Administrator-General Of West Bengal vs Commissioner Of Income-Tax, Calcutta

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 168, 169 of 1964

Decision Date: 6 October 1964

Coram: S.M. Sikri, J.C. Shah

In this matter the Court recorded that the petitioner was the Administrator‑General of West Bengal and the respondent was the Commissioner of Income‑Tax, Calcutta. The judgment was delivered on 6 October 1964 by Justice S. M. Sikri, who was joined by Justices J. C. Shah and K. Shah. The case concerned the application of section 41 of the Indian Income‑Tax Act, 1922, to income received by the Administrator‑General who had been appointed de bonis non of a deceased testator’s estate. The testator, identified only as “T,” died in 1938. His will provided that certain legacies were to be paid out of his estate over a period of fifteen years after his death, with the estate to be administered by executors and trustees during that period, and that the residue of the estate would thereafter pass to his five sons. Probate of the will was granted to the five sons on 24 August 1938. Subsequently, by an order dated 10 May 1948, the Calcutta High Court appointed the Administrator‑General of West Bengal as the administrator de bonis non of the remaining property. In income‑tax assessments for the years 1950‑51 and 1951‑52, the Administrator‑General, acting as the appellant, contended that the assessment should be made under section 41 because the income of the estate was receivable by him on behalf of the five sons, whose shares in that income were, in his view, definite and determinable. Both the assessing officer and the appellate authority rejected this claim. The High Court held that although the Administrator‑General was expressly mentioned in section 41 and therefore fell within the class of persons to whom the provision applied, the shares of the sons could not be said to be determinate for as long as the administration continued; consequently the proviso to subsection (1) of section 41 was attracted and tax was to be recovered at the maximum rate. The Administrator‑General appealed to this Court, obtaining a certificate under section 66A(2) of the Act. In his appeal he argued that the High Court erred in concluding that the sons’ shares were not determinate. The Revenue, for its part, submitted that section 41 was altogether inapplicable because the appellant received the estate’s income not on behalf of the five sons but in his capacity as an executor. The Court held that the mere reference to the Administrator‑General in section 41 did not settle the question. A further condition required by the provision was that the income must be received by the person on behalf of another person or persons. The Court observed that in the present case the Administrator‑General did not receive the income on behalf of the five sons; what the sons were entitled to was the residue of the estate, and any surplus that might arise from the estate’s income would ultimately be received by them not as ordinary income but as part of the residue. Accordingly, the position of an Administrator‑General appointed de bonis non was deemed no different from that of an executor with respect to the income he received from the estate. The Court relied on several precedents, including V. M. Raghavalu Naidu v. Commissioner of Income‑Tax, R. v. Income‑Tax Special Commissioners, Lord Sudeley v. Attorney‑General, Marla Celeste Samaritan Society v. Commissioner of Inland Revenue, Corbett v. Commissioner of Inland Revenue, Asit Kumar Ghose v. Commissioner of Agricultural Income‑Tax, Birendra Kumar Dutta v. C.I.T., and In re Cunliffe‑Owen Mountain v. Inland Revenue Commissioner, distinguishing the latter. The judgment was part of Civil Appeals Nos. 168 and 169 of 1964, arising from the High Court’s order dated 5 December 1961 in Income‑Tax Reference No. 116 of 1957.

