1. This appeal is directed against the order of the Commissioner (Appeals) holding that the income arising from a legacy before distribution was not taxable in the hands of the legatee-assessee.
2. The assessee is the widow of M. Parianna Pillai who died on 3-4-1958. Between 6-2-1956 and 5-1-1957, he had taken out six life insurance policies assuring a sum of Rs. 2,50,000 on his life. In the policies, he nominated his wife, Smt. Saraswathi Ammal, under Section 39 of the Insurance Act, 1938. On 16-2-1958, he made a will bequeathing the life insurance amount and company shares absolutely to his wife. By the same will, he bequeathed the other immovable and movable properties to his wife and all his sons and daughters numbering eight absolutely and equally and stated that if there are any liabilities, his wife and children shall discharge the same with the help of his assets. The will also stated that his wife shall administer his estate after his death.
After he died on 3-4-1958, his widow, i.e., the assessee claimed the insurance amount but the LIC did not immediately settle the claim.
Therefore, she filed a suit O.S. No. 53 of 1961 in the Sub-Court of Salem on 3-4-1961. The suit was decreed on 25-4-1968 directing the LIC to pay a sum of Rs. 2,50,000 with interest at 6 per cent per annum from the date of the suit and with costs as well. The LIC filed an appeal to the High Court on 12-6-1969 and applied for stay of the execution of the decree. On the direction of the High Court, the LIC deposited a sum of Rs. 3,97,811 consisting of principal of Rs. 2,50,000, costs at Rs. 23,561 and interest of Rs. 1,24,250 on 12-7-1969 and this amount was directed to be invested in the Government securities. On 30-7-1974, the LIC and the assessee filed a memo of compromise settling the suit claim at Rs. 3,95,870. In making the assessment for the assessment year 1975-76, corresponding to the previous year ended 31-3-1975, the ITO was of the view that the interest portion out of the sum of Rs. 3,95,870 which came to Rs. 1,45,870 represented income accruing to the assessee and was includible in the total income of that assessment year because this amount was received by the assessee in the previous year.
On appeal, the Commissioner (Appeals) found that the interest accrued only to the estate and could not be taxed in the hands of the legatee-assessee until its distribution. He was of the view that the receipt by the assessee was only a receipt on distribution of the estate and could not be treated as income includible in the total income.
3. The revenue is in appeal to contend that since the assessee being a legatee was entitled to the principal amount and having in fact received the interest accruing thereon, there was no justification for excluding such income from her total income. But, this contention of the revenue overlooks both the general law with regard to the testamentary succession as well as the clear provisions of the Income-tax Act, 1961 ('the Act') relating to the assessment of income arising in the course of testamentary succession. We must first notice that under Section 39 of the Insurance Act, where a nomination has been made for the purpose of receiving the amount assured, the suit for recovery of that amount should be filed only by such nominee. But that does not mean that the amount is receivable by the nominee in his own account but it is received only on behalf of the estate of the deceased as the nominee is accountable to the heirs of the deceased since the nomination does not by itself amount to a will. In this case, therefore, the assessee had filed a suit for recovery of the amount only in the capacity of a nominee and is bound to account for the receipt of the amounts to the estate of the deceased of which she was the administrator under the will. Under Section 211 of the Indian Succession Act, 1925, all the property of the deceased person vests only in the administrator. Under Chapter VII of the Indian Succession Act, the administrator has to take an inventory and account of the properties of the deceased, pay off the debts and distribute the legacies. Under Section 332 of the Indian Succession Act, the assent of the administrator is necessary to complete a legatee's title to his legacy. Under Section 349 of the Indian Succession Act, the legatee of a specific legacy is entitled to the clear produce thereof, if any, from the testator's death and, hence, it is possible to say that the interest accruing on the life insurance moneys accrued to the benefit of the legatee-assessee. It may follow that when the administrator gives his assent to the specific legacy, the title of the legatee relates back to the date of death and the income arising from after the death and before the assent belongs to the legatee. But, under Section 168 of the Act, the income of the estate of the deceased person is chargeable to tax only in the hands of the executor until the date of the complete distribution to the beneficiaries of the estate.
Sub-section (4) provides that in computing the total income of any previous year, any income of the estate distributed to a specific legatee shall be excluded but the income so excluded shall be included in the total income of that specific legatee. Therefore, the income-tax itself specifically provides that until the income is actually distributed, it shall not be assessed in the hands of the legatee, but shall be assessed only in the hands of the executor which is defined to include an administrator.
4. It was argued on behalf of the revenue that on the facts of this case, since the executor was also the sole beneficiary, it must be inferred that the very receipt of the amount by the assessee in pursuance of the decree of compromise amounted to a distribution and, therefore, the income should be assessed in the hands of the lagatee-assessee. But, the mere fact that the executor is also the sole beneficiary is not sufficient to presume that there was an assent by the executor for the legacy. In the case of the IRC v. Wahl 17 TC 744, the House of Lords pointed out that the question whether an assessee had appropriated the funds for his own use as a beneficiary was a question of fact and has to be decided on the evidence available. In that case, the assessee who was the sole surviving beneficiary under his father's intestacy recovered certain sums and received the incomes therefrom and used the greater part of it for his personal expenses investing the surplus in his own name. Yet, it was held that there was no sufficient evidence that the funds in question had been appropriated to his own use and, therefore, the income did not form part of his assessable income. In the present case, except for the fact that the assessee had to file a suit to recover the money and received it from the LIC, there is no other evidence to show that the assessee as an executor had assented to the legacy of the life insurance policies in her own favour by appropriating it unconditionally for her own use. On the other hand, the terms of the will suggests that even though she could recover the money as a nominee under the Insurance Act, she was bound as an administrator to see that all the debts are paid which were charged on the life insurance amount also before she could appropriate the residue to herself as a specific legatee. We, therefore, find that though the amount was received by the assessee in the previous year, there is no evidence to come to the unequivocal conclusion that she received the amount as a legatee and the receipt must be taken to be only in the capacity of an administrator. In view of this finding of fact, the proviso to Section 168 is attracted and insofar as this income was not distributed or applied to the benefit of specific legatee during the previous year, it could not be assessed in the hands of that specific legatee. Therefore, the order of the Commissioner (Appeals) excluding this amount from the total income of the assessee as a specific legatee must be upheld. The appeal is dismissed.
5. The assessee has filed a memorandum of cross-objection to contend that the share of loss from a business assessed in the status of an AOP consisting of herself and other heirs of her deceased husband should be taken into account in computing her total income. This claim was not entertained by the Commissioner because he found that the assessment has been made in pursuance of a direction given under Section 263 of the Act to consider the taxability of the insurance amount and a matter which has become final in the earlier assessment, could not be agitated in the assessment made in pursuance of such directions confined to that question. We agree with this reasoning of the Commissioner (Appeals) as we find that the question whether the assessee was entitled to set off the loss has become final by the earlier assessment order which has been rectified to leave out such loss with the consent of the assessee.
In the circumstances, we confirm the order of the Commissioner (Appeals) on this aspect of the matter.