Commissioner Of Income-Tax, Bombay vs James Anderson

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 128 of 1963

Decision Date: 2 December 1963

Coram: J.C. Shah, A.K. Sarkar, M. Hidayatullah

In this case the Supreme Court recorded that the petitioner was the Commissioner of Income‑Tax, Bombay and the respondent was James Anderson. The judgment was delivered on 2 December 1963 by a bench consisting of Justice J. C. Shah, Justice A. K. Sarkar and Justice M. Hidayatullah. The factual backdrop involved a man identified only as G, who held certain shares in a private limited company and who executed a will disposing of his estate before dying on 13 May 1945. After G’s death the respondent obtained Letters of Administration “durante absentia” to administer the estate. Pursuant to an agreement among the respondent, the company and a third party referred to as M, the respondent transferred the share certificates to M in exchange for payment of the purchase price. M, however, failed to present the certificates for registration, and consequently G’s name continued to appear on the register of shareholders of the company. The Income‑Tax Officer then made an order under section 23A of the Income‑Tax Act, as it then stood, deeming a portion of the undistributed assessable income of the company to have been distributed as dividend among the shareholders as of the dates of two general meetings, namely 26 May 1947 and 22 December 1947. Following that order the Officer issued a notice under section 34(1)(b) proposing to reassess the respondent’s income and requiring him to file a return for the relevant year. The respondent filed a return but omitted the dividend that had been deemed distributed by the order under section 23A. The Officer nevertheless included the deemed dividend in the respondent’s total income and levied tax thereon. The respondent appealed the assessment before the Appellate Assistant Commissioner and subsequently before the Income‑Tax Appellate Tribunal, but both appeals were dismissed. The matter was then taken on reference to the High Court, which held that the assessment made against the respondent in his capacity as administrator of G’s estate was not valid in law. On special leave, the Supreme Court affirmed two principal points: first, that a legal representative does not automatically acquire the rights of a shareholder with respect to shares in which the deceased was registered, although where the company’s articles make the estate liable for calls made during the shareholder’s lifetime or thereafter, the representative is obliged to satisfy those calls in his representative capacity; second, that the Income‑Tax Act does not contain any special provision permitting the assessment and taxation of deemed income from a deceased shareholder’s estate when the order deeming such income to have been distributed became effective after the shareholder’s death.

The provision contained in section 24B, which allows enforcement of a tax liability against the legal representative of a deceased person for tax that would have been payable had the person not died, was held to have only a narrow scope. The wording “tax which would have been payable under this Act, if he had not died,” was interpreted as creating liability only for tax on income that was actually received or was deemed to have been received in the financial year during which the taxpayer died. The provision does not create a mechanism for taxing income that a legal representative receives after the conclusion of that year. The Court referred to the authorities Commissioner of Income‑tax Bombay v Amarchand Shroff [1963] Supp. I S.C.R. 699 and Commissioner of Income‑tax Bombay v Ellis C. Reid I.L.R. 55 Bom. 312 in reaching this conclusion. Moreover, the Court stressed that assessing tax on such receipts after the relevant year on the basis that they constitute the personal income of the legal representative would amount to levying tax contrary to the provisions of the Act.

The matter was under the civil appellate jurisdiction as Civil Appeal No. 128 of 1963, filed by special leave against the judgment and order dated 21 September 1961 of the Bombay High Court in Income‑Tax Reference No. 32 of 1959. Counsel for the appellant and the respondent were listed, and the judgment was delivered on 2 December 1963. The case involved Henry Gannon, who was a registered holder of 2 674 shares of Gannon Dunkerley & Company, a private limited company based in Bombay. He died on 13 May 1945 after executing a will that disposed of his extensive property in the United Kingdom and British India. The National Bank of India Ltd. obtained probate of the will in the United Kingdom and appointed James Anderson as its attorney to administer the estate in British India. On 14 August 1946 Anderson secured letters of administration “durante absentia” for the estate in India. Of the shares, 450 were expressly bequeathed to designated legatees, and the corresponding share certificates and transfer forms were duly delivered to those legatees; the appeal raised no issue concerning these shares. By an agreement dated 14 August 1946 among the executor, the company and a person named Moraji, the executor agreed to sell the remaining 2 224 shares to Moraji. Accordingly, the share certificates and transfer deeds were handed to Moraji on 12 October 1946 for a purchase price of Rs. 140 per share. However, for reasons not evident from the record, Moraji failed to present the transfer deeds and share certificates for registration at the company’s office, and the name of Gannon remained on the register of shareholders for those 2 224 shares at all material times.