The Court observed that the five sons were entitled only to the residue of the estate, and that any savings arising from the estate’s income would ultimately be received by them not as personal income but as a portion of that residue. It also held that an Administrator‑General appointed de bonis non occupied a position no different from that of an executor with respect to the income he obtained from the estate, and therefore the same principles applicable to executors applied equally to the Administrator‑General. In reaching this conclusion the Court referred to the decisions in V. M. Raghavalu Naidu v. Commissioner of Income‑Tax and Excess Profits Tax, Madras, 18 I.T.R. 787; R. v. Income‑Tax Special Commissioners 7 T.C. 646; Lord Sudeley v. Attorney‑General, [1897] A.C. 11; Marla Celeste Samaritan Society of the London Hospital v. Commissioner of Inland Revenue, 11 T.C. 226; and Corbett v. Commissioner of Inland Revenue, 21 T.C. 449. The Court also mentioned the authorities Asit Kumar Ghose v. Commissioner of Agricultural Income‑Tax, West Bengal, 22 I.T.R. 177 and Birendra Kumar Dutta v. C.I.T. Calcutta, (1961) 42 I.T.R. 661, while distinguishing the case of In re Cunliffe‑Owen Mountain v. Inland Revenue Commissioner, (1953) 1 Ch. 545.

The judgment concerned two civil appeals, numbered 168 and 169 of 1964, filed under certificates granted pursuant to section 66A(2) of the Indian Income Tax Act, 1922. Both appeals challenged the judgment and order dated 5 December 1961 of the Calcutta High Court in Income‑Tax Reference No. 116 of 1957. The appellant was represented by counsel consisting of A. V. Viswanatha Sastri, K. Rajendra Chaudhuri, M. Raja‑gopal and K. R. Chaudhuri in the first appeal, and by K. Rajendra Chaudhuri and K. R. Chaudhuri in the second. The respondent was represented by the Attorney‑General, R. Ganapathy Iyer, R. H. Dhebar and R. N. Sachthey. The judgment was delivered by Justice Sikri.

The two appeals raised two points for determination. First, the Court was asked to decide whether, on the facts and circumstances of the case, the tax assessments made against the Administrator‑General of West Bengal in his personal capacity, rather than as a representative of the beneficiaries under the will of the late Raja P. N. Tagore, were legally correct. Second, assuming an affirmative answer to the first question, the Court was required to consider whether the assessment of the Administrator‑General at the maximum rate of tax was lawful.

The factual background, as set out in the statement of the case by the Income‑Tax Appellate Tribunal, involved the death of Raja Profulla Nath Tagore on 2 July 1938. Raja Tagore had executed an elaborate will dated 14 March 1927, which provided specific legacies to certain persons and institutions and designated the residue of his estate to his five sons. Clause 81 of the will declared that, save for the legacies already mentioned and the garden house at Allambazar Tagore Villa together with its furniture, all remaining movable and immovable property, whether presently owned or to accrue in the future, would belong to his sons. Clause 10 further stipulated that the legacies were to be paid in full within fifteen years of his death, with the estate to be managed under the supervision of his executors and trustees, and that the executors and trustees were to meet those legacies out of the small savings generated from the estate’s income, without selling any portion of the estate or any immovable property.

The Will of Raja Profulla Nath Tagore stated that, after the administration and payment of several trusts and the various legacies created by the testator, his five sons would continue to hold and enjoy all of the movable and immovable property that would accrue to the estate in the future. Clause 10 of the same Will set out the manner in which the legacies were to be discharged. It provided that every legacy fixed in the Will must be paid in full within fifteen years of the testator’s death and that during those fifteen years the estate would be managed under the supervision of the appointed executors and trustees. The clause further required that the executors and trustees discharge all legacies out of the small savings generated annually from the estate’s income, and that they were not authorized to sell any part of the estate or any immovable property for that purpose. Additionally, the Will declared that no interest would be payable on any of the legacies and that the legatees could not claim any interest. While the remaining clauses of the Will are not reproduced in full, it is noted that many legacies had to be satisfied before the residue of the estate could be determined. Probate of the Will was granted to the five sons on 24 August 1938. Subsequently, by an order dated 10 May 1948, the High Court appointed the Administrator‑General of West Bengal as the administrator of the estate, directing that letters of administration de bonis non and a copy of the Will be issued for the property and credits of the deceased. The Administrator‑General, who is referred to as the appellant, filed income‑tax returns for the assessment years 1950‑51 and 1951‑52, corresponding to the accounting years 1949‑50 (1356 B.S.) and 1950‑51 (1357 B.S.). The returns disclosed income of ₹33,611 for the first year and ₹39,630 for the second year. The appellant asserted that this income was specifically receivable on behalf of the five sons and that each son’s share in the income was fixed and determinable.

