assessment completed in the name of deceased without bringing all the L/H on record:

Action points from section 159:

Any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased.

– Any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative;

– The legal representative of the deceased shall, for the purposes of this Act, be deemed to be an assessee, for assessment as well for tax recovery purposes

When an assessee dies pending any assessment proceedings, AO has to ensure compliance of s. 159(2) before any orders are passed; assessment framed against dead person without bringing legal representatives on records was a nullity. [CIT vs. Dalumal Shyamumal (2005) 276 ITR 62 (MP)]

Thus, if ITO is informed about the death of the assessee & his L/Rs’, he must issue notices to L/R & make the assessment in the name of L/R. If he fails to do so and makes the assessment in the name of deceased, then such assessment will be void ab initio. [Late A.Y. Prabhakar vs. ACIT (2007) 12 SOT 1 (Chennai)]

B.3) Notice issued in the name of dead but assessment completed in the name of legal representative without issuing valid notices to legal representatives:

Hon’ble Delhi High Court in Braham Prakash vs ITO (2004) 275 ITR 242 has held that if notice u/s 148 of the Act is not served on the original assessee or deemed assessee (i.e. legal heir), then subsequent proceedings against the deemed assessee (i.e. legal heir) were bad in law as there was breach of principles of natural justice as well as mandatory provisions of section 148 of the Act. [Followed in Veena Vij vs. ITO (ITA No. 1299/DEL/2012), wherein, order was passed on the legal heirs on the basis of notice u/s 148 issued in the name deceased.]

Notice u/s 148 was issued in the name of dead and assessment was completed u/s 144 r.w.s. 147 in the names of three legal heirs of the deceased. Assessment was held to be invalid in view of section 2(7) [which defines ‘Assessee’], 2(31) [which defines ‘Person’] r.w.s. 159 of the Act. [ITO vs. Sikandar Lal Jain (2011) 45 SOT 0113 (TM)]
[Followed in Hasmukhbhai k. Barot L/H of Late Kantilal Barot vs. ACIT , ITA No. 441/Ahd/2011, order dt. 13.08.15]

S. 148/ 292BB: Issue of notice in the name of the deceased person renders the assessment order null and void even if the order is passed in the name of the legal heir. The fact that the legal heir attended the proceedings does not make it a curable defect u/s 292BB.Even after coming to know that original assessee had already died, the AO did not issue any notice u/s 148 of the Act or 143(2) of the Act in the name of the legal heir, therefore, the assessment framed by the AO on the basis of the notice issued u/s 148 of the Act in the name of the deceased assessee was invalid. [ITO vs. Late Somnath Malhotra, ITA No. 519/Del/2013, order dt. 02.07.15]

B.4) After issue of notice assessee dies but assessment/reassessment completed in the name of some of the legal representatives after issue of fresh notices to them:
B.5) Notice issued in the name of dead and assessment / reassessment completed in the name of some of the legal representatives after issue of fresh valid notices to them:

In the above context, as far as issue of notices u/s 142(1) or u/s 143(2) is concerned, Supreme Court in CIT vs. Jayprakash Singh (1996) 219 ITR 737 (SC) clarified as follows:

“When notices u/s 142(1) & 143(2) were issued to one of the Legal representatives ‘J’, he did not raise an objection before the ITO that unless and until notices to all the other legal representatives are sent, assessment orders cannot be made. He raised this question for the first time in the appeals preferred by him before the CIT(A) and thereafter before the Tribunal. Further, no other legal representative of deceased has come forward with such a plea.

Assessments made on the basis of return signed & filed by only one of the legal representatives (disclosing the total income received by the deceased) cannot be said to be null and void on the ground that notices were not sent to other legal representatives. An omission to serve or any defect in the service of notices provided by procedural provisions does not efface or erase the liability to pay tax where such liability is created by distinct substantive provisions (charging sections). Any such omission or defect may render the order made irregular—depending upon the nature of the provision not complied with—but certainly not void or illegal. [Followed in Shahid Atiq vs. CIT (2006) 152 taxman 71 (Del.)]

Thus, an assessment proceeding can not be held invalid or void by merely pointing out the fact that all the legal representatives in a case where there are many, were not present before the ITO because no notices were issued to all of them. In case where AO fails to take note of facts placed before it showing that there are other persons besides the person proceeded against who are also legal representatives, then it can only be said that proceedings are defective/irregular. In such eventuality, court may set aside the proceedings and order the fresh assessment in accordance with law.

