Income Tax Appellate Tribunal - Chennai
Late A.Y. Prabhakar (Indl.) vs Assistant Commissioner Of Income Tax on 10 March, 2006
Equivalent citations: (2006)105TTJ(CHENNAI)391
ORDER
Mahavir Singh, J.M.
1. These appeals of the assessee and the Revenue are directed against the respective orders of the CIT(A), Chennai. The relevant assessment years involved in these appeals are 1997-98 to 2002-03.
2. The first legal issue in these six appeals of the assessee, late Shri A.Y. Prabhakar (Individual) is, whether, the reassessment framed by the AO on a dead person without bringing on record, the legal representative, is valid, void or voidable ?
3. The briefly stated facts of the case are, that, the assessee has declared the income from house property in respect of the following house properties which were constructed with the money borrowed from Indian Bank and ANZ Grindlays Bank in 1989 :
_________________________________________________________________________ S.No. House No. Amount of borrowed capital (Rs.) _________________________________________________________________________
1. 5, Lattice Bridge Road, Chennai 14,54,000 _________________________________________________________________________
2. 225A, Anna Nagar, Chennai 8,75,000 _________________________________________________________________________
3. 9, L.B. Road, Chennai 6,30,000 _________________________________________________________________________ The returns were processed under Section 143(1)(a) or Section 143(1) of the IT Act, 1961 as the case may be for all these assessment years. Subsequently, the AO issued notice under Section 148 of the Act for the asst. yrs. 1997-98 to 2001-02 on 12th Nov., 2003 on the reasoning that the assessee could not pay back the principal amount borrowed as mentioned above. He also could not make the payment of interest on the borrowed capital. So, the bank charged interest on interest. The assessee claimed deduction in respect of interest on interest under Section 24(1)(vi) of the Act. The assessee vide letter dt. 27th Nov., 2003 requested the AO to treat the original returns filed as filed in response to the notice under Section 148 of the Act in all these five years. For the asst. yr. 2002-03, the regular assessment was framed after issuance of notice under Section 143(2) of the Act and the assessment was completed under Section 143(3) of the Act. In all these six years, the assessments were completed vide different orders dt. 28th March, 2005. During the course of the assessment proceedings, one of the legal representatives, Shri Ravindran Prabhakar brought to the notice of the AO that the assessee, A.Y. Prabhakar expired on 11th Nov., 2004 vide letter dt. 22nd Nov., 2004 which was filed with the ITO on 22nd Dec., 2004. With this letter, xerox copy of the death certificate and the legal heir certificate were enclosed and as per the certificate, two sons of the deceased assessee are the legal heirs viz., (i) Shri Raghunandan Prabhakar, 34 years and (ii) Shri Ravindran Prabhakar, 30 years. The AO without taking any cognizance of this letter, death certificate and legal heir certificate pursued the assessment proceedings and passed the assessment order on the deceased assessee, Shri A.Y. Prabhakar, individual which is dt. 28th March, 2005. Aggrieved, against the assessment on the deceased person, one of the legal heirs Shri Ravindran Prabhakar preferred an appeal before the CIT(A). Before the CIT(A), it was pleaded by the legal representative that the assessee died on 11th Nov., 2004 during the course of pendency of assessment proceedings and the AO has completed the assessment in the name of the assessee without impleading the legal heirs. Before the CIT(A), the ground raised was that this assessment is null and void. For this, the legal representative relied on the decision of the Hon'ble Madhya Pradesh High Court in the case of CIT v. Kumari Prabhawati Gupta and Ors. CIT(A) after relying on the provisions of Sub-section 2(a) and 3 of Section 159 of the Act and various decisions of the Hon'ble High Courts and apex Court, upheld the assessment orders and given a finding in p. 22, para 5.8 which reads as under :
5.8 In view of the detailed discussion hereinabove, I hold that there is no case for declaring the assessment proceedings as null and void. At the most there could have been procedural defect which has been cured by the AO as well as by me through notices issued to all the legal heirs of the appellant. The appellant, therefore, fails on the ground for all the assessment years under consideration.
