The 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

Case Number: Civil Appeals Nos. 15 to 19 of 1962

Decision Date: 10 October 1962

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

The case was titled The Commissioner of Income‑Tax, Bombay versus Amarchand N. Shroff, by his heirs and legal representatives, and the judgment was delivered on 10 October 1962 by the Supreme Court of India. The bench comprised Justice J. L. Kapur, Justice M. Hidayatullah and Justice J. C. Shah. The petition was filed by the Commissioner of Income‑Tax for the Bombay City and the respondent was Amarchand N. Shroff represented by his heirs and legal representatives. The citation of the decision is 1963 AIR 1448 and 1963 SCR Supl. (1) 699, with subsequent citator references including R 1964 SC1761, R 1965 SC1358, RF 1966 SC1260, D 1967 SC 193, R 1971 SC2591, RF 1973 SC1016, RF 1976 SC 313, D 1982 SC 865, R 1984 SC 790, and R 1989 SC2113. The relevant statutory provision is Section 24B of the Indian Income‑Tax Act, 1922 (Eleventh Act), which deals with the liability to tax the income of a deceased person and the treatment of such income in the hands of the legal representative for the previous year. The headnote of the judgment explains that Sub‑section (1) of Section 24B provides that when a person dies, his heirs and legal representatives are liable, out of the estate, to pay the tax that was assessed as payable by the deceased or any tax that would have been payable under the Act had the deceased not died. In the facts, a partner identified as A was one of three partners in a firm of solicitors and died on 7 July 1949. After his death the remaining two partners continued the business until 1 December 1949, when R, the son of A, joined as the third partner. The partners had agreed that the realizations arising from work performed up to A’s death would be divided between A and the other two partners. The firm maintained its accounts on a cash basis. During each of the five assessment years from 1950 to 1955, amounts were received by the heirs and legal representatives of A from the outstanding bills. The Income‑Tax Officer commenced proceedings under Section 34 of the Indian Income‑Tax Act, 1922, concerning these receipts, and the amounts were assessed to income‑tax in the names of the respondents under Section 34(1)(b) read with Section 24B for each of the five years, on the premise that the receipts after A’s death should be deemed income of A and therefore taxable under Sub‑section (1) of Section 24B. The Court held that the words “or any tax which would have been payable by him under this Act if he had not died” in Sub‑section (1) of Section 24B are restricted.

The Court explained that section 24B of the Income‑Tax Act applies only to income that the deceased person earned before death and to income that his heirs or legal representatives receive in the assessment year that immediately follows the death, provided that such income had not already been assessed but would have been treated as the deceased’s income if he had lived. The provision does not create a tax liability for the estate beyond that immediate assessment year or accounting year in which the person died. Apart from the specific language of section 24B, the statute does not permit any assessment of income that accrues after the deceased’s death. Consequently, the Court held that because the amounts in question were received after the end of the assessment year that followed the death of Amarchand N. Shroff, those amounts could not be taxed as his income in the subsequent years of assessment. In reaching this conclusion, the Court referred to earlier authorities, namely Allen v. Trehearne (1938) 22 Tax Cas. 15, Ellis C Reid v. Commissioner of Income‑Tax Bombay, 5 I.T.C. 100, and Wallace Brother & Co. Ltd. v. Commissioner of Income‑Tax, Bombay City, [1948] 16 I.T.R. 240, which support the view that section 24B’s operation is confined to the year of death and does not extend to later periods.

The judgment arose from civil appeals numbered 15 to 19 of 1962, which were filed against a judgment and order dated 10 October 1958 of the Bombay High Court in Income‑Tax Reference No. 22 of 1958. The appellant was the Commissioner of Income‑Tax, while the respondents were the heirs and legal representatives of the deceased Amarchand N. Shroff. The appeals concerned the assessment years 1950‑51 through 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. After his death the partnership continued with Mangaldas and Hiralal until 30 November 1949, and on 1 December 1949 Ramesh, the son of Amarchand who had qualified as a solicitor, joined as a third partner. The partners agreed that realizations of outstanding work completed before Amarchand’s death would be shared among Amarchand, Mangaldas and Hiralal; work done between 8 July 1949 and 30 November 1949 would be shared between Mangaldas and Hiralal; and work performed after 1 December 1949 would be shared among Mangaldas, Hiralal and Ramesh. The firm kept

