The Additional Income-Tax Officer, Salem vs E. Alfred

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 282 of 1960

Decision Date: 20/10/1961

Coram: M. Hidayatullah, S.K. Das, J.L. Kapur

In this case the Supreme Court of India heard a petition filed by the Additional Income‑Tax Officer, Salem, against the respondent E. Alfred. The judgment was delivered on 20 October 1961 by a bench consisting of Justice M Hidayatullah, Justice S K Das and Justice J L Kapur. The citation of the decision is 1962 AIR 663 and 1962 SCR Supplement (1) 143. The case is also reported in the citator as RF 1963 SC 1448 (5) and D 1965 SC 1358 (19). The matter concerned the provisions of the Income‑tax Act, 1922 (1 of 1922), particularly sections 22(2), 23, 24B(2), 29, 30 and 46(1), dealing with tax liability of a deceased person, the status of a legal representative as an assessee by fiction, the consequences of failure to pay assessed tax and the imposition of penalty. The factual background was that a taxpayer died intestate during the year of account. He left behind his son, identified as A and the respondent, together with eight daughters. Under section 22(2) of the Act a notice was issued to the legal representative. Pursuant to that notice the respondent was assessed under section 24B(2) and a notice of demand was issued under section 29. The respondent filed an appeal before the Appellate Assistant Commissioner. While the appeal was pending, the Income‑Tax Officer imposed a penalty under section 46(1) because the respondent had failed to pay the tax by the due date. After the appellate authority disposed of the appeal, a fresh notice of demand was issued and, on the respondent’s further default, a second penalty under the same provision was imposed. The respondent challenged both penalties by filing a writ petition. The Madras High Court set aside the penalties. The High Court held that section 46(1) could not be applied to a legal representative because the representative had been treated as an assessee only by the fictitious device created in section 24B(2). The High Court further reasoned that the fiction was intended solely for the purpose of assessment; once assessment was completed, the fiction ceased to operate because that subsection did not deal with collection of tax. The issue before this Court was whether the fictitious status of the legal representative terminated after the assessment, leaving the representative merely a debtor, or whether the representative could still be liable to penalty under section 46(1). The Court held that the fiction made the respondent an assessee for the purpose of assessing the deceased’s total income and that the fictitious status did not end with the assessment. The Court explained that when a person is deemed to be something else, the law must treat him as that thing for all purposes that flow from the deeming, even though in reality the deceased is dead and cannot be an assessee. Accordingly, the provisions of the Act, including the process of computation, liability and penalty, were deemed to apply to the legal representative, and the fiction must be carried through to its logical conclusion. The Court referred to the definition of “assessee” in section 144.

The Court noted that the definition of “assessee” in the Income‑Tax Act describes a person by whom income‑tax is payable. Accordingly, the legal representative of a deceased taxpayer falls within that definition. Because the legal representative was assessed under section 23, he also possessed a right of appeal under section 30. The Court further observed that the legal representative did not cease to be an assessee after the tax was determined, at least for the purposes of sub‑section (2) of section 24B, and that section 29 applied to him in his capacity as the assessee. The Court referred to the authorities Commissioner of Income‑Tax v. Teja Singh, [1959] Supp. 1 S.C.R. 394 and East End Dwellings Co. Ltd. v. Finsbury Borough Council, [1952] A.C. 109, in support of this view.

This appeal was a civil appellate matter, designated as Civil Appeal No. 282 of 1960, and arose from the judgment and order dated 15 February 1956 of the Madras High Court in Writ Petition No. 404 of 1952. Counsel for the appellant was represented by senior lawyers, while counsel for the respondent appeared for the party challenging the penalty. The judgment was delivered on 20 October 1961 by Justice Hidayatullah.

The central issue presented for determination was whether the legal representative of a deceased person, who had been assessed on the total income of the deceased as if he were the assessee, could be liable to a penalty under section 46(1) of the Income‑Tax Act. The facts were that the deceased, Ebenezer, died intestate on 22 November 1945 during his fiscal year that ended on 31 March 1946. He left behind his son, the respondent E. Alfred, and eight daughters. For the assessment year 1946‑47, the respondent was assessed under section 24B(2) after a notice was issued to him under section 22(2). The assessment was completed on 26 March 1951, and a demand notice was issued under section 29.

The respondent appealed the assessment order to the Appellate Assistant Commissioner. While the appeal was pending, the Income‑Tax Officer imposed a penalty of Rs 250 under section 46(1) because the respondent had failed to pay the tax by the due date. After the appeal was decided with only minor modifications, a new demand notice required payment of tax by 15 December 1951. Upon default, a second penalty of Rs 10,000 was imposed on 8 March 1952.