For this finding, the CIT(A) has gone through the provisions of Section 159 of the Act and directed the AO to issue notices to both the representatives to implead both of them as legal representatives and held that "I have also issued notices to both the legal heirs in exercise of my powers under Section 251 of IT Act." Further, the CIT(A) while upholding the order of the AO, has given the following reasoning :
It is clear by continuing the appellate proceedings through the Authorized Representative of one of the legal heirs (it may be mentioned here that Sri Raghunandan Prabhakar has neither appeared before me in response to notice dt. 21st Sept., 2005 nor he has authorized anyone to appear on his behalf before me), the legal heirs have ratified all the submissions filed before the AO and before me after the death of Sri A.Y. Prabhakar. In fact, the submissions made before the AO after the death of Sri A.Y. Prabhakar and made before me during the course of appellate proceedings are quite similar. I, therefore, do not find any force in this technical objection of the Authorized Representative of the legal heirs of the appellant. It may, however, be noted that despite all these opportunities given to the legal heirs of the appellant, no submissions on the merits of the case has been made.
Aggrieved, the legal representative is in second appeal before the Tribunal. Before us, Sri T. Banusekar, chartered accountant appeared on behalf of the assessee and Shri Shaji P. Jacob appeared on behalf of the Revenue.
4. We have heard both the sides and gone through the case records including the paper books filed by both the sides. We have also gone through the relevant provisions of the Act as well as the case law cited by both the sides. The deceased assessee, A.Y. Prabhakar has filed the original returns of income for the asst. yrs. 1997-98 to 2001-02 declaring the income from house properties and claimed deduction of interest paid to the bank under Section 24(1)(vi) of the Act. The returns were processed under Section 143(1) or 143(1)(a) of the Act, as the case may be. The AO issued notices under Section 148 of the Act on the ground that the Assessee has claimed interest on interest as deduction under Section 24(1)(vi) of the Act and accordingly, the income has escaped assessment. The notice under Section 143(2) of the Act, for the asst. yr. 2002-03 was issued. The AO issued notices under Section 148 of the Act for the asst. yrs. 1997-98 to 2001-02. The assessee filed a letter dt. 27th Nov., 2003 stating that the original returns filed be treated as filed in response to notices issued under Section 148 of the Act for these five assessment years. Subsequently, notices under Section 143(2) of the Act were issued and the claim of interest on unpaid interest was disallowed by the AO in these five assessment years while framing the assessments under Section 143(3) r/w Section 147 of the Act and for the asst. yr. 2002-03, the assessment was framed under Section 143(3) of the Act. During the pendency of the reassessment as well as assessment proceedings, the Assessee expired on 11th Nov., 2004 and one of the legal heirs filed a letter to the AO which is dt. 22nd Nov., 2004 and the same was received in the income-tax office on 22nd Dec., 2004. The relevant letter which is part of the assessment records has been filed in the assessee's paper book at p. 2 and the relevant letter is reproduced as it is :
Dt. 22nd Nov., 2004 From, Mr. Ravi Prabhakar 52/51, IIIrd Main Road, Gandhi Nagar, Adyar, Chennai - 600 020.
To The Asstt. CIT Circle IV, Nungambakkam High Road, Chennai-600 034.
Sir, Sub : Intimation of expiry of A.Y. Prabhakar, Individual-
Pan No. AAAPP7642M (G.I. No. 10718P)Reg.
I would like to inform you that my father Mr. A.Y. Prabhakar expired on 11th Nov., 2004. The xerox copy of the death certificate and the legal heirs certificate are enclosed herewith for your records.
As per the legal heirs certificate Mr. Raghunandan Prabhakar and Mr. Ravi Prabhakar are the only legal heirs of the deceased Mr. A.Y. Prabhakar.
This is for your kind information. Thanking you, Yours faithfully Sd/-
(Ravi Prabhakar) Enclosed :
1. The xerox copy of death certificate duly notarized
2. The xerox copy of legal heirs certificate duly notarized.
5. It is seen from the above letter that the death certificate and legal heir certificate were produced before the AO for their records wherein the following persons were declared as the legal heirs of the deceased assessee, viz., (i) Mr. Raghunandan Prabhakar and (ii) Mr. Ravi Prabhakar. It is seen that both the legal heirs/legal representatives are adults. Despite this letter, it is observed from the assessment orders passed for the asst. yr. 1997-98 that the assessment was framed on the deceased assessee, Mr. A.Y. Prabhakar, Individual as if he is alive. The relevant portion of the assessment order is being reproduced as it is :
Assessment order in the case of Shri A.Y. Prabhakar (Individual) PAN :AAAPP3662M Asst. yr. 1997-98 ITNS 65 Income-tax Department
1. Name of the Assessee : Shri A.Y. Prabhakar (Individual)
2. Address : 51, El Main Road, Gandhi Nagar, : Adyar, Chennai 20
3. PAN/GIR No. : AAAPP7642M
4. Ward/Circle/Range : Circle IV
5. Status : Individual
6. Assessment Year : 1997-98
7. Whether resident/resident but not ordinarily resident/non-resident : Resident
8. Method of accounting : Cash system
9. Previous year : 1996-97
10. Nature of Business(s) : Rental income
11. Date(s) of hearing : Various dates
12. Date of order : 28th March, 2005
13. Section and sub-section under : 143(3) r/w Section 147 which the assessment is made Assessment order The Assessee filed the return of income for the asst. yr. 1997-98 on 30th June, 1997 showing total loss at Rs. 3,71,283. This was processed under Section 143(1) on 8th Sept., 1997. Notice under Section 148 was issued and served on the assessee on 12th Nov., 2003. In response to notice under Section 148, the assessee filed letter dt. 27th Nov., 2003 stating that the original return already filed may be treated as return filed in response to the notice under Section 148. Notice under Section 143(2) was issued. In response to notice issued under Section 143(2) the Authorized Representative of the assessee Shri R. Subramanian, chartered accountant attended and filed the details called for. The case is discussed with him.
