Commissioner Of Income‑Tax, Bombay vs Amarchand N. Shroff, By His Heirs

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 23 October, 1962

Coram: J.C. Shah, J.L. Kapur, M. Hidayatullah

In this case, the Supreme Court of India heard an appeal filed on 23 October 1962 by the Commissioner of Income‑Tax, Bombay, against the heirs and legal representatives of the deceased Amarchand N. Shroff. The judgment was delivered by Justice Kapur, with the bench comprising Justices J.C. Shah, J.L. Kapur and M. Hidayatullah. The appeal arose from a certificate of the High Court of Bombay and concerned the interpretation of section 24B of the Income‑Tax Act in an income‑tax reference. The reference was answered in the negative, that is, the Court held that the provisions of section 24B did not apply, and the decision was against the Commissioner, who was the appellant. The respondents were the heirs and legal representatives of Amarchand N. Shroff, and the matters under dispute related to the assessment years 1950‑51, 1951‑52, 1952‑53, 1953‑54 and 1954‑55. The factual background was that Amarchand N. Shroff, together with Mangaldas and Hiralal, were partners in a solicitor firm. Amarchand died on 7 July 1949. Following his death the partnership continued with Mangaldas and Hiralal until 30 November 1949, after which Remesh, the son of Amarchand, who had by then qualified as a solicitor, joined as a third partner on 1 December 1949. The partners agreed that any receipts for work performed up to Amarchand’s death would be divided among Amarchand, Mangaldas and Hiralal; receipts for work done between 8 July 1949 and 30 November 1949 would be shared between Mangaldas and Hiralal; and receipts for work after 1 December 1949 would be shared among Mangaldas, Hiralal and Remesh. The firm maintained its accounts on a cash basis. For the five assessment years in question the heirs of Amarchand received the following sums from the outstanding receivables: Rs 37,847, Rs 43,162, Rs 34,899, Rs 13,402 and Rs 32,523 respectively. The Income‑Tax Officer sought to tax these receipts. For the years 1950‑51 and 1951‑52 the Officer assessed the amounts as income of a Hindu undivided family in the hands of the heirs. The assessment was appealed first to the Appellate Assistant Commissioner and subsequently to the Appellate Tribunal. Both members of the Tribunal concluded, albeit for different reasons, that the sums were not income of a Hindu undivided family but merely represented inheritance or the realization of Amarchand’s assets.

Later, the Revenue did not pursue the matter further, but the Income‑Tax Officer subsequently initiated proceedings under section 34 of the Act concerning the same receipts, this time treating the assessee as “Amarchand N. Shroff by his heirs and legal representatives,” an entity considered to be an individual rather than a Hindu undivided family. Accordingly, the amounts were assessed to income‑tax in the hands of the respondents under section 34(1)(b). This set the stage for the present appeal to the Supreme Court, which was to determine whether, on the facts and circumstances of the case, the sums of Rs 37,847, Rs 43,162, Rs 34,899, Rs 13,402 and Rs 32,523 were assessable to income‑tax in the hands of the assessee described as “Amarchand N. Shroff.”

In this matter the assessments that were made were read together with section 24B of the Income‑tax Act and covered the assessment years 1950‑51, 1951‑52, 1952‑53, 1953‑54 and 1954‑55. When the matter was taken on appeal, the Appellate Assistant Commissioner held that a notice issued under section 34 could be validly served only for the year 1950‑51; consequently the notices that had been issued for the later years were held to be invalid and the assessments for the years 1951‑52, 1952‑53, 1953‑54 and 1954‑55 were set aside. The Commissioner of Income‑tax then appealed this decision to the Appellate Tribunal. The Tribunal ruled that an assessment could not be made in respect of Amarchand, that section 24B was not applicable to income that was received after the death of Amarchand, and that the receipts in question were capital receipts rather than revenue receipts. Accordingly, the Tribunal affirmed the order of the Appellate Assistant Commissioner.

Subsequently, the Commissioner of Income‑tax applied for a reference of a specific question of law to the High Court. The question framed was whether, on the facts and circumstances of the case, the sums of Rs 37,847/‑, Rs 43,162/‑, Rs 34,899/‑, Rs 13,402/‑ and Rs 32,523/‑ were assessable to income‑tax in the hands of the assessee described as “Amarchand N Shroff by his legal heirs and representatives” for the respective five assessment years. The High Court answered this question in the negative. It held that, except for the provisions of section 24E, the amounts were not taxable and that section 24E did not apply to the present case.

