DIXIT C.J. - This is a reference under section 56(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), at the instance of the Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara. The question which has been propounded by the Tribunal for our decision is :
'Whether the sum of Rs. 24,341 was liable to tax under section 41(1) of the Income-tax Act, 1961 ?'
The material facts are that one Kanhaiyalal used to carry on business as selling agent of Messrs. Mohanlal Hargovinddas of Jabalpur under the name and style of 'Messrs. Hukumchand Mohanlal'. On or about 17th February, 1960, Kanhaiyalal died. His widow, Hira Laxmi, succeeded to the business of selling agent carried on by her husband and continued it under the same name and style, namely, 'Messrs. Hukumchand Mohanlal'. The firm of Mohanlal Hargovinddas had recovered from Kanhaiyalal an amount of Rs. 24,341 as sales tax for transactions effected during the period from 26th January, 1950, to 31st March 1951. Kanhaiyalal was allowed deduction on account of this amount of sales tax paid by him in the relevant assessment year. Subsequently, when the Assistant Commissioner of Sales Tax, Jabalpur, held in an appeal filed by Messrs. Mohanlal Hargovinddas that the sales effected during the period from 26th January, 1950, to 31st March, 1951, were not liable to sales tax and the Government refunded to the firm of Mohanlal Hargovinddas the amount of Rs. 24,341, the firm of Mohanlal Hargovinddas in its turn paid back to the assessee-firm, Messrs. Hukumchand Mohanlal, the sum of Rs. 24,341 by a draft. This draft was received by the assessee on 9th November, 1961, that is, after the death of Kanhaiyalal, and in the accounting year beginning from 1st April, 1961, and ending on 31st March, 1962.
The Income-tax Officer, Ujjain, taxed this amount in assessment proceedings against the assessee for the assessment year 1962-63. He did so under section 41(1) of the Act rejecting the contention of the assessee, Hira Laxmi, that the amount of Rs. 24,341 received by draft on 9th November, 1961, was the income of her deceased husband, Kanhaiyalal, and not her own income. The decision of the Income-tax Officer was upheld in appeal by the Appellate Assistant Commissioner. The assessee then preferred a second appeal before the Income-tax Tribunal, which was allowed. The Tribunal upheld the contention advanced on behalf of the assessee that it was her husband and not she who had obtained an allowance or deduction in respect of Rs. 24,341 in assessment proceedings against him and, therefore, section 41(1) of the Act did not in terms apply. The Tribunal has not given any elaborate reasons for allowing the assessees appeal. It first stated the argument of counsel appearing for the assessee thus :
The principal point made by Shri S. P. Mehta, who appeared for the assessee before us was based on the wording of section 41(1) of the 1961 Act, which corresponds to section 10(2A) of the 1922 Act. He contended that these section create an artificial liability of the assessee and that, therefore, they have to be construed strictly. He said that, but for the these sections, the amount of Rs. 24,341 in the present case would not have been the income of the assessee. If, therefore, section 41(1) is to be applied, the chargeability arises if the allowance of deduction had been made in an earlier assessment in respect of expenditure or trading liability incurred by the same assessee. Shri Mehta contended that the allowance or deduction had been made in respect of the expenditure or liability incurred by the assessees husband in the latters assessment and that, therefore, section 41(1) did not apply in terms. He conceded that if the assessees husband had been alive and were to be assessed in respect of the business in the assessment year under appeal, the inclusion of the amount in question in his total income would have been correct. His objection was as regards the present assessee being held chargeable under section 41(1).'
Then the Tribunal stated its conclusion after simply observing :
'We are inclined to agree with Shri Mehtas said argument. In the circumstances, the addition made must be deleted.'
On the wording of the question placed before us for decision in this reference, the question whether the amount of Rs. 24,341 can be brought to tax in the assessment proceedings for the year 1962-63 against the assessee, Hira Laxmi, has to be decided with reference to section 41(1) of the Act. That provision is as follows :
'41. (1) Profits chargeable to tax. - Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.'
Under the general law, once a trading liability has been allowed as a business expenditure and if this liability is remitted in any subsequent year., the amount remitted cannot be taxed as the income of the year of remission : nor can be the account for the year in which the liability was allowed be reopened and adjusted. This is clear from the decision of the House of Lords in British Mexican Petroleum Co. Ltd. v. Jackson. Section 41(1) supersedes this principle, as also section 10(2A) of the 1922 Act did, and lays down that where an allowance is granted in any year in respect of any loss, expenditure or trading liability and subsequently during any previous year the assessee receives, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure, or the assessee is benefited by the remission or cessation of the trading liability, the amount received or the amount of the liability which is extinguished is chargeable as business profits (British Mexican Petroleum Co. Ltd. v. Jackson of that previous year. It is clear from the wording of section 41(1) that the assessee made liable thereunder must be the same to whom an allowance had been granted earlier. There can be no doubt that if Kanhaiyalal had been alive and had himself received the amount of Rs. 24,341 during his lifetime, he would have been liable to pay tax on that amount under section 41(1). The question is whether when the amount of Rs. 24,341 was received by Kanhaiyalals widow after she succeeded to the business of her husband on his death, it is taxable in her hands under section 41(1).