6. The learned Counsel of the assessee argued that no assessment can be made on a dead person but in this case, the assessment is made on the dead person, and, therefore, the same is not valid particularly when the AO was informed of the death of the assessee which is clear from the above facts. Even the death certificate as well as the legal heir certificate were also submitted before the AO. But the AO has not brought on record or not impleaded the legal heirs. Even after these facts brought on record, the AO has passed the assessment order on the deceased assessee. He further argued that on the death of a person, his legal entity ceased to exist and no assessment order can be passed against such dead person and in any case if the assessment order is passed against the dead person, that would be null and void. He further argued that there are two legal heirs of the assessee and both are major as per the legal heir certificate produced before the AO and both should have been impleaded as legal representatives. He argued that the expression "legal representative" mentioned in Section 159 of the Act takes in plurality of legal representatives. If there are more than one legal representative of the deceased person, then all must be impleaded to make the representation of the estate complete. He further argued that the effort of the GIT(A) to implead the legal heirs at the appellate stage is of no consequence. Once the assessment order is passed on the dead person, the AO cannot implead the legal heir. He further argued that in such circumstances, the defect cannot be cured by setting aside the matter and directing the AO to complete the assessment after issuing the relevant notices and completing the procedure. He further argued that the CIT(A) has given a finding that it is clear that it is not a valid order. He has drawn our attention at p. 18 and the relevant portion starting from third line reads as under :
However, in view of preponderance of case law, it is to be held that in the present case, a defect crept in at the time when the assessment was concluded without issuing notice to one of the two legal heirs. In view of the above discussion this defect cannot make the assessment ab initio void. Such a defect is a curable defect. However, since now there is no provision for setting aside the assessment, I direct the AO to remove this defect by issuing notices to both the legal representatives of the appellant. The AO issued notices on 6th Sept., 2005 to both the legal representatives of the appellant namely, Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar. The appellant, however, relied on the decision of Madhya Pradesh High Court mentioned above and also stated that the legal heirs cannot be impleaded after the assessment has been completed. The appellant has also stated that the remand proceedings cannot be said to be proceedings under the IT Act.
Further, he relied on various case law.
7. On the other hand, the learned Departmental Representative has also filed a paper book, copy of authorization after the death of the assessee and copy of death certificate and legal heir certificate before the CIT(A) as well as Tribunal. He argued that the Authorized Representatives appeared before the AO on 7th Feb., 2005, filed his authorization and was heard on the matter. When this being the fact, there should not be any grievance for the assessee. Even he has drawn our attention to the copy of the written submission made by the legal representative before the AO during the course of assessment proceedings. The AO considered this written submission and passed the assessment order and there should not be any grievance for the legal heir about denial of natural justice. Further, he argued that before the CIT(A), Sri Ravi Prabhakar filed this appeal as legal heir and he is the same person who has signed the authorization letter issued to the chartered accountant, who made written submission before the AO during the course of assessment proceedings and filed appeals before the CIT(A) as well as the Tribunal. He argued that it shows that he was participating in all the matters connected with income-tax proceedings as the legal heir of the deceased assessee. The learned Departmental Representative filed a paper book containing pp. 1 to 17 including the petition, to bring on record the legal representatives before the Tribunal by the Asstt. CIT. The relevant petition is reproduced for clarity of facts as under:
Before the ITAT 'A' Bench, Chennai IT(SS) A No. 2000 & 01/2004; Asst. yr. 1997-98 to 2002-03 Asstt. CIT, Business Circle-IV, Appellant Chennai-600 034.
A.Y. Prabhakar (Late) (Indl.) 51, IE Main Road, Respondent Gandhi Nagar, Chennai - 20.