Counsel for the Commissioner of Income‑tax argued that a proper construction of section 24B required that the amounts received by the heirs and legal representatives of Amarchand after his death should be deemed, by the fiction contained in subsection (1), to be income of Amarchand himself and therefore liable to tax under section 24B(1). In other words, the respondents, as heirs and legal representatives of the deceased, should be liable to pay tax out of the estate to the extent that the estate could meet the charge, just as the deceased Amarchand would have been liable had he survived. The argument stressed the words in section 24B(1) that referred to “any tax which would have been payable by him under this Act if he had not died”. Section 24B was then set out: “Tax of deceased person payable by representative – (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. (2) Where a person dies before the publication of the notice referred to in sub‑section (1) of section 22 or before he is served with a notice under sub‑section (2) of section 22 or section 34, as …”

In this provision, when a person died his executor, administrator or other legal representative was required, upon receipt of a notice issued under subsection (2) of section 22 or under section 34, to comply with that notice, and the Income‑tax Officer could then assess the total income of the deceased as though the executor, administrator or legal representative were the assessee. Subsection (3) further provided that where a person died without having filed a return that he was required to file under section 22, or where he had filed a return that the Income‑tax Officer believed to be incorrect or incomplete, the Officer was empowered to make an assessment of the deceased’s total income and to determine the tax payable on that basis. To do so, the Officer could issue the appropriate notice that would have been served on the deceased had he lived, and could require any accounts, documents or other evidence that would have been demanded under sections 22 and 23. Subsection (1) stated that when a person died, his heirs and legal representatives were liable to pay, out of the estate, the tax assessed as payable by the deceased or any tax that would have been payable by him under the Act if he had not died. Counsel for the Commissioner argued that the words “or any tax which would have been payable by him under this Act if he had not died” meant that, regardless of when the income was received, if the heirs or legal representatives received income after the death, they were liable to pay tax just as the deceased would have been if he were alive. The Court observed that this interpretation was not consistent with the language of section 24B, because all the subsections had to be read together. Subsection (1) could be separated into two situations: first, where the deceased’s income had been assessed before his death; second, where the income had not been assessed but would have been taxable had he lived. The latter part, when read with subsections (2) and (3), was limited to the cases described therein. These provisions confined the liability to income received by the deceased before death and to income received after death by his heirs or legal representatives in the preceding year, which had already been assessed or would have been assessed as the deceased’s income had he not died. The Court referred to the earlier decision in Allen v. Trehearne, where the phrase “if he had not died” had been given a similar construction.

The Court explained that when a person died before the public notice prescribed under section 22(1) was issued, or before a notice under subsection 2 of section 22 or section 34 was served, the Income‑Tax Officer was authorized to compute and assess the total income of the deceased as if the heirs and legal representatives were the assessors. It further observed that subsection 3 of section 22 provided that if a person died before filing a return required by that section, or died after filing a return that the Officer considered incorrect or incomplete, the Officer could make an assessment on the total income of the deceased and that certain additional consequences would follow. In all of the situations mentioned, the language of subsections 1, 2 and 3 of section 24B implied that the heirs and legal representatives of a deceased individual were liable to pay income‑tax out of the estate where (i) an assessment had already been made, or (ii) the deceased died before assessment but the income had been received either before his death or by his heirs and legal representatives after his death during the preceding year. The Court therefore held that if the deceased died before the publication of the notice under section 22(1) or before service of a notice under section 22(2), or after service but before furnishing a return, or after filing an incorrect or incomplete return, the Income‑Tax Officer should assess the total income of that deceased person and determine the tax payable. Section 24B, the Court noted, did not empower the levy of tax on receipts made by the legal representatives of a deceased person in assessment years that succeeded the year of account in which the death occurred. The Court further stated that income‑tax became exigible with reference to a person’s total income of the preceding year. The issue before the Court was whether income received after the preceding year in which Amarchand died could be taxed under section 24B as income in the hands of his heirs and legal representatives. In the present case the accounts were maintained on a cash basis. The Court reiterated that, ordinarily, the assessee under the Act had to be a living person because legal personality ceased upon death. By virtue of section 24B, however, the legal personality of a deceased assessee was extended for the entire preceding year during which he died, so that income received by him before death and income received by his heirs and legal representatives after death but within that preceding year became assessable to income‑tax in the relevant assessment year. The legislation was enacted to tax, after death, income that had been received during the deceased’s lifetime and to fill the gap identified by the High Court in Ellis C. Reid v. Commissioner of Income‑Tax, Bombay. Any income received in the year following the preceding or account year could not be characterised as income received by the deceased, and the provisions of section 24B did not extend tax liability of the estate beyond the preceding or account year in which the death occurred.