However, as far as reassessment u/s 148 is concerned, service of notice on one of the legal representatives is not adequate and it is essential for the revenue to serve separate notices on each of the legal representatives in order to make a valid reassessment, failing which the action for reassessment would be void, as held by ITAT, Jodhpur in case of ACIT vs. Late Mangilal (infra).

Reassessment was null and void where notice u/s 148 was not served on all the legal heirs of deceased assessee, but only on some of the legal heirs. The defect of not sending notices to all the legal representatives is not curable under this Act. [ACIT vs. Late Mangilal through L/H Badri Prasad Bhatia [(2004) 23 CCH 0010 JodhTrib]

It is important to note that, while deciding as above in favour of assessee, Hon’ble ITAT distinguished the judgement of Hon’ble Supreme Court in case of CIT vs. Jayprakash Singh (supra) and observed that, said decision was rendered in the context of notices sent under the provisions of ss. 142(1) and 143(2) of the Act. The issue of notice under ss. 142(1) and 142(2) is entirely on the different footing. The processing of the returns under s. 143(3) simpliciter and the one processed under s. 148 of the Act after assuming jurisdiction to initiate reassessment proceedings are totally different. The assumption of jurisdiction is a very important step under the Act, which is based on certain happenings; whereas the proceedings under s. 142(1)/143(2) are quite procedural and ordinary. The proceedings under s. 147/148 of the Act affect the rights of the assessee. Even otherwise, if the irregularity of not sending notices u/s 148 to all the leagal heirs is to be cured as on today, the AO is not competent to issue notice under s. 148 to other legal heirs because of the limitation provisions of s. 149 of the Act. 

[Appeal of the revenue against the above judgement of ITAT, Jodhpur, which was dismissed initially, is recalled by Hon’ble Rajasthan High Court as CIT vs. Late. Shri. MangiLal Income Tax Appeal No. 66/2004 by allowing review petition No. 65/2011 and is pending as on date]

Notices for reassessment sent to all the daughters of deceased but not to his mother or to the trustees. Assessing Officer has not made proper enquiries before treating the daughters as legal representatives, accordingly, owing to confusion as regards valid legal representatives, matter remitted back to High Court for reconsideration. [ITO & Anr. vs. Maramreddy Sulochanamma (1971) 79 ITR 1 (SC)]

C) Miscellaneous:

C.1) Section 159 and assessees’ other than Individuals: HUF, company, firm etc. is a legal entity & not being a natural living person, cannot die. Such artificial persons cannot have a natural death and therefore in case the properties held by such legal entities, there can be no question of death or any question of applicability of section 159/168.

[The language of section 159 evidently only applies to natural persons and cannot be extended through a legal fiction, to the dissolution of companies. Once it is found that assessment is framed in the name of non-existing entity it does not remain a procedural irregularity of the nature which could be cured by invoking the provisions of section 292B. Participation by the amalgamated company in assessment proceedings would not cure the defect because "there can be no estoppel against law". Held, dismissing the appeals, that the orders of assessment were invalid. (AY. 2003-2004 to 2008-2009) [CIT .v. Dimension Apparels P. Ltd. (2015) 370 ITR 288 (Delhi)(HC)]

C.2.1) Filing of appeal after death of assessee: since every L/R is personally liable to extent of interest in estate inherited by him and he being deemed assessee under section 159(3), is to be treated as an aggrieved assessee as contemplated under section 246A and, therefore, entitled to file appeal and accordingly, merely because other two L/Rs’ did not prefer appeal for reasons known to them, L/R who filed appeal could not be deprived of her right to protect her interest in property by preferring appeal before Commissioner (Appeals). [Sudha Chowgule vs. DCIT [2011] 10 taxmann.com 101 (Mum.)]

 

C.2.2) During pendancy of appeal proceedings, appellant died and CIT(Appeal) passed order in the name of deceased appellant:
During course of appeal proceedings before Commissioner (Appeals), assessee breathed his last breath. Said appeal was dismissed by Commissioner (Appeals). It was found that deceased had appointed appellant as his executor, and, thus, appellant was competent enough to represent estate of deceased. Further, the court held that since order was passed by Commissioner (Appeals) in name of dead person, matter was to be remanded to files of Commissioner (Appeals) for readjudication. [Ramesh M. Mehta .v. ACIT (2014) 41 taxmann.com 76 (Mad.)(HC)]

C.3) Admission by deceased assessee in search proceedings: How far binding on legal representative:
The legal representatives of the deceased assessee is a trust and not an individual. The trust being a beneficiary can, therefore, dispute only so far as the unadmitted portions are concerned and cannot contest the admitted amounts. However, they can still contend that even though admissions have been made, they are contrary to law. That in law, there is no liability to pay tax. However, that is not the case. The retractions are sought to be made not on questions of law, but on facts. On facts, there have bee admissions by the late Shri H.R. Basavaraj. It was he alone who was best suited to state on facts. The legal representatives of the deceased is a trust. It was, therefore not possible for the trust to retract statements of fact made by the deceased assessee. A retraction can be made only on error or law and not on facts. [CIT vs. Late H. Basavraj (2012) 251 CTR 300 (Kar.)]