In answering this question, no assistance is available by the definition of the word 'assessee' given in section 2(7) of the Act. According to that definition, 'assessee' means a person by whom income-tax or income-tax or any other sum of money is payable under this Act, and includes -
'(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision of this Act.'
Even if the word 'assessee' as used in section 41(1) for the second time is taken to have the meaning given by the aforesaid definition, the question would still remain whether the widow of Kanhaiyalal is a person by whom tax is payable under section 41(1) on the amount of Rs. 24,341 received by her. There is no provision in the Act deeming a successor in business or the legal representative of an assessee to whom an allowance had already been granted as an assessee for taxability under section 41(1) of the amount remitted and received by the successor or the legal representative. Section 170(2) of the Act, which deals with an assessment on the successor in respect of the income of the predecessor when the predecessor cannot be 'found', that is to say, when he is dead or has disappeared, has no applicability here. Under that provision, the assessment can be made on the successor only in respect of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year. Here, the amount of Rs. 24,341 was not received by Kanhaiyalal in the account year in which he died and in which his widow, Hira Laxmi, succeeded to the business. It was received by Hira Laxmi in the account year ending on 31st March, 1962. It cannot, therefore, be urged that Hira Laxmi is liable to pay tax on Rs. 24,341 as successor to the business and, therefore, she is an 'assessee' within the meaning of section 2(7) of the Act.
The liability of a legal representative has been deal with by section 159. The first sub-section of that section lays down :
'Where a person dies, his legal representatives 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.'
It will be seen that under this provision the liability of a legal representative is only for the payment of that sum which 'the deceased would have been liable to pay under the Act if he had not died' and in the like manner and to the same extent as the deceased. A similar provision occurred in section 24B of the Income-tax Act, 1922. In construing that provision the Supreme Court said in Commissioner of Income-tax v. Amarchand N. Shroff and Commissioner of Income-tax v. James Anderson, that section 24B did not authorise the levy of tax on receipts by the legal representative of a deceased person in the year of assessment succeeding the year of account being the previous year in which such persons died; that section 24B extended fictionally the legal personality of a deceased person only for the duration of the previous year alone became assessable to tax in the relevant assessment year, but not the income received in any year subsequent to that previous or accounting year; and that section 24B did not have the effect of supplying the machinery for taxation of income received by a legal representative on behalf of the estate after the expiry of the year in the course of which such person died. Section 159(1) of the Act must also be similarly construed and it must be held that under that provision the amount received by a legal representative of a person cannot be taxed in his hands if it cannot be said to be income which might be deemed by fiction to have been received by the deceased an for which the deceased would have been liable to pay tax if he had not died. On this construction, it is plain that the amount of Rs. 24,341, which was received by Kanhaiyalals widow not in the previous year in which Kanhaiyalal died but subsequently in the accounting year ending on 31st March, 1962, cannot be taxed in the hands of Hira Laxmi as the legal representative of her deceased husband, Kanhaiyalal.
Shri Adhikari, learned counsel appearing for the department, relying on sub-section (3) of section 159 urged that the amount of Rs. 24,341 could be taxed in the hands of Hira Laxmi under section 41(1). We are unable to accept this contention. Sub-section (3) of section 159 no doubt says that 'the legal representative of the deceased shall, for the purposed of this Act, be deemed to be an assessee.' But this provision read with section 2(7) defining the term 'assessee' is not sufficient by itself to fasten liability on Hira Laxmi under section 41(1). Unless there is some provision in the Act providing that the amount remitted and received by the legal representative of an assessee to whom an allowance had already been granted shall be deemed to have been received by the deceased for the purpose of assessment under section 41(1), no assessment under section 41(1) can be made on the legal representative for the remitted amount received after the death of the assessee to whom the allowance had been granted. If sub-section (3) of section 159 by itself had been sufficient to impose liability on the legal representative for payment of any sum which the deceased would have been liable to pay if he had not died, then there would have been no necessity of expressly providing by sub-section (1) for the liability of the legal representative. In our opinion, sub-section (3) of section 159 means no more than this that where the legal representative of a deceased is liable to pay under the Act any sum which the deceased would have been liable to pay if he had not died, then the legal representative would be deemed to be an 'assessee' for the purposes of the Act.
It was also urged by learned counsel for the revenue that under the Act it is the person who receives the income, profits and gains who is liable to pay tax on the amount; that the amount for which allowance was given to Kanhaiyalal was a part of the profit of the business, and, therefore, the amount remitted and received by Hira Laxmi represented profits of the business; and that, consequently, the amount of Rs. 24,341 was liable to tax as the personal income of Hira Laxmi. In our opinion the question whether the amount of Rs. 24,341 is liable to tax as the personal income of Hira Laxmi does not arise in the present case as the only question placed before us is whether that amount is assessable in the hands of Hira Laxmi in the manner in which the department sought to assess it under section 41(1). We, therefore, decline to express any opinion on the question whether the amount of Rs. 24,341 received by Hira Laxmi can be taxed as personal income.
For these reasons, our answer to the question referred to us is that the sum of Rs. 24,341 received by Hira Laxmi is not liable to tax under section 41(1) of the Income-tax Act, 1961. The assessee shall have the costs of this reference. Counsels fee is fixed at Rs. 200.