In the present matter, the name of the late Mr. Henry Gannon continued to appear on the register of shareholders for the 2,224 shares at all material times. For the assessment years 1946‑47 and 1947‑48, the Income‑tax Officer in Bombay issued an order on 26 March 1953 under section 23A of the Income‑tax Act, 1922 (as then in force). The order held that certain undistributed portions of the Company’s assessable income were to be deemed as dividends distributed to the shareholders as at the dates of the General Meetings of the Company, namely 26 May 1947 and 22 December 1947. The deemed net dividends were fixed at rupees 61,051 for the first meeting and rupees 3,73,099 for the second.

Subsequently, on 28 March 1953, the Income‑tax Officer sent a notice under section 34(1)(b) of the Income‑tax Act to “James Anderson, Administrator to the Estate of late Mr. Henry Gannon”. The notice stated that the Officer had reason to believe that Mr. Anderson’s income assessable for the year ending 31 March 1949 had escaped assessment, and that the Officer intended to reassess that escaped income. The notice required Mr. Anderson to file a return showing his total income and his total worldwide income assessable for that year.

In compliance with the notice, Mr. Anderson filed a return but omitted the dividend amounts that had been deemed to have been distributed by the order of 26 March 1953. The Income‑tax Officer, in the assessment order, incorporated the deemed dividends into Mr. Anderson’s total income and, after applying section 18(5), taxed the amount at the appropriate rate.

Mr. Anderson appealed the assessment order to the Appellate Assistant Commissioner and subsequently to the Income‑tax Appellate Tribunal in Bombay, but both appeals were dismissed. By way of further remedy, Mr. Anderson requested that the Tribunal refer two specific questions to the High Court of Bombay under section 66(1) of the Income‑tax Act. The first question asked whether, on the facts and circumstances of the case, the assessment made against Mr. Anderson, as Administrator to the estate in India of the late Mr. Henry Gannon, was valid in law. The second question, contingent upon an affirmative answer to the first, asked whether the deemed dividends of rupees 61,051 and rupees 3,73,099, deemed to have been distributed on 26 May 1947 and 22 December 1947 respectively under section 23A, were assessable in the hands of the applicant.

The High Court answered the first question negatively, concluding that the assessment was not valid in law, and it declined to address the second question. With special leave, the Commissioner of Income‑tax, Bombay, appealed that decision to the Supreme Court. The estate of Gannon, to which the letters of administration pertained, had vested in Mr. Anderson by virtue of section 211 of the Indian Succession Act. However, Mr. Anderson had not taken steps to have his name entered in the Company’s register of shareholders, and the Income‑tax Officer had sought to tax the deemed dividends in the hands of Mr. Anderson as the estate’s administrator.

In this appeal, the Court examined an order issued by the Income‑tax Officer under section 23A, which created a notional income by deeming dividends to have been distributed to Mr James Anderson in his capacity as administrator of the estate of Mr Henry Gannon. The Court observed that the order merely generated a legal fiction of distribution and receipt of dividend; it did not, by itself, impose a tax liability. For a tax liability to arise, the notional income must be followed by a separate assessment order that actually charges tax on that income. The sole issue before the Court was whether the Income‑Tax Act provides a mechanism for assessing dividends that are deemed to have been distributed under section 23A when, at the time the fiction of distribution becomes effective—namely the date of the relevant General Meeting—the registered shareholder had died and his legal representatives had not been entered in the company’s register of shareholders. The Court recalled its earlier decision in Commissioner of Income‑tax, Bombay City II v Shakumtala and others, following Howrah Trading Company Ltd. v. Commissioner of Income‑tax, Central Calcutta, which held that the term “shareholder” in section 23A refers exclusively to a person whose name appears in the company’s register, and only such a registered shareholder is subject to tax on the deemed dividend. Counsel for the Commissioner argued that this principle should apply only when the registered shareholder is alive and beneficial ownership has been transferred inter vivos to a person whose name is not on the register, and not where a deceased shareholder’s estate is represented by an administrator who obtains the shareholder’s rights without being entered in the register. The Court noted that the ability of an executor or administrator to enforce the shareholder’s rights or incur liability depends on the nature of those rights and obligations, as well as the provisions of the statute and the company’s articles. The Court further pointed out that a legal representative of a deceased person cannot vote on the shareholder’s behalf nor become a director solely by virtue of the representation. However, section 35 of the Indian Companies Act, 1913, provides that a transfer of shares or other interests of a deceased member by his legal representative, even though the representative is not a member, is as effective as if the representative were a member at the time of the transfer. This provision indicates that a legal representative does not automatically acquire all the rights of a shareholder in a company where the deceased’s name was entered as the registered holder, although the estate of a shareholder of a com‑

The Court noted that, by virtue of the Articles of the Company, a company is liable for calls on shares whether the calls are made during the shareholder’s lifetime or after the shareholder’s death, and that the legal representative is required to satisfy those calls in his representative capacity. This requirement does not arise because the legal representative becomes, by probate or Letters of Administration, a shareholder in place of the deceased, but because, as a representative, he has a duty to discharge the obligations that are enforceable against the estate.

