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Commissioner of Income-tax Vs. Estate of Late A.V. Viswanatha Sastri (by the Executor) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 283 of 1975 (Reference No. 241 of 1975)
Judge
Reported in[1980]121ITR270(Mad)
ActsIncome Tax Act, 1961 - Sections 168 and 176(4)
AppellantCommissioner of Income-tax
RespondentEstate of Late A.V. Viswanatha Sastri (by the Executor)
Appellant AdvocateA.N. Rangaswami and ;Nalini Chidambaram, Advs.
Respondent AdvocateS. Padmanabhan, Adv. and ;N.V. Balasubramanian and B. Chitra
Cases ReferredIn Nalinikant Ambalal Mody v. S.A.L. Narayan Row
Excerpt:
.....176 (4) of income tax act, 1961 - x appointed his son y as executor of will - y filed return of income as executor of will - failed to include professional fees of x received by y while making assessment - whether arrears of professional fees of x received by y can be taxed in hands of y as executor - under section 176 (4) where any profession is discontinued as result of cessation of profession or business by either death or retirement any sum received after discontinuance shall deemed to income of recipient - under section 168 income of estate of deceased person alone is chargeable to income tax in hands of executor and not at hands of deceased - arrears of professional fees of x realized by y cannot be clubbed with income from estate of x and bought to tax at hands of executor..........as the assessee, were not offered for assessment:assessment year.assessment year.arrears of legal feesreceived rs.1967-6846,4921968-6989,6001969-7011,3601970-713,2002. it was claimed before the ito that the aforesaid fees due to the deceased received after his death by the legal representative was not liable to be taxed in his hands and reliance was placed on the decisions of the supreme court in cit v. amarchand n. shroff : [1963]48itr59(sc) and cit v. james anderson : [1964]51itr345(sc) . it was further urged before the ito that the liability of the executor was limited to the income received from the date of death of the deceased to the end of previous year, that there was no appropriate machinery to implement the provisions of section 176 of the i.t. act, 1961, that the provisions.....
Judgment:

Ramanujam, J.

1. Sri A.V. Viswanatha Sastri, a former judge of thiscourt and later a senior advocate practising in the Supreme Court, died onJanuary 4, 1966. Two days prior to his death, he executed a will bywhich he appointed his son, Sri V. Ratnam, as an executor of the will.For the assessment years 1967-68, 1968-69 and 1970-71, returns of incomewere filed by Sri V. Ratnam in his capacity as executor of the estate of thedeceased offering for assessment the income from properties, dividends andinterest due to the said estate. However, the following amounts being theprofessional fees payable to the deceased and received by the executor,hereinafter referred to as the assessee, were not offered for assessment:Assessment year.

Assessment year.Arrears of legal feesreceived

Rs.1967-6846,4921968-6989,6001969-7011,3601970-713,200

2. It was claimed before the ITO that the aforesaid fees due to the deceased received after his death by the legal representative was not liable to be taxed in his hands and reliance was placed on the decisions of the Supreme Court in CIT v. Amarchand N. Shroff : [1963]48ITR59(SC) and CIT v. James Anderson : [1964]51ITR345(SC) . It was further urged before the ITO that the liability of the executor was limited to the income received from the date of death of the deceased to the end of previous year, that there was no appropriate machinery to implement the provisions of Section 176 of the I.T. Act, 1961, that the provisions of the said section were, at any rate, discriminatory in so far as it imposed liability to professional income only and not business income and that, in any event, even if the professional income received after the death of the deceased was to be assessed, it should be assessed separately and not clubbed with the other income earned by the executor. The ITO was of the view that the aforesaid decisions were not applicable to the instant case as they were rendered under the provisions of the Indian I.T. Act, 1922, and that Section 176(4) of the I.T. Act, 1961, specifically provides for the taxability of the professional income received after discontinuance of the profession. He also rejected the contention that there was no proper machinery to implement the provisions of Section 176 and that in any event it was discriminatory. In this view, the ITO included the legal fees due to the deceased and received by the executor under the head, 'Professional income' and brought it to charge.

3. On appeal by the executor before the AAC all the contentions which were urged before the ITO were reiterated. The AAC also held that the I.T. Act, 1961, has brought about a change from the 1922 Act by introducing a special provision, viz., Section 176(4) to bring to charge any sum received after the discontinuance of the profession due to the death or otherwise of the person who earned the income, thus superseding the Supreme Court's decision in CIT v. Amarchand N. Shroff : [1963]48ITR59(SC) and CIT v. fames Anderson : [1964]51ITR345(SC) . He also held that under Section 168 of the I.T. Act, the income of the estate of the deceased person should be charged to tax in the hands of the executor in this case and that the executor having collected all fees due to the deceased, the ITO was justified in clubbing the arrears of professional receipt with the other income earned by the executor from the estate of the deceased.