The Income‑Tax Officer rejected the appellant’s claim for the assessment year 1950‑51, holding that the Administrator‑General was only acting as executor of Raja P. N. Tagore’s estate and that the execution of the estate had not yet been completed. Consequently, the officer reasoned that the question of beneficiaries did not arise and that the Administrator‑General himself was liable to be assessed as the executor of the estate. The same reasoning was applied to the assessment year 1951‑52, and a similar order was issued. The Appellate Assistant Commissioner affirmed both orders of the Income‑Tax Officer. In arriving at this decision, the Commissioner referred to the principles laid down in the cases of V. M. Raghavalu Naidu v. Commissioner of Income Tax and Excess Profits Tax, Madras, and Asit Kumar Ghose v. Commissioner of Agricultural Income‑Tax, West Bengal, which had held that tax on the individual incomes of beneficiaries could be levied only after the administration of the estate was completed and the residue had been ascertained.

In the cases of Madras and Asit Kumar Ghose v. Commissioner of Agricultural Income‑Tax, West Bengal, the Court observed that tax could be imposed on the separate individual incomes of beneficiaries only after the estate’s administration had been completed and the remaining assets of the estate had been ascertained. Both parties admitted before the Court that the administration of the estate in the present matter was not finished until the end of the accounting year 1950‑51. The Appellate Tribunal rejected the submission that tax could be levied earlier and held that the condition for applying section 41 required the Administrator‑General of West Bengal to receive the income on behalf of the beneficiaries. The Tribunal explained that, in accordance with section 211 of the Indian Succession Act, the Administrator‑General acted as the legal representative of the deceased and not as a receiver on behalf of the beneficiaries; such a role could arise only after the estate’s administration was complete or when specific directions were issued. The Tribunal further noted that the proviso to section 41 stipulated that where the income was not specifically receivable on behalf of a particular person, or where an individual’s share was indeterminate or unknown, the tax must be levied and recoverable at the maximum rate. It found no doubt that in the present case the Administrator‑General was not receiving the income on behalf of any beneficiary, and that certain benefactions involved payments whose beneficiaries’ shares were inherently indeterminate or unknown. Consequently, the Tribunal concluded that the tax should indeed be imposed at the maximum rate, while also stating that the assessee could not claim that the beneficiaries’ incomes should be assessed separately rather than together in the hands of the Administrator‑General. After the appellant’s application, the Tribunal referred two questions to the High Court. The High Court ruled that an Administrator‑General appointed by the Court fell squarely within the ambit of section 41 and could not be treated differently merely because he possessed the powers of an executor. It further held that, while the administration remained incomplete, the income from the properties could not be said to belong to the sons, and therefore the sons did not possess any determinate share in the profits or gains of the estate during the accounting years. The proviso to section 41(1) therefore applied, making the tax recoverable at the maximum rate. Counsel for the appellant in Civil Appeal 168 of 1964 argued that the High Court erred in finding the sons’ shares to be indeterminate, asserting that each son held a fixed one‑fifth share and that the issue should be whether the shares were determinate rather than whether the actual amounts varied.

In the case before the Court, counsel argued that the issue was not whether the actual amount each son would receive varied, but rather whether the sons’ shares themselves were fixed. He said that even if the income fluctuated, the entitlement of each son remained a fixed portion. To support this view, he referred to the authority in Birendra Kumar Datta v. Commissioner of Income Tax, Calcutta (1). He further contended that Section 41 was mandatory and that, if the proviso to Section 41 did not apply, the Income‑Tax Officer was obligated to assess the appellant under Section 41.