The Court explained that an order issued by the Income‑tax Officer under section 23A of the Indian Income‑tax Act, 1922 declares that dividend is deemed to be distributed among the shareholders. By the express provision of that statute, each shareholder’s proportionate share of the dividend must be included in the total income of that shareholder for the purpose of assessing his total income. Consequently, the statute applies to the shareholder and treats the dividend as taxable income of that shareholder. The obligation to pay tax on the deemed dividend therefore rests on the shareholder, and it may be enforced against either the shareholder himself or his legal representative in the manner and to the extent permitted by the statute.

The Court further observed that the Income‑tax Act contains no special mechanism for assessing and levying tax on such deemed income when the order of the Income‑tax Officer, which causes the income to be deemed distributed, becomes effective after the shareholder’s death. The general provision in section 24B, which allows enforcement of tax liability against the legal representative of a deceased person for tax that would have been payable had the person not died, has only a limited application in this context.

The Court then referred to the decision in Commissioner of Income‑tax Bombay v. Ellis C. Reid, where the Bombay High Court rejected the Income‑tax Department’s claim to assess the estate of a deceased person through his legal representative. The High Court held that the definition of “assessee” in section 2(2) of the Indian Income‑tax Act, 1922, as it stood at the relevant date, applied only to a living person, using the words “a person by whom income‑tax is payable” and not “a person by whom or by whose estate income‑tax is payable.” In the absence of any provision enabling tax collection from the estate of a deceased person, the Income‑tax Officer’s attempt to make an assessment under section 23(4) could not succeed. The Court also observed that the Income‑tax Act contains no reference to the death of a person on whom tax was originally charged, and it was difficult to assume that such an omission was unintentional. In Reid’s case, the taxpayer had died after the commencement of the financial year but before the assessment of the prior year’s income, a fact that was central to the Court’s reasoning.

In the earlier authority it was observed that the taxpayer had died after the financial year had begun but before the income of the preceding year had been assessed. The Court held that the executors named in the taxpayer’s will were not required to pay tax on income that was due to the deceased. This conclusion was reached even though the taxpayer had died while assessment proceedings were still pending, because the proceedings could not be continued after his death and an assessment could not be made posthumously. To remedy this gap in the assessment machinery, the Legislature introduced section 24B by way of the Indian Income‑Tax (Second Amendment) Act, 1933. The first sub‑section of that provision stated: “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.” In later interpretation, the Court explained in the case Commissioner of Income‑Tax, Bombay City v. Amarchand Shroff that the incorporation of section 24B extended the legal personality of a deceased individual for the whole of the previous year in which he died. Consequently, any income received by the deceased before death or received by his heirs or legal representatives after death, provided it fell within that previous year, became assessable to tax in the relevant assessment year. Income that arose in the year following the previous or account year was not captured by the provision.

In the Amarchand Shroff case, a partner identified as “A” who worked in a solicitors’ firm that kept its accounts on a cash basis died on 7 July 1949. The firm’s outstanding professional fees that had been earned before A’s death were collected over a period of five years after his death and were shared among the remaining partners, with a portion of the sums being paid to A’s heirs and legal representatives as his share. The Income‑Tax Department attempted to assess the amounts received by A’s legal representative under section 34(1)(b) read with section 24B. The Court held that section 24B did not empower the levy of tax on receipts made by the legal representative of a deceased person in assessment years that succeeded the account year in which the person died. Accordingly, only the income that the deceased had received before death and the income that his heirs or legal representatives received after death, but within the same previous year, became assessable to income tax in the appropriate assessment year. Receipts made by the legal representatives after the close of the account year in which A died were not assessable. Applying this principle to the present matter, the Court noted that Gannon had died in May 1945 and that the dividend for which orders under section 23A were issued was deemed to have been distributed in the account year ending 31 March 1949.