Subsequently, the respondent filed a petition under article 226 of the Constitution in the Madras High Court, challenging both penalties. The High Court ruled in the respondent’s favour, setting aside both penalty orders and granting a certificate of fitness to appeal to this Court. The present appeal therefore arose from that decision. The High Court, in reaching its conclusion that section 46(1) did not apply to a legal representative, held that the words of the section did not encompass a legal representative. It emphasized that the provision referred to “when an assessee is in default in making a payment of income tax,” and that, under the statutory scheme, a legal representative, though treated as an assessee for assessment purposes, was not intended to be subject to the penalty provision.

The Court explained that the High Court’s conclusion rested on the wording “is in default in making a payment of Income tax” because the statute distinguishes between “an assessee” and “other person” as set out in section 29. The learned Judges observed that a legal representative is treated as an assessee only by way of a fiction created in subsection 2 of section 24B, and that this fictional status ceases once the tax liability is computed, that is, once the assessment is completed. They further analysed the three subsections of section 24B, noting that subsection 1 imposes on the legal representative a liability to collect tax but does not label him as an assessee for that purpose; subsection 3, which deals with matters other than collection, likewise does not refer to the legal representative as an assessee; and subsection 2, which creates the fictional status, is intended solely for the purpose of assessment and, because it does not concern collection, the fiction cannot be extended beyond the assessment stage that determines the tax. Accordingly, the High Court held that after the assessment, the legal representative is not an “assessee” within the meaning of section 29 but can only be classified under the expression “other person”. Since sections 45 and 46 impose penalties on “an assessee in default”, the Court concluded that a legal representative cannot fall within that category and therefore no penalty could be imposed upon him or recovered. The Court then turned to the pre‑1953 definition of “assessee”, which read “assessee means a person by whom income‑tax is payable”. It observed that this broad definition is sufficient to include a legal representative who, although paying the tax out of the deceased’s estate, is nevertheless the person by whom the tax is payable. The Court reproduced the language of section 24B: “(1) Where a person dies, his executor, administrator, or other legal representative shall be liable to pay out of the estate of the deceased person to the extent to which the estate is capable of meeting the charge the tax assessed as payable by such person, or any tax which would have been payable by him under this Act if he had not died.” Subsection 2 provides that if a person dies before the notice required under section 22 or section 34 is published or served, the legal representative, upon receipt of such notice, must comply, and the Income‑tax officer may assess the total income of the deceased as if the legal representative were the assessee. Subsection 3 states that where a person dies without having filed a return required under section 22, or where the return filed is believed to be incorrect or incomplete, the Income‑tax officer may assess the total income and determine the tax payable, and may, by issuing the appropriate notice that would have been served on the deceased had he survived, require the executor, administrator, or other legal representative to produce accounts, documents, or other evidence that the officer could have demanded from the deceased under sections 22 and 23.

When the income‑tax officer is of the opinion that a return filed by a deceased person is either incorrect or incomplete, the officer is authorized to assess the total income of that deceased individual and to compute the tax that would be payable on the basis of that assessment. To carry out this assessment, the officer may issue the notice that would have been required to be served on the deceased had he been alive. The notice may require the executor, administrator or any other legal representative of the deceased to produce any accounts, documents or other evidence that, under sections 22 and 23 of the Act, the officer could have demanded from the deceased himself. This procedure is provided for in subsection (3) of section 24B, which empowers the officer to determine tax liability even when the deceased has not complied with the return‑filing requirement, provided the officer has reasonable grounds to doubt the correctness of the return that was filed or to suspect that no return was filed at all.

Section 24B, as originally introduced by the Second Amendment Act of 1933 and subsequently amended by the 1939 Amendment Act, sets out a three‑fold scheme. Subsection (1) makes the legal representative of a deceased person liable to pay, out of the estate and to the extent that the estate can satisfy it, any tax that the deceased was assessed as owing or any tax that would have become payable had the deceased not died. This provision creates an absolute liability limited only by the estate’s capacity, without dealing with the mechanics of notice, assessment or collection. Subsection (2) addresses the situation where a person dies before any general notice is published or before a special notice under section 22 or section 34 is served. In such cases, once the special notice is served on the legal representative, the representative must comply with it, and the income‑tax officer may assess the total income of the deceased as if the representative were the assessee. Subsection (3) covers the circumstance where a person dies after being required to file a return but either fails to do so or files a return that the officer believes is erroneous. Under this provision, after serving the appropriate notice under sections 22 or 23, the officer may demand the necessary accounts and documents from the legal representative and proceed with the assessment. In the present matter, the facts fell within subsection (2) because the deceased, Ebenezer, died before the close of his accounting year. Accordingly, the notice was served on the respondent, who was treated as the assessee for the purpose of assessment, and the assessment consequently rendered the respondent liable under subsection (1) to pay the tax assessed from Ebenezer’s estate, subject to the estate’s ability to meet the charge.

