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Commissioner of Income-tax Vs. S. Kumaraswamy Reddiar Sons - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberI.T.R. No. 112 of 1979
Judge
Reported in[1985]154ITR724(Ker)
ActsIncome Tax Act, 1961 - Sections 40, 159 and 220(2)
AppellantCommissioner of Income-tax
RespondentS. Kumaraswamy Reddiar Sons
Appellant Advocate P.K.R. Menon, Adv.
Respondent Advocate G. Sivarajan, Adv.
Excerpt:
- .....is one of the surviving members of that family, entered into a settlement, in his capacity as the legal representative of the deceased, with the income-tax department, as evidenced by annexure b dated february 2, 1972. that document shows that there was a dispute as to the extent of the income earned by the business of the deceased during the years 1957-58 to 1966-67. by the settlement dated february 2, 1972, the income of the business was determined at .rs. 12,83,621. on this basis, the income-tax was payable by the legal representative. however, on account of the delay which occurred in the payment of the tax, as demanded under section 156 read with section 220(1), the ito levied interest in the total sum of rs. 90,474. this being the liability of the estate of the deceased, it was.....
Judgment:

Kochu Thommen, J.

1. Radhakrishnan and Muthukrishnan are the sons of the late Kumaraswamy Reddiar, who died on July 10, 1968, leaving a will dated September 22, 1967, under which his properties, including a business, were bequeathed to the HUF of which he was the karta. The relevant portion of the will reads :

'.....Myself and my sons, K. Radhakrishnan and K. Muthukrishnan, have constituted a joint Hindu undivided family. For the benefit of the family I hereby throw into the common hotchpot all my properties including the business into the joint Hindu undivided family mentioned earlier and I am managing the same.....'

2. The business of the deceased which was held by him in his individual capacity was thus bequeathed to the HUF.

3. Radhakrishnan, who is one of the surviving members of that family, entered into a settlement, in his capacity as the legal representative of the deceased, with the Income-tax Department, as evidenced by annexure B dated February 2, 1972. That document shows that there was a dispute as to the extent of the income earned by the business of the deceased during the years 1957-58 to 1966-67. By the settlement dated February 2, 1972, the income of the business was determined at .Rs. 12,83,621. On this basis, the income-tax was payable by the legal representative. However, on account of the delay which occurred in the payment of the tax, as demanded under Section 156 read with Section 220(1), the ITO levied interest in the total sum of Rs. 90,474. This being the liability of the estate of the deceased, it was paid by Radhakrishnan as the legal representative in due course.

4. On March 12, 1972, a partition was effected between the two sons of the deceased as a result of which Radhakrishnan, as the karta of his own family, took over the business with all its assets and liabilities and began to run it in the name and style of M/s. S. Kumaraswamy Reddiar & Sons, Alleppey. It was in respect of the income earned by this business that the assessment in question was made for the year 1974-75. The assessee claimed a deduction of a sum of Rs. 90,474 on the ground that it was a liability which the assessee had incurred at the time of taking over of the business in terms of the partition effected between the two sons of Kumaraswamy Reddiar. It was contended that the interest paid, owing to the delayed payment of the tax due on the income of the business of the deceased during his life, was an allowable deduction in computing the business income of the HUF of which Radhakrishnan is the karta.

5. The ITO disallowed the claim stating that it was not permissible in view of Section 40(a)(ii) of the I.T. Act, 1961. This order was confirmed in appeal by the AAC. However, on further appeal, the Tribunal held that the assessee was entitled to claim the amount as an admissible deduction to the extent that it related to the year in question. The amount thus allowed was Rs. 50,000.

6. At the instance of the Revenue, the following question has been referred to us:

'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that, the assessee is entitled to the deduction of interest levied under Section 220(2) of the Income-tax Act in respect of the tax arrears of the predecessor-owner of the business ?'

7. The Tribunal has, in our view, lost sight of the fact that the assessment in question was not on the legal representative of the late Kumaraswamy Reddiar, but on another HUF of which the legal representative happens to be the karta. Radhakrishnan is at once a legal representative of the deceased and a legatee of a devisee under his will in his capacity as one of the surviving members of the original HUF.

8. As the legal representative, it was his personal obligation in terms of Section 159 to discharge the obligations of the estate of the deceased. It was in such capacity that he entered into a settlement with the Income-tax Department as regards the total income earned by the business of the deceased during his life. It was also his responsibility in such capacity to discharge the liability in respect of, or arising from, the taxes payable on such income.

9. The assets of the deceased which are capable of distribution are those which remain after the liabilities of the estate are discharged. It is only such residuary portion of the assets that can be recognised to have come into the hands of the successors. By virtue of the subsequent partition between the two brothers, Radhakrishnan as the karta of his HUF succeeded to the business in respect of whose income for the relevant assessment year tax has been levied on the family (M/s. Kumaraswamy Reddiar and Sons--the HUF).

10. The payment of interest in the sum of Rs. 90,474 made by Radhakrishnan as the legal representative is an item which is totally irrelevant to the assessment in question. It was not an expenditure laid out or expended for the purpose of the business which was transferred to the family of Radhakrishnan under the partition between himself and his brother. The assessment being on the family of Radhakrishnan, which is a different entity, it has no nexus whatever with the liability discharged by Radhakrishnan as the legal representative of the deceased. The amount paid by the legal representative as interest is inadmissible as a deduction in the proceedings in question not merely because of the ban under Section 40(a)(iii), but fundamentally because it is unconnected with the business of the assessee and is, therefore, irrelevant to a claim by the assessee under Section 37. In any case an amount paid under a statutory obligation cannot be taken into account in computing the business income. [See Indian Aluminium Co. Ltd. v. CIT : [1971]79ITR514(SC) ]. The very fact that Rs. 40,474 has been disallowed out of Rs. 90,474 claimed as an expenditure of the year in terms of Section 37 and the further fact that the said disallowance has not been challenged by the assessee would indicate that the payment of Rs. 90,474 was made by or on behalf of the legal representative and not by the assessee. The alternative contention urged on behalf of the assessee that the total sum of Rs. 90,474 was paid, under coercion, in the circumstances, does not arise for consideration. There is in any case nothing on record to support that contention.

11. The amount demanded and paid related to the liability of the deceased. The liability was discharged by the legal representative. It has no relevance to the assessment in question. The Tribunal, in our view, erred in law in holding to the contrary.

12. In the circumstances, we answer the question referred to us in the negative, that is, in favour of the Revenue and against the assessee. We direct the parties to bear their respective costs in this tax referred case.

13. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.


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