In this case the Court observed that the dividend which was deemed to have been distributed was accounted for in the financial year that ended on 31 March 1949. According to the decision in Amarchand Shroff’s case(1), the legal personality of the deceased, Gannon, ceased for the purposes of s. 24B at the conclusion of the account year in which Gannon died. Consequently no tax could be imposed under s. 24B on any dividend that was deemed to have been received by Gannon or by his legal representatives after that year ended. The Commissioner’s counsel attempted to rely on observations made by Justice Kapur, who had spoken for the Court in Amarchand Shroff’s case(1) (at p. 67). Justice Kapur had stated: “In the present case the amounts which are sought to be taxed and which have been held not to be liable to tax are those which were not received in the previous year and are therefore not liable to tax in the several years of assessment. It cannot be said that they were income which may be deemed by fiction to have been received by the dead person and therefore they are not liable to be taxed as income of the deceased, Amarchand, and are not liable to be taxed in the hands of the heirs and legal representatives who cannot be deemed to be assessees for the purpose of assessment in regard to those years.” After quoting this passage, the Commissioner’s counsel advanced two further arguments. The first argument asserted that even if, after the close of the account year, receipts that would have been treated as the deceased’s income had he lived ceased to be assessable in his name, such receipts could nevertheless be taxed as income in the hands of the legal representatives. The second argument contended that where the income was notional under s. 23A, the deceased’s legal personality should be regarded as extending to the end of the year in which that notional income was deemed to have been received by the legal representatives. The Court found the first argument plainly inconsistent with the ruling in Amarchand Shroff’s case(1), where it had held that receipts by an heir or legal representative for professional services performed by the deceased solicitor were taxable only to the limited extent authorized by s. 24B. The Court also held that the second argument introduced a concept foreign to the earlier decision, because Amarchand Shroff’s case dealt not with a fictional distribution of dividends under s. 23A but with a fictional receipt of income by the deceased, achieved by extending his legal personality. Section 24B therefore could not support two different interpretations regarding the extension of the deceased’s legal personality.

The Court noted that Section 24B concerns the liability of a legal representative to pay tax that is assessed as payable by the deceased person, or any tax which would have been payable by him under the Act if he had not died. The Court held that if the expression “tax which would have been payable under this Act, if he had not died” is intended to create liability for tax on income received in the year of account during which the taxpayer died, then a different interpretation of the same expression when applied to notional income would be impermissible. Because the Legislature has not made any general provision for the assessment of income that is receivable by the estate of a deceased person, the Court concluded that the words “any tax which would have been payable by him under this Act if he had not died” cannot be regarded as supplying the machinery for taxing income that a legal representative receives for the estate after the year in which the deceased died has expired.

The Court then considered the argument that, besides Section 24B, the legal representatives of a deceased person also act as representatives of his estate for taxation purposes and that the taxing authorities are competent to assess them on income received on behalf of the estate. Counsel for the respondent did not rely on any specific provision of the Act to support this contention; instead, he merely asserted that the Act seeks to tax all assessable incomes and that income received by a legal representative of a deceased person’s estate should not be allowed to escape tax to the detriment of public revenue. The Court observed that if the Legislature has failed to establish a procedure for assessing such income, the Courts cannot supply that procedure.

The Court examined the definition of “assessee” in Section 2(2) as amended by the Indian Income‑tax (Amendment) Act, 25 of 1953, with effect from 1 April 1952. That definition describes an assessee as a person by whom income‑tax or any other tax is payable, or any person in respect of whom any proceeding under this Act has been taken for the assessment of his income, of the loss sustained by him, or of the amount of refund due to him. By reference to Section 3, the Court explained that where income‑tax is chargeable for any year at the rate or rates prescribed by the Central Legislature, tax at that rate shall be charged for that year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year of every individual, Hindu undivided family, company and local authority, and of every firm and other association of persons or the partners of the firm or the members of the association individually. Consequently, the charge to income‑tax must be made in accordance with and subject to the provisions of the Act, and the Legislature has not provided that income received by a legal representative, which would but for the death of the deceased have been received by the deceased, is to be treated for assessment purposes as the personal income of the legal representative.

The Court observed that any sum received by a legal representative from the estate of a deceased person is to be regarded, for the purpose of income‑tax assessment, as the personal income of that legal representative. Consequently, if tax were imposed on those receipts on the ground that they constitute the personal income of the legal representative, such an imposition would be contrary to the provisions of the Act. The Court therefore held that assessing tax in that manner would not be in accord with the statutory scheme. In reaching this conclusion, the Court agreed with the decision of the High Court, although it arrived at the agreement on reasons that differ somewhat from those articulated by the High Court. On the basis of this reasoning, the Court concluded that the appeal could not succeed. Accordingly, the appeal was dismissed, and the appellant was ordered to pay the costs of the proceedings. The order of dismissal was thus confirmed, and the matter was closed.