Petition to bring on record legal representatives It is ascertained that the (respondent) Sri A.Y. Prabhakar has passed away on 11th Nov., 2004. In view of this, the legal representatives of the respondent are to be brought on record in respect of the above appeal proceedings.
In this connection, Sri Ravi Prabhkar, s/o (Late) Sri A.Y. Prabhakar has filed death certificate, heir certificate and also a letter obtained from other legal heir (his brother) Sri Raghunandan Prabhakar nominating him to pursue the appeal (letter enclosed).
Hence it is prayed that Sri Ravi Prabhakar, s/o (Late) Sri A.Y. Prabhakar may kindly be impleaded in the above appeal proceedings.
Sd/-
(S. Chandrasekaran)
Place : Chennai-34 Asstt. CIT,
Date : 10th Feb., 2006 Business Circle IV, Chennai -34.
8. In view of the facts narrated above and considering the arguments of the learned Counsel of the assessee as well as the learned Departmental Representative, first of all, we have to go through the definition of the expression "legal representative". The "legal representative" has been defined in Clause (29) of Section 2 of the Act which reads as under:
2(29) 'legal representative' has the meaning assigned to it in Clause (11) of Section 2 of the CPC, 1908 (5 of 1908);
Section 2(11) of CPC reads as under :
legal representative' means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued;
The expression "legal representative" as defined in CPC means a person who represents the estate of a deceased, and-includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued. The definition is inclusive in character and its scope is wide and it is not confined to legal heirs only instead it stipulates a person who may or may not be heir, competent to inherit the property of the deceased but he should represent the. estate of the deceased person. All such persons would be covered by the expression "legal representative". If there are many heirs, those in possession bona fide, without there being any fraud or collusion, are also entitled to represent the estate of the deceased. This view has been upheld by the Hon'ble apex Court in the case of Custodian of Branches of Banco National Ultramanno v. Natini Bai Naique , 1591. It is to be noted that even the Hon'ble apex Court and the jurisdictional High Court has defined the meaning of "legal representative" where the word legal representative means all the legal representatives of the deceased. The Hon'ble Madras High Court in the case of Muniyammal v. Addl. ITO has held that all the legal representatives should concur in applying the copies of statement to the ITO and further, it has also held as under:
(ii) that in a case where a person died leaving more than one legal representative, the estate was represented by all of them jointly, and not by one of them alone. As between co-heirs, one was not the agent of the other. Section 24B of the IT Act made a legal representative of a deceased person liable to the tax assessed as payable by the deceased, the liability being however limited to the extent of the estate left by the deceased. The word "legal representative" in Section 24B, Sub-section (1), meant all the legal representatives collectively, if there were more than one. When there was a plurality of legal representatives all of them should concur in applying for the inspection of the statements made to the ITO or for obtaining certified copies. But where they did not agree, one of them alone could not be held to represent the deceased and, therefore, one of them alone could not have inspection;
9. According to the general rule, if a person dies leaving behind him more than one heir, under Section 159 of the Act, the AO is under obligation to proceed to assess the total income of the deceased against all the legal representatives. The expression "legal representative" in Section 159 of the Act takes in plurality of legal representatives. Thus, if there are more than one legal representative of the deceased person, all must be impleaded to make the representative of the estate complete and if notice is served on only one of the legal representatives, there would not be complete representation of the estate and the proceeding will be wholly invalid. This view has been held by the Hon'ble Gujarat High Court in the case of Chooharmal Wadhuram v. CIT and while dealing with similar issue, it was held as under (headnote) :
The notices issued by the ITO for reopening the assessment of the deceased, Chooharmal Wadhuram, for the asst. yrs. 1946-47 and 1947-48 under Section 34(1)(a) were addressed to 'Chooharmal Wadhuram, legal representativesDaulatram and Ors. 1 and though there were, admittedly, besides Daulatram, other legal representatives of Chooharmal Wadhuram, namely, three other sons and a widow, the notices were served only on Daulatram, and were not served on the other legal representatives. There was nothing to show that Daulatram was in management or administration of the entire estate of the deceased and there was also no finding of the Tribunal nor any material on record to show that Daulatram represented the estate of the deceased with the consent, express or implied, of the other legal representatives :
Held, that the service of the notices on Dulatram alone was not sufficient to bind the estate of Chooharmal Wadhuram as Daulatram did not completely represent the estate of the deceased, and, therefore, the assessment of the income of the deceased, Chooharmal Wadhuram, was not in compliance with the requirements of Sub-section (2) of Section 24B, and the reassessment orders under Section 34(1) were invalid :
Held also, that the assessment orders were not valid even against Daulatram, as the estate was not properly represented and an assessment of the income of the deceased person must be made on all those who represent his estate or interest wholly and completely."