The Attorney‑General, appearing for the Revenue, submitted that Section 41 did not apply at all because, on the facts, the appellant received the income not on behalf of the five sons but in the capacity of an executor. He emphasized that the term “executor” was not mentioned in Section 41 and that an executor would be assessable under sections 3 and 4 of the Act. As an alternative argument, the Attorney‑General maintained that the sons’ shares were indeterminate. The Court, inclined to accept the first submission of the learned Attorney‑General, therefore held that it need not express any opinion on whether the shares of the five sons were indeterminate within the proviso to Section 41.

Section 41 reads as follows: “41. Court of Wards, etc. (1) In the case of income, profits or gains chargeable under this Act which the Courts of Wards, the Administrators‑General, the Official Trustees or any receiver or manager (including any person whatever his designation who in fact manages property on behalf of another) appointed by or under any order of a Court, or any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise (including the trustee or trustees under any Wake deed which is valid under the Mussalman Wakf Validating Act, 1913 (6 of 1913) are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such Court of Wards, Administrator‑General, Official Trustee, receiver or manager or trustee, or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly; Provided that where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate but, where such persons have no other personal income chargeable under this Act and none of them is an artificial judicial person, as if such income, profits or gains or such part thereof were the total income of an association of persons.”

It is not disputed that before Section 41 can be applied, it must first be established that the Administrator‑General was entitled to receive the income on behalf of a person or persons.

In this case, the Court observed that it was undisputed that the administration of the estate had not been completed within the accounting periods that were under consideration. Consequently, the Court framed the central issue as whether the appellant had received the income for his own benefit or on behalf of the five sons during that period. The Court found that, while the estate was being administered, the appellant did not receive the income on behalf of the five sons. Whenever the appellant received income, he possessed a discretion to apply the funds either to pay legacy A, to pay legacy B, or to meet the expenses of the estate. The Court further explained that if a surplus remained in one year, the appellant could, in a subsequent year, allocate that surplus to pay legacy C, legacy D, or to cover further expenses. The Court noted that the five sons were entitled only to the residue of the estate, which would be paid to them finally, not as ordinary income but as a portion of the residue. The Court cited English law, stating that aside from any statutory provision, a residuary beneficiary is not treated as taxable on the income of an estate while the estate is in administration. The Court explained that a share of the residue does not vest in the beneficiary until it is determined either in whole or in part by transfer, assent, or appropriation, referring to Wheatcroft on Law of Income Tax, Surtax and Profits Tax, section 1‑1104. The Court then referred to the decision in R. v. Income Tax Special Commissioners (1) (Ex parte, Dr. Barnardo’s Homes) as supporting the argument presented by the learned Attorney‑General. The Court recounted the factual background from the headnote of that decision. It recorded that Mr. Denzil Thomson died on 15 November 1914, leaving the residue of his estate to Dr. Barnardo’s Homes National Incorporated Association. The will was contested by the testator’s next‑of‑kin, and the dispute was partly resolved when the Association transferred one‑third of the residuary estate to the next‑of‑kin. Because of the contest, the division of the residuary estate was delayed, and the investments representing the residue remained under the control of the executors until May 1916. Between May 1916 and December 1916, two‑thirds of the investments were transferred to the Association and one‑third to the next‑of‑kin. Income generated from those investments was subject to income tax deduction, and the total tax deducted from the income accrued between the testator’s death and the transfers amounted to £498 0s 11d. The Association applied, under Section 105 of the Income Tax Act, 1842, to the Special Commissioners of Income Tax for repayment of two‑thirds of that amount, namely £332 0s 7d., on the basis that the tax had been levied on income payable to the Association and that the Association used the income solely for charitable purposes. The Court noted that the application was unsuccessful, and that the Secretary of the Association subsequently applied for and obtained a rule nisi requiring the Special Commissioner of Income Tax to show cause why a writ of mandamus should not be issued directing an exemption from income tax on the income in question.