The partnership maintained its books on a cash basis, recording transactions only when cash was actually received or paid. During the five assessment years from 1950‑51 through 1954‑55 the heirs and legal representatives of the deceased partner Amarchand received, from the outstanding receivables of the firm, amounts of Rs. 37,847, Rs. 43,162, Rs. 34,899, Rs. 13,402 and Rs. 32,523 respectively. The Income‑Tax Officer subsequently attempted to levy tax on these receipts, characterising them as assessable income under the provisions of the Income‑Tax Act. For the first two assessment years, namely 1950‑51 and 1951‑52, he assessed the amounts as income of a Hindu undivided family comprising the heirs and legal representatives of Amarchand. The assessors appealed first to the Appellate Assistant Commissioner and subsequently to the Appellate Tribunal, seeking reversal of the assessment. Both members of the Tribunal, although for different reasons, concurred that the sums did not constitute income of a Hindu undivided family but represented inheritance or the realization of assets belonging to the deceased partner. Following that decision the Revenue did not continue the proceedings, but some time later the Income‑Tax Officer reopened the matter under section 34. In the renewed proceeding the officer treated the same receipts as income of ‘Amarchand N. Shroff by his heirs and legal representatives’, describing the entity as an individual rather than a Hindu undivided family. Accordingly, the amounts were assessed under section 34(1)(b) read with section 24B of the Income‑Tax Act for each of the five assessment years 1950‑51 through 1954‑55. On appeal, the Appellate Assistant Commissioner held that a notice issued under section 34 was valid only for the year 1950‑51; notices for the subsequent years were defective. Consequently, the assessments for the years 1951‑52, 1952‑53, 1953‑54 and 1954‑55 were set aside. The Commissioner of Income‑Tax appealed this decision to the Appellate Tribunal, which held that no assessment could be made against Amarchand. The Tribunal further observed that section 24B did not apply to the receipts received after his death and that those receipts were capital in nature rather than revenue. Accordingly, the Tribunal upheld the order of the Appellate Assistant Commissioner. The Commissioner then raised a question of law before the High Court, asking whether, given the facts, 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’. The High Court considered whether those amounts should be taxed in the hands of the assessee described as ‘Amarchand N. Shroff by his legal heirs and representatives’ for the relevant assessment years. The High Court answered the question in the negative, holding that apart from section 24E of the Income‑Tax Act the amounts were not taxable and that section 24E itself did not apply to the case. Counsel for the Commissioner argued that a proper construction of section 24B would deem the amounts received by the heirs and legal representatives after Amarchand’s death to be income of Amarchand. He further submitted that, because of the fiction contained in sub‑section (1), such amounts should be liable to tax under section 24B(1). In

In other words, the respondents, who were the heirs and legal representatives of the deceased Amarchand, were held to be liable to pay tax from the estate of Amarchand on those amounts to the extent that the estate could meet the charge, just as the deceased would have been liable had he not died. The argument placed particular emphasis on the words contained in subsection (1) of section 24B, namely “or any tax which would have been payable by him under this Act if he had not died.” The Court reproduced the full text of section 24B for reference. Subsection (1) provides that when a person dies, his executor, administrator or other legal representative must, out of the deceased’s estate and to the extent that the estate is capable of meeting the charge, pay the tax that has been assessed as payable by the deceased or any tax which would have been payable by him under this Act if he had not died. Subsection (2) states that if a person dies before the publication of the notice required under subsection (1) of section 22, or before being served with a notice under subsection (2) of section 22 or section 34, the executor, administrator or other legal representative must, upon receipt of the appropriate notice, comply with it, and the Income‑tax Officer may assess the total income of the deceased as if the executor, administrator or other legal representative were the assessee. Subsection (3) adds that where a person dies without having filed a return required under section 22, or where the return filed is believed by the Income‑tax Officer to be incorrect or incomplete, the Officer may make an assessment of the deceased’s total income and determine the tax payable on that assessment. For this purpose, the Officer may, by issuing the appropriate notice that would have been served on the deceased had he survived, require any accounts, documents or other evidence that he might have required under sections 22 and 23. The Court reiterated that subsection (1) makes the heirs and legal representatives liable to pay, out of the estate, the tax assessed as payable by the deceased or any tax which would have been payable under the Act if the deceased had not died. According to the submission of counsel for the Commissioner of Income‑tax, the words “or any tax which would have been payable by him under this Act if he had not died” should be interpreted to mean that, regardless of when the income was actually received, if the income is received by the heirs or legal representatives after the deceased’s death, they are liable for the tax just as the deceased would have been had he been alive at the time of receipt.