In view of the case law of the Hon'ble apex Court, jurisdictional High Court and Gujarat High Court, discussed above, we fairly feel that all legal heirs must be proceeded against the deceased particularly when there are more than one legal heir of the deceased as per the' legal heir certificate and representation made before the AO. In the present case, the AO was informed much before the completion of the assessment that the assessee has died on 11th Nov., 2004. The AO has not taken any step to implead the legal heirs and the assessment order was passed on the deceased assessee treating the assessee as alive. In the event of death of the assessee, the names of the legal representatives should be substituted and there may be any one of the five contingencies, in respect of an assessment year. In the present case only one contingency will apply, i.e., the assessment was taken up but could not be completed and the assessee dies before such completion. In the circumstances, the AO has to bring all the legal representatives on record and continue the proceedings on the legal representatives as legal representatives of the assessee. No doubt, the proceedings have to be continued from the point where the death took place, and the income of the deceased is to be assessed in the hands of the legal representative as if the latter was the assessee. The Section 159(2) extends the personality of the deceased and treats the legal representative as the assessee in respect of all the proceedings even against the deceased already taken. Thus, where the assessee died before the proceedings were completed, it is incumbent under Section 159(2) on the AO to bring the legal representative of the deceased on record and to proceed from the stage it was left at the time of death of the deceased.
10. Now, we have to go through the provisions of Sub-section 159(1), (2) and (3) of the Act which reads as under :
159(1) Where a person dies, his legal representative shall be liable to pay and in the like manner and to the same extent as the deceased.
(2) For the purpose of making an assessment (including an assessment, reassessment or computation under Section 147) of the income of the deceased and for the purpose of levying any sum in the hands of the legal representative in accordance with the provisions of Sub-section (1).
(a) Any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased;
(b) Any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative, and
(c) All the provisions of this Act shall apply accordingly.
(3) The legal representative of the deceased shall, for the purposes of this Act, be deemed to be an assessee.
As per the provisions of Section 159(2)(a) of the Act, it is clear that any proceedings taken against the deceased before his death shall be deemed to be taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased. It means that the AO has to bring on record all the legal representatives and the proceedings will continue on the legal representatives as deemed assessee from the stage at which it stood on the date of the death of the assessee. In the present case in hand, the AO was informed about the death of the assessee and the complete details regarding the legal heirs and it was supported by legal heir certificate and death certificate of the assessee. But the AO never tried to bring on record the legal representatives as informed to him. However, the learned Departmental Representative strongly relied on the view that one of the legal representatives, Sri Ravi Prabhakar, who submitted the legal heir certificate and informed the AO before the completion of assessment proceedings, is an assessee before the AO as well as before the first appellate authority. To support the view, he relied on the decision of the Hon'ble Punjab & Haryana High Court in the case of Swaran Kanta v. CIT .
11. We have gone through the decision cited by the learned Departmental Representative and observed that in that case, the legal representative was impleaded and then the assessment was completed. No doubt, the assessment was completed in the name of the deceased person instead of the legal heir and there was a finding of the Tribunal that since the legal heir of the deceased was impleaded and was heard, it could not be said that the assessment order was passed on a dead person. Here, in the present case, the legal representatives were not impleaded despite receipt of information by the AO, the assessment order was passed on a dead person. Further, the learned Departmental Representative relied on the decision of the Hon'ble Madhya Pradesh High Court in the case of Smt. Kaushalyabai v. CIT. In this case, the Hon'ble High Court found that there is only legal representative, i.e., widow of the assessee who has fully participated in the proceedings and the defect if any, stands automatically cured. In view of this fact, the Hon'ble Madhya Pradesh High Court has answered this question against the assessee and in favour of the Revenue. In the present case in hand, there are two legal representatives and both have not been impleaded in the assessment proceedings. Hence, the facts in the case cited above are entirely distinguishable from the facts of the present case in hand.
12. Further, he relied on the case law of the Hon'ble apex Court in the case of CIT v. Jai Prakash Singh . The facts in this case are that the return was filed voluntarily by one out of ten legal representatives disclosing the income of the deceased and moreover, the legal representative complied with the notices under Sub-section 142(1)(a) and 143(2) of the Act. The assessment was completed and the legal representative has not raised any objection during the course of assessment but raised the objection in appeal that notices have not been issued to other legal representatives. The Hon'ble apex Court has held that the assessment was erroneous but not null and void. But, in the present case, despite information to the AO, he has not impleaded any of the legal heirs and the assessment was framed on the dead person. Therefore, the facts of the present case are distinguishable from the facts of the case of the Hon'ble apex Court.
