P.V. Chandran vs Commissioner of Income Tax

S. Sankarasubban, J.

Both these original petitions challenge the same order. Hence, they are heard together. The challenge in both these original petitions is against Ext. P3 order passed by the Commissioner, Cochin u/s 264 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The facts which led to the filing of the original petitions are as follows:

One P.V. Swamy was an assessee under the Act. He died on 1-9-1990. He has been assessed to Income Tax upto the assessment year 1991-92. During the financial year 1994-95, the assessment of Sri P.V. Swamy for the assessment years 1982-83 upto 1987-88 and 1989-90 were revised and a sum of Rs. 21,52,500 was refunded to the legal heirs u/s 244 of the Act. The refunded amount included an amount of Rs. 8,34,479 being the interest calculated on the actual refund amount u/s 244(1A) based on revised assessment. The petitioners in these two original petitions are the legal heirs of the aforesaid P.V. Swamy. For the assessment year 1995-96 one-third of the interest amount of Rs. 8,34,479 was included as the income of the petitioners in their return. Thus, Rs. 2,78,160 was included as income by both these petitioners for the assessment year 1995-96. Thereafter, the petitioners, according to them, realised their mistake and filed a petition u/s 264 of the Act before the Commissioner for exclusion of the interest offered for assessment on the ground that it is not actually an income in the hands of the petitioners. The revision petitioners were heard by the Commissioner. It was contended before the Commissioner that the petitioners'' receipt is only a capital receipt. It is also contended that the amount was actually due to the assessee and u/s 159 of the Act, the petitioners represent the assessee and the original assessee was their father and hence, interest amount cannot be treated as income of the petitioners. The Commissioner considered the matter and by Ext. P3 order held that the amount paid by the department as interest is having the character of income and it was paid to the legal representatives. The receipt by the legal representative need not be and cannot be in the capacity in which they were paid by the department. It is against the above order, the original petitions were filed. When the matter came up before the learned single Judge, the learned single Judge referred the matter to the Division Bench (reported as P. V. Chandran v. CIT (2001) 114 Taxman 471 (Ker) on the ground that there was no authoritative pronouncement on this subject.

The father of the petitioners, Sri P.V. Swamy was a partner of the firm, Kerala Transport Company. When the assessment regarding the Kerala Transport Company was revised as per the appellate order, a revision became necessary regarding the assessment of Sri P.V. Swamy for the assessment years 1982-83 upto 1987-88 and 1989-90. The date of the refund order ranges from 31-10-1994 to 27-3-1995. So it was received in the accounting year 1994-95. There are three heirs for Sri P.V. Swamy. The entire refund amount included an interest of Rs. 8,34,479. The question raised is whether the amount of Rs. 8,34,479 which was received as interest should be treated as income of deceased P.V. Swamy, so that it will be received as capital by the legal representatives and will not be included as assessable income.

The refund in this case is ordered u/s 240 of the Act, which says that, "where as a result of any order passed in appeal or other proceeding under this Act, refund of any amount become due to the assessee, the assessing officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf". u/s 244(1A) of the Act, for refund of an amount u/s 240(1), the assessee is entitled to simple interest at fifteen per cent on the amount so found to be in excess from the date on which such amount was paid to the date on which the refund is granted. The interest mentioned is simple interest at the rate of 1 per cent per annum. The argument of the counsel for the petitioners is that this amount is only received by way of inheritance. According to the contention of the petitioners, the refund and interest accrued to it are amounts due to the assessee and hence, such amount become part of his estate and is not liable to be included as income, personally of the petitioners. Counsel for the petitioners relied on section 159 of the Act. u/s 159(1) of the Act, 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. Under sub-section (2) of section 159, it is stated that for the purpose of making an assessment (including an assessment, reassessment or recomputation u/s 147), any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative from the stage at which it stood on the date of the death of the deceased; any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative and all the provisions of this Act shall apply accordingly. Sub-section (3) states that for the purpose of this Act, the legal representative of the deceased shall be deemed to be an assessee. Section 168 of the Act states that, income of the estate of a deceased person shall be chargeable to tax in the hands of the executor.

The question before us is whether the interest that was received by the legal representative can be deemed to be the income of the original assessee. The income has been defined u/s 2(24) of the Act. It is also without doubt that a person is liable to pay tax only for the amount which has accrued as income. If the income has not accrued or the income was not received during the assessment year, the Income Tax authorities cannot assess the person to tax. When difficulties arose in assessing such income where an assessee died after the filing of the return or before the finalisation of the assessment, section 24B was incorporated in the 1922 Act. Section 24B is in pari materia with section 159 of the Act. The scope of section 24B was considered by the Honourable Supreme Court in the decision in The Commissioner of Income Tax, Bombay City I, Bombay Vs. Amarchand N. Shroff, by his heirs and Legal Representatives, , The Honourable Supreme Court held as follows :

"Section 24B did not authorise the levy of tax on receipts by the legal representatives of a deceased person in the years of assessment succeeding the year of account being the previous year in which such person died. 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. 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 heirs and legal representatives after his death but in that previous year became assessable to Income Tax in the relevant assessment year. The section was enacted to bring to tax, after his death, income received during his lifetime, and fill up the lacuna which was pointed out in Ellis C. Reid v. CIT 5 ITC 100. Any income received in the year subsequent to the previous or the accounting year could not be called income received by the deceased person. The provisions of section 24E did not extend to tax liability of the estate of a deceased person beyond the previous or the account year in which that person died".

