Commissioner of Income Tax vs G.B.J. Seth

U.N. Bhachawat, J.—This is a reference u/s 256(1) of the income tax Act, 1961 (hereinafter referred to as "the Act") referring the following question for answer to this Court at the instance of the assessee: Whether the Tribunal was correct in law in holding that notwithstanding the status of the assessees being an AOP, they were entitled to claim set off on account of the balance of brought forward capital losses incurred by the deceased prior to his death during the accounting year in question?

The material facts giving rise to the present reference are these.

The relevant assessment year is 1974-75. The accounting year for the assessment year is the year ending 31-3-1974. One R.C. Jail, who was an assessee, died on 17-12-1973, that is, during the accounting year in question. Two separate assessments were made for this accounting year in question: one regarding the income for the period 1-4-1973 to 17-12-1973, i.e., up to the death of late R.C. Jail in the status of an individual; second for the period 15-12-1973 to 31-3-1974 which is the period relevant for consideration.

The assessees are the executors of the will of the late R.C. Jail. For the accounting period 18-12-1973 to 31-2-1974, they had filed the return in the status of individual which was not accepted in view of the provisions contain ed in section 168(1)(b) of the Act and they were assessed in the status of AOP. In the computation for this period, the ITO found that the assessees (the executors) had sold foreign shares for Rs. 3,35,325 which eventually resulted in long-term capital gains to the extent of Rs. 1,04,384. The assessees, however, claim ed a set off, on account of the brought forward capital loss against these gains. This claim for set off was disallowed by the ITO on the ground that the present assessment was on AOP whereas the capital loss was suffered by the deceased who was an individual and thus the two were distinct entities, namely, AOP and individual. This order of the ITO was confirmed in appeal before the AAC. In the second appeal before the Tribunal, it was contended on behalf of the assessee that what was being assessed was only the estate of the deceased and not the executors personally. It was only for statistical purposes that the executors of the estate were to be assessed as AOP and, therefore, the claim for set off could not be negatived by treating the assessees as a different entity. This argument found favour with the Tribunal. It held that the claim for set off could not be rejected on the ground that the executors, who were assessed as AOP, were a different entity; it set aside this view of the authorities below, but held that whether in their assessment the assessees were entitled to the set off would depend on the finding whether the several conditions enumerated in section 72 of the Act are fulfilled or not. With these observations, the Tribunal partly allowed the appeal.

The learned counsel for the department submitted that on the death of the assessee there are two distinct provisions in the Act regarding the assessment of his income, one section 159 and the other section 168 of the Act. He submitted that for the same accounting year in which the deceased died up to the date of death section 159 applies and for the remaining period of the accounting year section 168 applies and the assessment is made in two distinct status, which is indicative of the intention of the Legislature that the two are to be treated as distinct entities and, therefore, the setting off the gain of one against the loss of the other cannot be permitted. He relied on the following commentary of the author of the book "Kanga and Palkhivala''s" the Law and Practice of income tax, 7th Edn. Vol. 1 (hereinafter referred to as the said book) at page 944 under the caption "Income of deceased till date of death and income of estate after that date'''':

...In the light of that section, section 159 should be construed as applying in respect of the income of the deceased only up to the date of his death and not up to the end of the accounting year in which the death occurs. The income of the estate for the period from the date of death up to the end of the accounting year in which the death occurs should be assessed u/s 168. Thus, in respect of the year of death two separate and distinct assessments would have to be made, one on the legal representatives u/s 159 in respect of the income of the deceased up to the date of death, and the other on the ''executors'' u/s 168 in respect of the income of the estate for the rest of the year. This may result in lowering the rate and incidence of tax for the year. This position would not be affected by the fact that the legal representatives assessable u/s 159 may be the same individuals who are assessable as executors u/s 168. Assessments for the years subsequent to the year of death should be made on the executors till the administration of the estate is completed [section 168(3)].

The argument of the learned council for the assessee was that the executors are also the legal representatives of the deceased; section 159 and section 168 are merely machinery sections, the ultimate burden of the tax assess ed is on the estate of the deceased, when the assessment is made following the mechanism provided u/s 159 and also when the assessment is made following the mechanism provided in section 168. He argued that both the sections provide the mechanism for assessment on the legal representative of the deceased. He argued that in such a setting of the legal application the question of there being two distinct entities does not arise and the view taken by the Tribunal is right.

It may be stated that the learned counsel for the parties were unable to cite any authority in respect of their rival contentions and were fair enough, at the same time, in conceding that they were not able to lay their hands on any reported case, one way or the other bearing on the point in issue. The learned counsel for the department argued that albeit the commentary referred to by him and quoted by us in paragraph 5 of this order directly did not relate to the question at hand but it lent weight to his contention somewhat indirectly.