13. The learned Departmental Representative, further, relied on the decision of the Hon'ble Supreme Court in the case of Addl. ITO v. Mrs. Suseela Sadanandan and Anr. wherein it has laid down certain principles and the relevant finding of the Hon'ble apex Court reads as under:
Their Lordships set aside the order of the High Court in Suseela Sadanandan v. Addl. ITO (1963) 47 ITR 318 (Ker) and remanded the matter to the High Court for fresh disposal after considering : (i) whether the person on whom the notices were served was in possession and management of the entire estate of the deceased, and if so whether he would be the legal representative; (ii) even if he intermeddled only with a part of the estate, whether the ITO bona fide treated him as representative of the estate; (iii) whether he, in fact, represented the estate and the other executors or representatives expressly or impliedly accepted his representation; and (iv) whether the first respondent who was not a party to the assessment proceedings could question the enforceability of the final assessment order against the person on whom notice was served.
In the above case law referred by the learned Departmental Representative, either there are exceptional cases or service of notice to one of the legal representatives was sufficient, or there was only one legal representative who participated in the proceedings. But in the present case in hand, there are two legal representatives and the AQ was informed before the completion of the assessment that the assessee died leaving behind two legal heirs and copy of legal heirs' certificate along with death certificate was filed. However, the assessment was completed on the dead person. There may be cases where there are several legal representatives but one may represent whole interest of the deceased and in such cases there being complete representation of the interest of the deceased before the AO, the assessment made would bind the estate of the deceased. We agree with the learned Departmental Representative that such cases may arise, where one legal representative is managing the entire estate of the deceased and, he, therefore, completely represents the interest of the deceased. This view has been fortified by the Hon'ble Gujarat High Court in the case of Chooharmal Wadhuram (supra) and the Hon'ble apex Court in the case of Mrs. Suseela Sadanandan and Anr. (supra). Then there may be cases, where one legal representative is served, he appears in the proceedings with the consent, express or implied, of the other legal representative, in such cases too, the estate would be properly and completely represented by one legal representative and the assessment would be binding on the estate. Even, where the AO bona fide and diligently believes one or more persons to be the only legal representatives of the deceased and initiates proceedings by serving notice on them and subsequently it is found that, besides those served, there were also other legal representatives of the deceased. The Hon'ble apex Court has also supported this view in the case of Daya Ram v. Shyam Sundari wherein it has held that :
... where a plaintiff or an appellant after diligent and bona fide enquiry ascertains who the legal representatives of a deceased defendant or respondent are and brings them on record within the time limited by law, there is no abatement of the suit or appeal, that the impleaded legal representatives sufficiently represent the estate of the deceased and that a decision obtained with them on record will bind not merely those impleaded but the entire estate including those not brought on record.
But the facts in the present case are entirely different. During the pendency of reassessment proceedings, the assessee expired on 11th Nov., 2004 and one of the legal representatives filed a letter to the AO intimating the death of the assessee along with xerox copy of the death certificate and legal heir certificate. As per the legal heir certificate, there are two legal representatives of the deceased, i.e., Shri Raghunandan Prabhakar and Shri Ravi Prabhakar. It is observed from the assessment order that the assessment order is passed on dead person and the relevant assessment order is reproduced in pp. 7 and 8 at para 5 of this order. Both the legal representatives were not impleaded. It is a fact that the assessee died before the completion of the assessment and that also during the pendency of the assessment proceedings. On the death of a person, his legal personality ceases to exist and thereafter no order can be passed against such dead person. If any order is passed against that dead person, that would be a nullity. This view has been held by the Hon'ble apex Court in the case of CIT v. Amarchand N. Shroff . While dealing with the situation, the Hon'ble apex Court has held as under :
The correct position is that apart from Section 24B no assessment can be made in respect of the income of a person after his death : see Ellis C. Reid v. CIT (1930) 5 ITC 100. In that case, and that was a case before Section 24B was enacted, a person was served with a notice under Section 22(2) of the IT Act but no return was made within the period specified and he died. It was held that no assessment could be made under Section 23(4) of the Act after his death. At p. 106 it was observed :
It is to be noticed that there is throughout the Act no reference to the decease 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 in 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 individual assessee has ordinarily to be a living person and there can be no assessment on a dead person and the assessment is a charge in respect of the income of the pervious year and not a charge in respect of the income of the year of assessment as measured by the income of the previous year : Wallace Brothers & Co. Ltd. v. CIT (1948) 16 ITR 240 (PC). By Section 24B the legal representatives have, by fiction of law, become assessees as provided in that section but that fiction cannot be extended beyond the object for which it was enacted. As was observed by this Court in Bengal Immunity Co. Ltd. v. State of Bihar legal fictions are only for a definite purpose and they are limited' to the purpose for which they are created and should not be extended beyond that legitimate field. In the present case the fiction is limited to the cases provided in the three sub-sections of Section 24B and cannot be extended further than the liability for the income received in the previous year.