In this matter the Court explained that the provisions of section 24B of the Income‑Tax Act do not extend the tax liability of a deceased person’s estate beyond the previous or account year in which the death occurs. To support his contention, the counsel for the Commissioner of Income‑Tax cited the scheme of the Act as discussed in Additional Income‑tax Officer v. E. Alfred [1962] 44 I.T.R. 442, 445, but the Court observed that nothing in that decision sustains the Commissioner’s argument. The Commissioner also relied on certain observations from a Bombay High Court judgment reported as re B. M. Kamdar [1946] 14 I.T.R. 10; however, those observations were likewise of no assistance. In that case, Justice Kania (as he then was) had stated that determining whether a particular sum constitutes income is unrelated to the time of its receipt, and that the timing of receipt is relevant only for ascertaining the year in which tax may be levied under the Act. The facts involved a consulting engineer who ceased practising on 15 February 1938 but later received a lump sum representing outstanding professional fees earned before the cessation, the receipt occurring during the calendar year that was the previous year. The engineer maintained his books on a cash basis and argued that, because his profession had ended in the previous year, the source of the income had terminated and the amounts received should not be taxable. The Court held that the income was assessable, noting that the engineer was alive when the receipt was made and consequently section 24B was inapplicable to those facts. Counsel further cited the observations of Justice Derbyshire, C.J., in re Sreemati Usharani Shoudhurani [1942] 10 I.T.R. 199. In that case the managing agent of a limited company died on 12 May 1938, leaving a credit in the company’s books for commission earned by him prior to his death. The sum was paid after his death in the previous year 1938‑39, and the Commissioner sought to tax it under section 24B. The Court ruled that the income was taxable, with Justice Derbyshire explaining that the widow, as the recipient of her husband’s salary, was treated as the legal representative for assessment purposes and the amount fell within section 24B(1) because it was received by the widow in the previous year and had been earned by the deceased during that same previous year. Accordingly, the Court affirmed that, apart from the operation of section 24B, no assessment can be made in respect of a person’s income after his death.

Section 24B expressly provides that an assessment cannot be made with respect to the income of a person after that person has died. The principle was earlier articulated in the decision of Ellis C. Reid v. Commissioner of Income‑tax, Bombay, reported in 5 I.T.C. 100. In that case, which arose before the enactment of section 24B, the taxpayer had been served with a notice under section 22(2) of the Income‑tax Act but had failed to file a return within the time prescribed, and subsequently the taxpayer died. The Court held that, pursuant to section 23(4) of the Act, no assessment could be made after the taxpayer’s death. At page 106 of the judgment, the Court observed that the statute contains no reference to the death of a person on whom tax liability has originally arisen, and that such an omission could hardly be accidental. The Court further explained that the legislature must have intended that any privilege conferred by payment of income‑tax would not extend to conferring immortality; every person liable to tax inevitably dies, and in most cases the final instalment of tax is not collected before death. Accordingly, the legislature chose not to enact any provision dealing expressly with the assessment of, or recovery of tax from, the estate of a deceased individual. The Court therefore emphasized that the individual assessee must ordinarily be a living person, and that an assessment is a charge on the income of the previous year, not a charge on the income of the year of assessment measured by the previous year’s income. This principle was reaffirmed in Wallace Brothers & Co. Ltd. v. Commissioner of Income‑tax, Bombay City, reported in 1948 16 I.T.R. 240 at 244. By operation of section 24B, the legal representatives of a deceased person are, by fiction of law, deemed to become the assessable persons, but that fictional status cannot be extended beyond the purpose for which the provision was enacted. The Court, referring to its earlier decision in Bengal Immunity Co. Ltd. v. The State of Bihar, explained that legal fictions are created for a definite purpose and must be confined to that purpose; they should not be stretched beyond the legitimate field for which they were devised. In the present matter, the fictional treatment afforded by section 24B is limited to the situations described in its three subsections and cannot be applied to create liability for income that was not received in the previous year. The amounts that the Commissioner seeks to tax, and which this Court has held to be outside the charge of tax, were not received in the preceding year and therefore do not fall within any year of assessment. Consequently, it cannot be said that such sums may be deemed, by fiction, to have been received by the deceased Amarchand, nor can they be taxed in the hands of the heirs or legal representatives, who therefore cannot be treated as assessable persons for those years.

The Court concluded that the heirs and legal representatives of the deceased could not be considered assessees for the purpose of tax assessment with respect to the assessment years in dispute. This conclusion followed from the earlier finding that the income in question had not been received in the previous year and therefore fell outside the scope of sections providing a legal fiction for taxation. Accordingly, the Court affirmed that no tax liability could be attached to the heirs or legal representatives for those particular years. The Supreme Court further observed that the High Court had correctly answered the substantive question in the negative, thereby rejecting the claim advanced by the Commissioner of Income-tax. The Court expressed its view that the High Court's decision was legally sound and that there was no basis to overturn it. As a result of this assessment, the Court determined that the appeals filed by the Commissioner of Income-tax could not succeed. Accordingly, the appeals were dismissed and the parties were ordered to pay the costs of the proceedings. In sum, the final order of the Court dismissed the appeals and affirmed the earlier judgment of the High Court. The dismissal with costs underscored the principle that taxation cannot be imposed through fictional constructs beyond the statutory limits. The decision thereby clarified that the heirs and legal representatives are not liable for tax on income that was not actually received by the deceased in the relevant year.