We shall first refer to the definition of "legal representative". In this Act the defining section 2(29) of the Act says about the expression "legal representative" that the meaning assign ed to it is the same as in the Code of Civil Procedure, section 2(11) of the Code reads as follows:

''legal representative'' means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued.

This enlarged definition of "legal representative" classes persons such as executor or administrator who represent the estates of the deceased.

Section 159(1) says where a person dies, his legal representative 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''s, and then section 159(6) says that the liability of a legal representative under this section shall, subject to the provisions of sub section (4) and sub- section (5), be limited to the extent to which the estate is capable of meeting the liability.

It would be pertinent here to point out that the word "estate" in section 159(6) includes income accruing after death from the corpus left by the deceased. This is the view taken by the Allahabad High Court in RAM LAKHAN Vs. Income Tax OFFICER, KANPUR, AND ANOTHER., . It may be mentioned that section 24B of the 1922 Act corresponded to section 159 of the 1961 Act. Further by virtue of section 159(5), the provisions of sections 161(2), 162 and 167 of the Act have been made applicable so far as may be and to the extent to which they are not inconsistent with the provisions of section 159 in relation to a legal representative. We now turn to section 168. In the very opening, section 168(1) provides that the income of the estate of a deceased person shall be chargeable to tax in the hands of the executor. Further section 168(2) provides that the assessment of an executor under this section shall be made separately from any assessment that may be made on him in respect of his own income.

Then, by virtue of section 169, the provisions of section 162 have been made applicable in case of an executor in respect of tax paid or payable by him as they apply in case of a representative assessee.

This section 162 extends to every representative assessee the right to retain, out of moneys in his possession in his representative capacity, an amount equal to any sum paid or payable by him under the Act or to recover the amount paid from the person beneficially entitled to the income. A similar right, as already discussed hereinabove, is conferred on legal representatives by virtue of section 159 (5) and on executors, administrators and other persons administrating the estate of a deceased person by virtue of section 169.

It is also of significant relevance to point out that, as provided in section 168(1), for the purposes of the 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.

Here we would recall section 169 by virtue of which the executor is equated to representative assessee to attract the applicability of section 162 which gives the right to representative assessee to recover the tax paid, as already discussed in paragraph 12 of this order. Thus, section 161(1), which contains general provisions relating to representative assessee, has also a material bearing on the question to be answered. This section 161(1) says that although the representative assessee shall be subject to the same duties, responsibilities and liabilities, as if the income were his income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to have been made in his representative capacity only, and the tax shall be, subject to the other pro visions contained in Chapter XIV in which this section as well as section 159 and section 168 appear, levied upon and recovered from him in like manner and, to the same extent as it would be leviable upon and recoverable from the per son represented by him. It is true that representative assessee take their status from the beneficiaries they represent and it is wholly immaterial whether there is one representative assessee or there are two or more of them representing the same beneficial interest or interests, whereas in the case of executor u/s 168 if there is only one executor, he will be assessed as if the executor was an individual or, if there are more executors than one, then, as if the executors were an AOP, but this difference is of no consequence as all the same the assessee or assessees are assessed as representing the estate of the deceased.

The upset of the foregoing discussion is that both sections 159 and 168 deal with assessment on legal representatives. Section 159 is meant to enable the revenue to make an assessment on the legal representative in respect of the income which accrued to or was received by the deceased. Section 168 authorises an assessment on the legal representative in respect of the income which accrues to him after the death, the estate being vested in him. Though the assessment is of the executor or executors, as the case may be, for all practical purposes, it is the assessment of the deceased. It is pertinent to recall the expression in section 168(1) that the income of the estate of a deceased person shall be chargeable to tax in the hands of the executor. An executor or executors, as the case may be, who is accountable for assessment to the income tax authorities for payment of income tax, does not pay such tax out of his personal property. The incidence of tax is on the estate of the deceased. The assessment is either on the deceased Or the actual beneficiaries and even in the case of assessment according to the procedure u/s 159 the incidence of tax is on the estate. In such a situation, due to the co-relation of section 159 and section 168, the two separate assessment for the same year would not make the assessees to be two distinct entities. The argument of the learned counsel for the department that the assessment till the date of death in individual status and thereafter in the status of AOP makes the two as distinct entities, cannot be accepted for the reasons already discussed above on the facts and circumstances already discussed. It would also be relevant to point out that as per section 168(1)(a), had there been only one executor the assessment would have been as if the executor were an individual. It is, therefore, only for statistical purposes that the executors of the estate of the deceased are assessed as AOP otherwise, as already stated, for the purpose of rates, etc., the assessment has to be deemed to be on the assessee or the actual beneficiaries. In the result, we answer the question in the affirmative, that is, in favour of the assessee and against the department. We make no order as to costs.