14. No doubt, the provisions of Section 159(2) of the Act provide that any proceedings commenced before the death of the deceased may continue thereafter against the legal representative and any proceedings which could have been taken against the deceased if he is surviving may be taken against the legal representative but the proceedings can only continue against the legal representative and not against the dead person. There are exceptions to the general rule where it is shown that the legal representative of a deceased assessee, who was present before the AO, either voluntarily or in response to the notice issued to the deceased but served upon him or his agent allows the assessment proceedings to continue without any objection, then legal representative cannot take objection against the assessment in further appeals. Yes, we agree with this. In the present case, the assessee has taken objection at the initial stage that the assessee has died and information was given to the AO by writing a letter that there are two legal heirs and they filed the copy of the death certificate and legal heirs certificate. Even if we presume that the argument of the learned Departmental Representative is correct, that one of the legal representatives participated in the proceedings but the other legal representative was not present in the assessment proceedings by any expressed or. implied consent, what will be the consequence of the order passed on a dead person. Now, under the general law, it is a fundamental principle, well established, that a decree passed by a Court without jurisdiction is a nullity and that its validity could be set up whenever and whatever, it is sought to be enforced or relied upon, and even at the stage of execution and even in collateral proceedings. A defect of jurisdiction whether it is pecuniary or territorial, or whether it is in respect of the subject-matter of the action, strikes the very authority of the Court to pass any decree and such a defect cannot be cured by the consent of the parties. This view has been strongly supported by the Hon'ble apex Court's decision in the case of Kiran Singh v. Chaman Paswan , . The provisions of Section 159(2) of the Act makes it very clear that any proceedings of assessment commenced before the death of the deceased may continue but only against the legal representative and in proceeding which could have been taken against the deceased if he had survived, may be taken but only against legal representative and no order can be passed on a dead person. No doubt, the legal representatives are deemed assessees. The Hon'ble Madhya Pradesh High Court has dealt with this issue in the case of CIT v. Kumari Prabhawati Gupta and Ors. wherein it has held that the AO has to bring the legal representative on record and continue the proceedings against the legal representative. The proceedings are to be continued from the stage where the death took place and the income of the assessee is to be assessed in the hands of the legal representative. The legal representative is deemed as assessee in respect of all the proceedings even against the deceased already taken and if the assessee died before the proceedings of assessments were completed, it is incumbent under Section 159(2) of the Act, that the AO has to bring the legal representative on record from the stage where it was left at the time of the death of the deceased. The Hon'ble Madhya Pradesh High Court has held as under :
We have heard learned Counsel for the parties and perused the records. It is an admitted fact that the assessee died before the proceedings for assessment were completed. Since the proceedings had not been completed and it was yet to be completed, therefore, it was incumbent under Section 159(2) of the Act on the ITO to have brought the legal representative of the deceased on record and proceeded from the stage where it was left at the time of death of the deceased. According to the findings of the Tribunal, the proceedings had not been completed before the death of the assessee; therefore, the Tribunal has rightly held that the assessment should be completed under Section 159(2) of the Act. In this view of the matter, we are of the opinion that the view taken by the Tribunal is correct and both the questions are answered against the Revenue and in favour of the assessee.
15. From the above facts and circumstances of the case, it is seen that the assessment order was passed on the dead person. One of the legal heirs has informed the AO during the pendency of the assessment proceedings that the assessee has expired on 11th Nov., 2004. Before the AO, complete details like legal heir certificate and xerox copy of the death certificate were filed. Now, as the principle laid down and exception provided by the Hon'ble apex Court in the case of Mrs. Suseela Sadanandan (supra), the first exception is that :
If it had been established that E.D. Sadanandan had alone been managing the entire estate, the Court could have come to the conclusion that he was the legal representative of the deceased and, therefore, represented the estate in the assessment proceedings.