To recover the amount of £332 0s 7d, the Court noted that the House of Lords, in the case of Lord Sudelev v. Attorney‑General, had ruled that before the residue of the estate was ascertained, the Association, being the residuary legatee, possessed no interest in the testator’s property. The Court further explained that the taxed income generated by the estate prior to that ascertainment belonged to the executors and was not received by them in the capacity of trustees on behalf of the Association. The Court then cited the observation of the Master of Rolls in the Court of Appeal, who stated that the income received by the executors during the interim period was held not for the residuary legatee but for the executors themselves, to be applied in the administration of the estate. Viscount Finlay added that the present matter was essentially governed by the earlier House of Lords decision in Lord Sudelev’s case, which emphasized that a legatee’s right to a share of a residue does not confer any interest in the testator’s assets until the residue is finally ascertained. Consequently, the income from which the income tax was deducted was the executors’ income, not the charity’s. Although the executors were obliged to apply that income in the course of the administration, they did not hold it as trustees for the charity, and no trust in favour of the charity over that income was ever created. Ultimately, when administration concluded, the charity received its share of the estate consisting of both capital and accumulated income; the executors alone had been the recipients of the income during administration, and no retroactive liability could be imposed on the charity for tax that was deducted at source. Viscount Cave reinforced this principle by observing that once a testator’s personal estate is fully administered and the net residue identified, the residuary legatee becomes entitled to that residue together with any accrued income, but until that moment the legatee holds no specific property or income, which remain the mixed fund of the executors for administrative purposes. The Court mentioned that subsequent authorities, including the decisions of the Maria Celeste Samaritan Society of the London Hospital v. Commissioners of Inland Revenue and Corbett v. Commissioners, have adopted the same view.

The Court observed that the cases of Inland Revenue (2) and the earlier decision in Dr. Barnardo’s case had both articulated a universal rule that applied to every situation where a residuary estate was being ascertained and could not be determined until the administration of the estate was complete. The Court noted that Mr. Sastri had referred to the decision in In re Cunliffe‑Owen Mountain v. Inland Revenue Commissioners (3), but the Court considered that the Court of Appeal had not adopted any view that departed from the earlier position. The Court of Appeal, while interpreting section 27(1) of the Finance Act, 1949, which exempted legacy duty in certain circumstances, examined the nature of the title of a residuary legatee. It held that the title of a residuary legatee to a residuary estate remained unchanged both before and after the completion of the administration, even though the legatee could not claim any specific asset or the income from any such asset until the administration was finished and the estate was fully settled. The Court rejected the contention that, pending final administration, the residuary legatee possessed only a legal expectancy. However, the Court stressed that this conclusion did not imply that the executor or administrator received the income on behalf of the residuary legatee. In V. M. Raghavalu Naidu v. Commissioner of Income‑tax and Excess Profits Tax (4), the Madras High Court held that section 41 of the Act was inapplicable where the administration of the estate had not been completed by the executors. The citation (1) 11 T.C. 226, (2) 21 T.C. 449, (3) [1953] 1 Ch. 545 and (4) (1950) 18 I.T.R. 787 were noted. The High Court in that case dismissed the Revenue’s argument that the Administrator‑General did not fall within the purview of section 41 because the Administrator‑General, although appointed by the Court, was expressly covered by the provision and could not be treated differently merely because he possessed the powers of an executor. The Court nevertheless pointed out that the explicit mention of the Administrator‑General in section 41 did not settle the issue, because the provision also required that the income be received by the Administrator‑General on behalf of a person or persons, a condition that must be satisfied before section 41 could apply. The Court clarified that the position of an Administrator‑General appointed de bonis non was no different from that of an executor concerning the income he receives from the estate. Consequently, the Court held that section 41 of the Act was not applicable in the present matter, because the appellant received the income for his own benefit and not on behalf of the five sons of the deceased Raja. In view of this analysis, the Court concluded that the answers to the two questions posed at the beginning of the judgment were affirmative. Accordingly, the appeals were dismissed with costs, and a single set of hearing fees was ordered, the appeals being dismissed.