4. Aggrieved by the order of the AAC, the assessee went before the Income-tax Appellate Tribunal. It was urged by the assessee before the Tribunal that the deceased was maintaining accounts on cash basis, that though the arrears of professional fees received by the executor are taxable as deemed income in view of Section 176(4) it could be taxed only in the hands of the recipient and not in the hands of the executor, that though the executor as well as the recipient in this case happen to be the same person it doesnot make the receipt of the professional fees as one received by the executor and that therefore the assessments made on the executor on the arrears of fees received by the legal representative is in violation of Section 176(5) and that under Section 168 of the I.T. Act, only the income of the estate of the deceased in the hands of the executor could be taxed.

5. On behalf of the revenue, it was contended that arrears of professional income due to the deceased constitute the income of the estate within the meaning of Section 168 of the I.T. Act, 1961, and, therefore, the ITO was justified in including the arrears of professional fees received by the executor as the income of the estate for all the assessment years in question. It was also contended by the revenue that under Section 176(4) the professional income received after the death of the person carrying on the profession should be deemed to be the income of the recipient, that the word 'recipient' occurring in Section 176(5) would also include an executor as in this case and that, therefore, there is no legal flaw in assessing the professional income of the deceased in the hands of the executor.

6. After due consideration of the above rival contentions, the Tribunal took the view that the arrears of professional fees in respect of' the profession which the deceased carried on till his death constituted part of his estate and, therefore, it can by no stretch of language be called the income of his estate as contemplated in Section 168 and that as such Section 168 cannot be invoked for bringing to tax the arrears of professional fees due to the deceased as income of the estate. On the applicability of Section 176(4), the Tribunal took the view that as per the fiction created thereunder deeming the professional income of the deceased received after his death to be the income of the recipient in the year of receipt, Sri Ratnam who was the recipient of the professional income which was due to the deceased was assessable thereon and that, therefore, the arrears of professional fees are liable to income-tax under Section 176(4) in the hands of Sri V. Ratnam as recipient and not as executor. In this view, the Tribunal held that the inclusion of arrears of professional fees received in the income of the estate and bringing it to tax under Section 168 was not justified and that the said receipt of arrears of professional fees should, however, be taxed as deemed income in the hands of Sri V. Ratnam as a recipient and not as the executor in the year of receipt.

7. Aggrieved by the order of the Tribunal, the revenue sought a reference under Section 256(1) of the I.T. Act and the following question has been referred for the opinion of this court :

'Whether, on the facts and in the circumstances of the case, it has been rightly held by the Appellate Tribunal that the arrears of professional fees received by Sri V. Ratnam in the capacity of the executor cannot beincluded in the income of the estate of late Sri A.V. Viswanatha Sastri under Section 168 of the Act '

8. It is common ground that Sri A.V. Viswanatha Sastri was carrying on legal profession when he died on January 4, 1966, after executing a will on January 2, 1966, appointing his son, Sri V. Ratnam, to be the executor of the will and that the latter as executor has collected the arrears of professional fees due to the deceased after his death for all the four assessment years in question. On these admitted facts the only point that arises for consideration is under what provision of the I. T. Act, the receipt of professional fees by Sri V. Ratnam is assessable. The ITO proceeded on the basis that the combined operation of the provisions of Sections 168 and 176(4) makes the executor liable in respect of, (1) income of the estate which came into his hands, and (2) any sum received by the executor after the discontinuance of profession by reason of the death of the person concerned or otherwise and that, in this case, the executor having received income of the estate as well as the professional fees due to the deceased both are assessable in his hands and that the professional fees received after the death of the deceased need not be separately assessed in his hands and it is only on that basis that the legal fees received was assessed under the head 'Profession'. The AAC upheld the assessment on the reasoning that such professional fees received should be deemed to be the income of the estate and charged to tax if such sum could have been included in the total income of the deceased had it been received before his death and that as the executor received the arrears of professional fees as also other income from the estate of the deceased, the ITO was justified in clubbing the arrears of professional fees with the other income from the estate of the deceased in the hands of the executor. The Tribunal, however, had taken the view that Section 168 will not apply to the facts of this case as the arrears of professional fees due to the deceased cannot be taken to be the income from the estate of the deceased and that the arrears of income if at all can be assessed only in the hands of Sri V. Ratnam under Section 176(4) separately as the recipient and not as an executor. According to the Tribunal, under Section 168 only the income from the estate could be charged to tax in the hands of the executor and not the arrears of income due to the deceased which automatically becomes part of the estate. As regards the application of Section 176(4), the Tribunal is of the view that it should have operation independent of Section 168 and that under Section 176(4) it is only the recipient who can be taxed in respect of the receipt of professional fees due to the deceased if such receipt would have been included in the total income of the deceased had it been received before his death. The question is whether the Tribunal's view that the receipt of professional income of thedeceased should not be included in the income of the estate of the deceased under Section 168 could be sustained.