In this case the Court observed that the heirs and legal representatives of a deceased person were liable to pay tax in the same manner as the deceased would have been liable had he been alive when the income was received. However, the Court held that this view did not accord with the wording of section 24B and that all of its sub‑sections had to be read together. According to the Court, sub‑section (1) could be split into two situations: first, where the income of the deceased had already been assessed before his death; and second, where the income had not been assessed but would have been taxable if the deceased had not died. The Court explained that the second situation, when read together with sub‑sections (2) and (3), was limited to the cases expressly mentioned in those provisions. Accordingly, the words “if he had not died” applied only to income that the deceased earned before his death or to income received after his death by his heirs and legal representatives during the preceding year, and which had not yet been assessed but would have been assessed as if the deceased were still alive. The Court referred to Allen v. Trehearne for an interpretation of the phrase “if he had not died.” Sub‑section (2) was explained to provide that, if a person died before the publication of the public notice under section 22(1) or before a notice was served under sub‑section 2 of section 22 or under section 34, the income‑tax officer could compute and assess the total income of the deceased as if the heirs and legal representatives were the assessors. Sub‑section (3) was described as governing the situation where a person died before filing a return required by section 22 or died after filing a return that the officer found to be incorrect or incomplete; in such cases the officer could make an assessment on the total income of the deceased and certain other consequences followed. The Court concluded that, in all of the enumerated situations, the language of sub‑sections (1), (2) and (3) of section 24B indicated that the heirs and legal representatives 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 was received before his death or by the heirs and legal representatives after his death during the previous year. The Court further held that where the death occurred before the publication of the notice under section 22(1) or before service under section 22(2), or after service but before a correct return was filed, the income‑tax officer should assess the total income of the deceased and determine the tax payable thereon. Importantly, the Court emphasized that section 24B did not empower the levy of tax on receipts made by the legal representatives in assessment years that succeeded the year of account being the previous year in which the deceased died. Consequently, income‑tax was exigible only with reference to the total income of the previous year.

The Court was asked to determine whether income that was received after the previous year in which Amarchand died could be taxed under section 24B as the income of the deceased, payable by his heirs and legal representatives. In the case before the Court, the taxpayer had maintained his books on a cash basis. Under the Income‑Tax Act, an assessee is normally required to be a living person because a person’s legal personality ends upon death. Section 24B, however, temporarily extends the legal personality of a deceased assessee for the whole of the previous year during which the death occurred. Consequently, any income that the deceased received before his death, as well as any income that his heirs or legal representatives received after his death but still within that same previous year, is chargeable to income‑tax in the assessment year that corresponds to that previous year. The Legislature introduced this provision to ensure that income earned during the deceased’s lifetime and received after his death is brought within the tax net, thereby remedying the gap identified by the Bombay High Court in Ellis C. Reid v. Commissioner of Income‑Tax, Bombay(1). By contrast, any receipt of income in a year that follows the previous or account year cannot be described as income of the deceased person. The effect of section 24B is therefore confined to the assessment of the estate for the year in which the death occurred and does not impose tax liability on the estate for later years.

The Commissioner of Income‑Tax relied on the statutory scheme described in Additional Income‑Tax Officer v. E. Alfred(2) to support his claim. The Court found that the cited decision contained no statement that could bolster the Commissioner’s argument. The Commissioner also referred to observations made in the Bombay High Court judgment concerning B. M. Kamdar(3). Those observations did not aid the Commissioner’s position either. In that case, the learned judge, then Kania, J., observed that the determination of whether a particular sum constituted income was unrelated to the timing of its receipt; the timing of receipt was relevant only for ascertaining the year in which tax should be levied under the Act. The Kamdar case involved a consulting engineer who had ceased his practice on 15 February 1938 but later received a lump sum representing professional fees earned before the cessation, which were realised during the calendar year that was the previous year. The engineer, who kept his accounts on a cash basis, argued that because he had discontinued his profession in the previous year, the source of income had ceased and the amounts received should not be taxable. The Court held that the sum was assessable. The assessee in that matter was alive when the income was received, and the citation to the case appears as (1) 5 I.T.C. 100. (2) [1962] 44 I.T.R. 442, 445. (3) [1946] 14.