C.4) Penalty: Section 159 and initiation/ levy of penalty:
Penalty proceedings pending against the deceased may be continued against the legal representatives. In view of clause (a) of section 159(2), pending the penalty proceedings, if assessee dies, the same can be continued by impleading the legal representative of the deceased.

Alert: During pendency of penalty proceedings assessee died and, thereupon AO, without issuing a fresh notice to legal heir of deceased-assessee passed a penalty order. The Tribunal held that the order so passed was not sustainable being violative of principles of natural justice. [Jai Narain Upadhyay v. ACIT (2012) 137 ITD 241 (TM)(Luck.), Chandrakant A. Gandhi vs. ACIT (2013) 40 taxmann.com 432 (Ahd.)]

There is no prohibition in law against initiation and levy of penalty on legal representatives. Since assessee was liable to pay tax and be treated as deemed assessee after death of her father, under provisions of section 159 there was nothing wrong in initiating penalty proceedings against assessee (i.e. L/H) after death of her father. [Tapati Pal vs. CIT (2002) 124 TAXMAN 123 (Cal.)]

In Late Iqbal Hussain vs. ITO (2007) 111 TTJ 717 (ALL) Hon’ble ITAT, Allahabad, after considering all the juducial precedents available on the subject matter opined that, no definition of word "proceeding" has been given in section 159. Further, in section 159(2) the word "proceeding" has not been qualified. Therefore it cannot be confined to mean the proceeding for assessment only. It will cover the proceeding for penalty also. The words "any sum" used in section 159 refer to tax, interest and penalty and not merely tax. Accordingly, ITAT confirmed that, penalty can be levied on LRs’ in case same was initiated while assessee was alive or can be initiated / levied on LRs’ after death of assessee, after bringing all the LRs’ on record.

Contrary View- In favour of assessee:

No Penalty Proceedings can be initiated against deceased assessee. It is for the purpose of assessment of the deceased assessee and not for penalty purposes, that any proceedings which could have been taken against the deceased, had he survived, may be taken against the legal representatives. It is amply clear that proceedings under section 159(2)(b) do not include penalty proceedings. [ITO vs. V. P. Sharma [2006] 154 Taxman 34 (ITAT, Delhi)]

Penalty under s. 271(1)(c) are not criminal proceedings as provisions of CrPC are not applicable and it is not necessary to prove mens rea in these proceedings. Accordingly, even penalty can be initiated/levied against the legal representatives. However, as per settled principles, if the assessee can prove his bona fides i.e. where the offence was committed under a bona fide belief, no penalty can be levied on him. Now question arises, in case return was filed by deceased before his death, how the LRs’ of the deceased can be called upon to prove the bona fides of the deceased?

C.5) Recovery:
Recovery proceedings already pending against the deceased at the time of the death, can be continued in the hands of legal representative as per rule 85 of schedule II of the Income Tax Act, 1961 [except arrest and detention]. Again, however, the liability of such representative is limited only to the extent to which the estate left by the deceased is capable of meeting the tax liability.

The AO issued notice on the deceased. One of the legal representatives participated in the proceedings and the AO passed assessment order. All the four legal representatives had inherited property of the deceased. Can tax liability imposed upon the deceased assessee be recovered from the rest of the legal representatives, who inherited the property, but did not participate in the proceeding, because they had not received any notice? Answer is ‘NO’!! Even section 292BB will not help the AO in this situation.

C.6) Prosecution:
A legal representative is not liable to the prosecution and offences falling under chapter XXII of the Act.

Conclusion:
No doubt, the income received or accruing to, the deceased person till the date of his death shall, undoubtedly, be taxed in the hands of legal representative of the deceased, but, subject to the procedural compliance by the AO as explained by the judiciary as above in view of section 159 and the overall scheme of the Act.

Further, as held by Hon’ble Supreme Court in the case of Kapurchand Shrimal Vs. CIT (131 ITR 451), an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose direction the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by nature. Accordingly, the courts, may, instruct (in such irregular/defective or even invalid assessments) the AO to initiate fresh proceedings or to continue the proceedings from where the irregularities intervened, if otherwise permissible under the law. [Veena Vij vs. ITO (ITA No. 1299/DEL/2012)]