Commissioner of Income Tax vs Estate of Late A.V. Viswanatha Sastri (by the executor)

Ramanujam, J.—Sri A.V. Viswanatha Sastri, a former judge of this court and later a senior advocate practising in the Supreme Court, died

on January 4, 1966. Two days prior to his death, he executed a will by which 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 income were filed by Sri V. Ratnam in his capacity as executor of the estate of

the deceased offering for assessment the income from properties, dividends and interest due to the said estate. However, the following amounts

being the professional 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 fees received

Rs.

1967-68 46,492

1968-69 89,600

1969-70 11,360

1970-71 3,200

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 The Commissioner of Income Tax, Bombay City I,

Bombay Vs. Amarchand N. Shroff, by his heirs and Legal Representatives, and Commissioner of Income Tax, Bombay Vs. James Anderson, . 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.

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 The Commissioner of Income Tax, Bombay City I, Bombay Vs. Amarchand N. Shroff, by his heirs and Legal

Representatives, and Commissioner of Income Tax, Bombay Vs. James Anderson, . He also held that u/s 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.

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 does not 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 u/s 168 of the I.T. Act, only the income of the estate of the deceased in the hands of the executor could be

taxed.

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 u/s 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.

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 u/s 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 u/s 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.

Aggrieved by the order of the Tribunal, the revenue sought a reference u/s 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 be included in the income of the estate of late Sri A.V. Viswanatha Sastri u/s 168

of the Act ?

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 u/s 176(4) separately as the recipient and not as an executor.

According to the Tribunal, u/s 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 u/s 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 the deceased should not be included in the income

of the estate of the deceased u/s 168 could be sustained.

In The Commissioner of Income Tax, Bombay City I, Bombay Vs. Amarchand N. Shroff, by his heirs and Legal Representatives, , 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 u/s 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.

In Commissioner of Income Tax, Bombay Vs. James Anderson, , 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. u/s 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 u/s 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 u/s 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 such deceased 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.

In Nalnikant Ambalal Mody Vs. Commissioner of Income Tax, Bombay, , 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 u/s 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 u/s 12 as ""income from other sources"".

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 u/s 168 has been made.

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

Subject as hereinafter provided, the income of the estate of a deceased 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 an individual; 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.

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.

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.

In Commissioner of Income Tax, Bombay City I Vs. Elphinstone Dye Works (P.) Ltd., , 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 as income 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 u/s 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 u/s 176 is independent. Dealing with Section 176(4), the Calcutta High Court in Mrs. Roma Bose Vs. Income Tax Officer, ""C"" Ward and

Others, 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 u/s 176(4) as professional income.

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

u/s 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 on the 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 u/s 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.