In this case, the Court observed that the tax which had been assessed was to be paid out of the estate of the deceased, Ebenezer, to the extent that the estate was capable of meeting the charge, even though, by operation of legal fiction, the respondent was treated as the assessee for the purpose of assessing Ebenezer’s total income. The Court acknowledged that this fiction unquestionably made the respondent an assessee for the assessment of the deceased’s income. However, the Court then examined whether the fictional status ceased once the assessment was completed, leaving the respondent merely a debtor to the tax department thereafter. The answer to that question was held to be decisive for the subsequent operation of the other provisions of the Income‑Tax Act. The Court explained that when something is deemed to be something else, it must be treated as if it really were that thing, although in reality it is not. Because the original assessee had died before any notice—whether general or special—could be served on him, he could not himself be treated as the assessee for the assessment process. Consequently, the statute creates a fiction whereby a different person, namely the legal representative, is deemed to be an assessee for the purpose of assessment. The Court noted that the term “assessment” carries several meanings, and in one sense it encompasses the entire procedure of computing and levying tax. It is in this broader sense that the legal representative, by operation of the fiction, becomes an assessee, and the Court emphasized that this fiction must be fully developed without allowing confusion, quoting the principle that “the mind should not boggle” as stated in Commissioner of Income‑Tax v. Teja Singh, applying Lord Asquith’s dictum in East End Dwellings Co., Ltd. v. Finsbury Borough Council. Turning to the statutory definition, the Court reiterated that an “assessee” means a person by whom income‑tax is payable. A legal representative who, by fiction, is declared to be an assessee therefore falls within this definition, because the tax is payable by him out of the assets left by the deceased. Accordingly, the assessment of the legal representative is made under section 23 of the Act, and he retains the right to appeal under section 30 of the same Act, a right that would be unavailable if he ceased to be an assessee after the tax was determined. The Court clarified that it was not concerned with the legal representative’s position under the third sub‑section of section 24 B, nor was it required to consider the consequences of a default in payment of tax by the representative. The fiction, the Court held, is enacted at least for the purpose of subsection (2) and the analysis is confined to that provision. Moreover, the Court stressed that the fiction created by subsection (2) cannot be curtailed by provisions that address entirely different situations. Under section 45, if a notice of demand issued under section 29 to an assessee is not complied with, the assessee is deemed to be in default, and under section 46(1), a penalty may be imposed on a defaulting assessee. All these stages therefore apply to the respondent as an assessee in default, and the relevant provisions concerning penalty and demand notices are consequently triggered.

The Court considered the decision reported in [1952] A.C. 109 at page 132 and held that the individual before it was himself the assessee with respect to the assets and tax liability of Ebenezer; consequently he was an assessee in default and therefore liable to the imposition of a penalty for that default. The point that required resolution was whether section 29, which draws a distinction between an “assessee” and an “other person,” made any difference to the liability of the respondent. The High Court, and the counsel for the respondent who relied upon the High Court’s reasoning, pointed out that section 29 first refers to an “assessee” who is liable to pay tax and then adds the words “other person” who is also liable to pay such tax. They argued that, on the basis of this wording, the respondent should be classified as the “other person” and not as the “assessee” for the purposes of the penalty provision. The High Court therefore reasoned that the expression “an assessee” in sections 45 and 46 is limited to a person who is assessed on his own behalf and does not extend to an “other person” who is not an assessee. The High Court emphasized that this distinction must be kept in mind when construing the word “assessee” in sections 45 and 46, and accordingly it confined the term “assessee” in those two sections to a proper assessee. The Court further observed that the words “other person” cannot apply to a legal representative who is deemed an assessee by fiction, and that the provision must be worked out to its logical conclusion. Since the legal representative falls within the meaning of “assessee,” he does not fall within the category of “other person,” and therefore it was unnecessary to decide which other persons might be included under the statute. In the Court’s opinion, the penalty could be imposed on the respondent in his capacity as an assessee. Accordingly, the appeal succeeded and was allowed, with costs awarded both in this Court and in the High Court. The appeal was thus allowed.