In that case the Honourable Supreme Court further held that, the amounts received by the legal representatives of a person could not be taxed in their hands as they could not be said to be income which might be deemed by fiction to have been received by the deceased. The court further held that legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond that legitimate field.

Learned counsel for the petitioner relied on the decision in Commissioner of Income Tax, Madhya Pradesh Vs. Hukumchand Mohanlal, . In that case, what happened was that the assessee''s husband died and she succeeded to the business carried on by him. A firm which had recovered certain amounts towards sales-tax from the assessee''s husband succeeded in an appeal against its sales-tax assessment and refunded that amount to the assessee, as a result of the order in appeal. This amount which was received by the assessee was treated as income of the assessee by the department. The Honourable Supreme Court held that Income Tax 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 representatives. It further held that section 41 did not apply to this case because the assessee sought to be taxed was not the assessee contemplated by that section. The assessee within section 41(1) having been died, the revenue could not take advantage of its provisions. The facts in the above case are entirely different from the case in hand.

Learned counsel for the petitioner also relied on the decision of the Honourable Supreme Court in Kapil Mohan Vs. The Commissioner of Income Tax, Delhi, . The facts of that case were as follows:

One N. Mohan had deposited the sum of Rs. 1,57,250 under the Annuity Deposit Scheme framed under Chapter XXII-A of the Income Tax Act, 1961. The same was refundable to him in 10 equal instalments of principal and interest under the provisions of section 280D of the Act. The said Mohan died on 15-7-1969. The instalment of principal and interest in the sum of Rs. 12,013 payable to him u/s 280D was paid to the assessee, his son and executor. For the assessment year 1970-71, the Income Tax Officer treated the sum of Rs. 12,013 as income in the hands of the assessee. On appeal, the Appellate Assistant Commissioner held that the said sum was not taxable in the assessee''s hands. The Tribunal reversed the order of the Appellate Assistant Commissioner and at the behest of the assessee, referred the question to the Delhi High Court and the High Court held against the assessee. In considering the question, the Honourable Supreme Court held as follows :

"On the original depositors death, the balance of the annuity deposit that he had made becomes part of his estate and is liable to tax as such. Becoming a part of his estate, his legal representatives becomes entitled to recover it, and they would under the general law be entitled to recover it in one lump sum, paying no tax on it (except estate duty, should a statute levying it he on the statute book at the relevant time). Sub-para. 4(a) of para 6 of the Annuity Deposit Scheme 1964 does no more than recognise that the unpaid balance of the annuity deposit has to be paid over to the original depositor''s legal representatives. It cannot be taxed as income in the hands of the legal representative. "

In the above decision, as a matter of fact, the Honourable Supreme Court at page 286 held as follows :

"The annuity deposit, when made, became capital. When returned, either as a whole or by instalments, it was not liable to tax as income. For this reason, section 2(24)(viii) was enacted, whereby instalment or annuity was treated as income, provided it was received u/s 280D, that is to say, the annuity was to be treated as income if received by the original depositor. On the original depositor''s death, the balance of the annuity deposit that he had made became part of his estate."

It is also pertinent to point out that, the Honourable Supreme Court also relied on the scheme which stated that unpaid balance of the annuity deposit has to be paid over to the original depositor''s legal representative and that it would be paid in instalments as annuity. Though so paid in annuity form, the repayment is of capital.

The above decision can be distinguished because, the observations have been made on the basis of the facts of these cases. As already stated, in this case, it cannot be said that interest on the refund accrued at the time before the death of the original assessee. The legal fiction u/s 159 of the Act is only restricted for the purpose of completing the assessment proceedings for that year. Any income which was received before the death of the original assessee and which was paid subsequent to his death and received by his heirs and legal representatives but paid in the same year should be treated as income of the assessee and the legal representatives will be assessed on behalf of the original assessee. As observed by the Honourable Supreme Court, at the time when the income was received, the persons should be alive. Here, refund is availed only when it is ordered and it could be received only subsequently. The fiction cannot be extended beyond what it was intended. It was then submitted that on the basis of equity, this interest should have been treated as income of the deceased. As it is well known, tax and equity are strangers. Hence, according to us, income received by the petitioners as interest on refund of the amount deposited by the father, the original assessee, is to be treated as income of the petitioners. The original petitions are dismissed.