9. In CIT v. Amarchand N. Shroff : [1963]48ITR59(SC) , the question arose as to whether the legal representative in receipt of the remuneration payable to the deceased as partner of a firm of solicitors for the work done before his death was assessable in his hands under Section 24B of the Indian I.T. Act, 1922. The Supreme Court took the view 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 subsequent to the year of accounting being the previous year in which the deceased partner died, that the assessee under the Act had ordinarily to be a living person and could not be a dead person because his legal personality ceased on his death, that by Section 24B, the legal personality of a deceased-assessee was extended for the duration of the entire previous year in the course of which he died and, therefore, the income received by him before his death and that received by his legal representatives after his death, but in that previous year, became assessable to income-tax in the relevant assessment year, and that the sanction was enacted by the legislature only to bring to tax after his death income received during his lifetime. It was clearly ruled in that case that any income received during the year subsequent to the accounting year could not be called income by the deceased person and the legal fiction contained in Section 24B will not extend to tax the amounts received by the legal representatives after the relevant accounting year during which the death of the concerned person took place.

10. In CIT v. James Anderson : [1964]51ITR345(SC) , a deceased holding some shares in a bank died in 1945, leaving a will and appointing the bank as executor. The bank obtained probate of the said will and appointed the assessee as its attorney to administer the estate of the deceased in British India and the said attorney obtained letters of administration in India. Under Section 23A of the Indian I.T. Act, 1922, certain amounts were deemed to have been distributed as dividends to the legal representatives. The ITO added the deemed dividends as the income of the administrator. When that assessment was challenged before the Supreme Court it was held that the assessment made on the administrator was not valid in law because, (1) the fictional extension of the legal personality of the deceased for the purpose of assessment under Section 24B of the Indian I.T. Act, 1922, came to an end at the end of the accounting year in which the deceased died and no tax could be levied on the assessee under Section 24B on the dividends deemed to have been distributed after the end of that year ; and (2) there was nothing in the Income-tax Act providing that the income received by a legal representative, which would, but for the death of the deceased, have been received by suchdeceased person was to be regarded for the purpose of assessment as the personal income of the legal representative and, therefore, the deemed dividends could not be assessed to tax as the assessee's personal income. In that case, the Supreme Court observed that Section 24B of the Indian I.T. Act, 1922, extends fictionally the legal personality of a deceased person only for the duration of the previous year in the course of which he died and the income received either by him before his death or by his heirs and representatives after death in that previous year alone becomes 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 the legislature not having made any provision generally for the assessment of income receivable on behalf of the estate of the deceased person the expression 'any tax which would have been payable by him under this Act if he had not died' in Section 24B cannot 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.

11. In Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT : [1966]61ITR428(SC) , an advocate had been elevated to the Bench of the Bombay High Court on first of March, 1957. During the years 1958 and 1959, during no part of which he had carried on any profession, he received certain monies on account of outstanding fees for professional work done by him before his elevation. The question arose, whether the said receipt was chargeable to tax as professional income. The Supreme Court expressed the view that the receipts were not chargeable to tax, that though the receipts were outstanding dues for professional work done they cannot be brought to tax under Section 10 as the profession had not been carried on at all during the years 1958 and 1959, nor could the receipts be brought to tax under Section 12 as 'income from other sources'.

12. The above three decisions were rendered with reference to Section 24B of the Indian I.T. Act, 1922. However, we are concerned in this case with the provisions of the 1961 Act. Under the 1961 Act, some of the lacunae pointed out by the Supreme Court in the above three decisions have been removed. Section 24B of the 1922 Act corresponds to Section 159 of the 1961 Act. Section 159, however, deals with legal representatives other than an executor, and in respect of assessments on executors, a separate provision under Section 168 has been made.

13. Section 168(1) of the I.T. Act, 1961, is in the following terms:

'Subject as hereinafter provided, the income of the estate of adeceased person shall be chargeable to tax in the hands of the executor,--

(a) if there is only one executor, then, as if the executor were anindividual; or

(b) if there are more executors than one, then, as if the executors were an association of persons,

and for the purposes of this Act, the executor shall be deemed to be resident or non-resident according as the deceased person was a resident or non-resident during the previous year in which his death took place.'