The Court observed that the income reported in I.T.R. 10 had been received by the assessee and that section 24B of the Income‑Tax Act did not apply to the factual situation before it. Counsel also relied on the observations of Derbyshire, C.J., in re Sreemati Usharani Shoudhurani (1). In that case the managing agent of a limited company died on 12 May 1938. At the time of his death the company owed him a sum of money as commission earned before his death. That sum was paid after his death, during the previous year 1938‑39, and the tax authorities attempted to tax it under section 24B. The Court held that the amount was taxable. Derbyshire, C.J. explained at page 205 that the widow, who was the legal representative, had received the salary due to her husband; that the Income‑Tax Officer was therefore entitled to assess the total income of the deceased as if the legal representatives were the assessors, and that the amount was liable to tax under section 24B (1). However, the Court noted that in that case the amount was received by the widow in the previous year and had been earned by the deceased during the previous year. The Court then stated that, apart from the specific provisions of section 24B, no assessment could be made in respect of the income of a person after his death. It referred to Ellis C. Reid v. Commissioner of Income‑Tax, Bombay (2). In that earlier case, which pre‑dated the enactment of section 24B, a notice under section 22(2) had been served on a person who failed to file a return within the prescribed period and subsequently died. The Court held that no assessment could be made under section 23(4) after the person’s death. At page 106 the judgment observed: “It is to be noticed that there is through the Act no reference to the death of a person on whom the tax has been originally charged, and it is very difficult to suppose the omission to have been unintentional. It must have been present to the mind of the legislature that whatever privileges the payment of income‑tax may confer, the privilege of immortality is not amongst them. Every person liable to pay tax must necessarily die and, in practically every case, before the last instalment has been collected, and the legislature has not chosen to make any provisions expressly dealing with assessment of, or recovering payment from, the estate of a deceased person.” The Court emphasized that the individual assessee must ordinarily be a living person and that an assessment cannot be made against a dead person; an assessment is a charge in respect of the income of the previous year, not a charge in respect of the year of assessment as measured by the previous year’s income. This principle was reiterated in Wallace Brothers & Co. Ltd. v. Commissioner of Income‑Tax, Bombay City (2). By virtue of section 24B, the legal representatives, by a legal fiction, become assessors, but that fiction is limited to the specific objects for which the section was enacted.

The Court observed that the legal fiction provided in section 24B was intended only for the specific purpose for which the legislation created it, and that purpose could not be broadened. Referring to its earlier decision in Bengal Immunity Co. Ltd. v. The State of Bihar, the Court noted that legal fictions are employed for a definite objective, are limited to that objective, and must not be extended beyond the legitimate field for which they were devised. In the present matter, the Court explained that the fictional treatment under section 24B is confined to the situations enumerated in its three subsections and may not be applied to liability for income that was not received in the previous year. Consequently, the amounts that the Commissioner sought to tax, and which the lower tribunal held were not liable to tax, were precisely those sums that had not been received in the prior year and therefore could not attract tax liability in the relevant years of assessment. The Court emphasized that it could not be said that such sums were income that could be deemed, by fiction, to have been received by the deceased individual, and hence they could not be treated as assessable income. The Court cited the authorities (1) [1948] 16 I.T.R. 240, 244 and (2) [1953] 2 S.C.R. 603, 664 to support this view. Accordingly, the amounts in question were not income of the deceased Amarchand and were not assessable in the hands of his heirs or legal representatives, who cannot be regarded as assessees for the purpose of assessment for those years. In the Court’s assessment, the High Court had correctly ruled against the Commissioner of Income‑tax, answering the issue in the negative. As a result, the appeals were dismissed with costs, and the orders of the High Court were affirmed.