14. As per this section, the income of the estate of the deceased shall be chargeable to tax in the hands of the executor. However, we are inclined to agree with the Tribunal that the arrears of professional fees cannot be treated as income from the estate of the deceased. The legal fees due to the deceased as on the date of his death is admittedly one of the assets left by the deceased and, therefore, it will become part of the estate of the deceased. We do not see how a part of the estate can be treated as income of the estate. As per the language used in Section 168, income of the estate of a deceased person alone is chargeable to income-tax in the hands of the executor, and not the estate of the deceased. The legal fees due to the deceased on the date of his death will be part of his estate and that will probably be taken into account for the purpose of assessment of estate duty. We are, therefore, of the view that on the language of Section 168, the arrears of fees, which cannot be taken to be the income of the estate, cannot be brought to charge under S; 168.

15. The learned counsel for the revenue, however, points out that all the debts which were outstanding on the date of the death of the deceased should be taken to be income from the estate of the deceased, that the expression 'the estate of the deceased' should be taken to denote a fictional person and that the estate continues in the person of the deceased so long as the executor continues to function. In Stroud's Judicial Dictionary, 3rd edn., Vol. 2, the word 'estate' has been taken to refer to continue the legal person of the deceased. It is also pointed out by the revenue that the preposition 'of' occurring in the phrase 'income of the estate' should be read as 'from' as it is intended merely to refer to the origin of the income and that it does not postulate the income being earned by the estate. Whatever be the meaning of the phrase 'income of the estate of the deceased' one thing is definite and clear and that is this : The arrears of professional fees due to the deceased which were realised later cannot be taken to be the income from the estate as it would amount to recovery of a part of the estate of the deceased. We do not, therefore, see how Section 168 could be invoked in this case, even assuming that Section 176(4) will enable the revenue to proceed against the recipient of the arrears of fees after the death of the deceased.

16. In CIT v. Hukumchand Mohanlal : [1971]82ITR634(Bom) , the Supreme Court pointed out that where certain amounts due to the deceased had been recovered by the firm in which he was a partner, they cannot be treated asincome of the deceased and taxed in the hands of the legal representative and that the Act did not contain any provision making a successor in business or the legal representative of an assessee to whom an allowance had already been granted, liable to tax under Section 41(1) in respect of the amount remitted and received by the successor or the legal representative. As per this decision, the legal personality stops with the death and it cannot continue thereafter. It is contended by the learned counsel for the revenue that Section 168 must be read along with Section 176(4) and if so read the charge under Section 176 is independent. Dealing with Section 176(4), the Calcutta High Court in Mrs. Roma Bose v. ITO : [1974]95ITR299(Cal) had expressed the view that if an income cannot be charged to income-tax under any of the heads mentioned in Clauses (a) to (e) of Section 14 of the new Act, the same shall be chargeable to income-tax under the head 'Income from other sources' mentioned in Clause (f) of the said Section 14, and that the money received by a person on account of arrears of fees from a profession which had been carried on by him cannot be brought to charge under Section 176(4) as professional income.

17. Admittedly, in this case, the arrears of fees realised by the executor has been treated as professional income and on the day when the assessment was made, admittedly the profession no longer continued. Therefore, even assuming that the executor can be assessed as a recipient under Section 176(4) in this case, the executor cannot be taken to have been validly assessed under the head 'Professional fees'. On the scope of Section 176(4), we are of the view that even if Section 176(4) treats the recipient as a taxable entity irrespective of the question whether there is a will or whether the recipient is an executor or not, the amount of arrears of fees due to the deceased has to be treated as the income of the recipient and cannot be taken to be an income of the estate of the deceased, and that, therefore, it has been rightly held by the Tribunal that Section 168 may not apply to a situation as in this case. As per Section 176(4) where any profession is discontinued in any year on account of the cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had it been received before such discontinuance. As per the aforesaid provision, where any profession is discontinued as a result of the cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be, though in fact is not the income of the recipient, deemed to be the income of the recipient and charged to tax as his income in the year of receipt if such sum would have been included in the total income of the person, who carried onthe profession, if it was received by him before such discontinuance. A fiction is created by law under the aforesaid provision. As per the said fiction, the executor, viz., Sri Ratnam, is the recipient of the arrears of professional income, which was duo to Sri A.V. Viswanatha Sastri and which were assessable to income-tax, if he had received them before he died. It is, therefore, clear that the arrears of professional fees are liable to income-tax under Section 176(4) in the hands of the recipient, viz., Sri V. Ratnam, as his income and chargeable to tax as his income as income from other sources in the year of receipt. The arrears of fees realised by Sri V. Ratnam will have to be taxed in his hands as a recipient in the year of receipt and cannot be tacked on and clubbed with the income of the estate of the deceased and brought to tax in the hands of the executor along with the income of the estate. In this view of the matter, the question referred to us is answered in favour of the assessee. The reference is ordered accordingly. There will be no order as to costs.


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