Further, the Hon'ble apex Court has laid down the exception as under :
Though notices served only on one of the executors, the proceedings might show that the estate was properly represented by E.D. Sadanandan with the consent, express or implied, of the other executors and heirs.
Further, the principle laid down is that the cases in which the situation may arise is where the ITO bona fide and diligently believes one or more persons to be the only legal representatives of the deceased and initiates proceedings by serving notice on them and subsequently it is found that, besides those served, there were also other legal representatives of the deceased. Then there is no reason why in such cases the general rule evolved in the field of civil law should not be applied.
16. No doubt, the Hon'ble apex Court has laid down the general rule of application but this cannot be applied blindly in the income-tax proceedings. If the principle laid down by the Hon'ble apex Court is applied to the assessment proceedings, it would frustrate the proceedings for assessment of income of a deceased person and will result in escapement of income in the hands of legal heirs of the deceased person. In the present case, the facts are very clear and it does not fall within any of the exceptions and general rule will apply. There is nothing to show that Sri Ravi Prabhakar who participated in the assessment proceedings to some extent, was in the management of the entire estate of the deceased, Shri A.Y. Prabhakar. There is nothing on record to show that the AO made an attempt to make diligent and bona fide inquiry to find out who the legal representatives of the deceased assessee are and to serve notice on all those who are the legal representatives. Here, that is not the case. One of the legal representatives, at the time of continuation of assessment proceedings, informed the death of the assessee, Shri A.Y. Prabhakar, that he has expired on 11th Nov., 2004 and filed xerox copy of the death certificate and legal heir certificate also before the AO. But the AO has not taken any step to implead these legal heirs and passed the assessment order on the deceased. The learned Departmental Representative argued that even if service of notice to one of the legal representatives, Shri Ravi Prabhakar who participated in the assessment proceedings alone is sufficient to bind the estate of the deceased as the assessment order can be enforced against the other representative who was not served the notice. The argument of the learned Departmental Representative was that one of the legal representatives has participated in the assessment proceedings and there was complete representation of the estate of the deceased. Here, we cannot agree with the contention of the learned Departmental Representative. The learned Departmental Representative overlooked the basic principle that in order to assess the income of a deceased person the assessment must be made on all those who represent his interest or estate wholly and completely and there must be complete representation of the estate of the deceased in the proceedings. Otherwise, the position would be as if the deceased is not before the ITO and obviously no assessment of income of a person can be made in his absence. In the present case, Shri Ravi Prabhakar, one of the legal representatives does not represent the deceased as both the legal representatives together represented him and therefore, they must all be before the AO in order to enable him to make a valid assessment on the income of the deceased. The assessment which is made on the income of the deceased cannot be valid as against one legal representative and invalid as against another. Once the assessment is made in compliance with the requirement of Section 159 of the Act, it is a valid assessment and the amount of tax assessed can be recovered from all the legal representatives as provided in Section 159(2) of the Act as claimed by the learned Departmental Representative. Then this would lead to a highly anomalous situation that the assessment of income of the deceased person made on participation of one of the legal representatives of the deceased person would be enforceable against another legal representative though he is not impleaded and had no opportunity of contesting the assessment proceedings, the legislature surely have not intended to bring about such an extraordinary result. As per the provisions of Section 159(2)(a) of the Act that any proceedings commenced before the death of the deceased may be continued thereafter against the legal representative and any proceedings which could have been taken against the deceased, if he had survived, may be taken against the legal representatives. Therefore, the AO is duty-bound to bring on record all the legal representatives and pass order on all the legal representatives after impleading them.
17. The term "legal representative" means one who stands in the place of and represents the interests of another, i.e., one who is entitled to take any descent or distribution. It is the person, one on whom the status of a representative is fastened by reason of the death of his ancestor and on the death of any person some of the rights fall on or accrue to another as successor, and that another is a legal representative of the former. The legal heir who succeeds to the estate, purporting to be an heir at law, effectively represents the estate. Thus, the heir or heirs of the deceased in possession of the estate is of the legal representative, Whether under the definition in the CPC or in its popular sense. The provisions of Section 159(2)(a), and (b) are very clear that the legal representative must be impleaded, in case, if the proceeding is to be continued and in no way, it gives right to the AO to deviate from it except the exceptions as provided by the Hon'ble apex Court in the case of Mrs. Suseela Sadanandan (supra). In the provisions of Section 159(2)(a) of the Act, the words are very clear where it states that "any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued...." Here, the words 'shall' and 'may' are mandatory and this 'may' and 'shall' will be treated as 'shall'. The above words are mandatory or directory will depend on the context and this has been explained in V.S. Sundaram's Law of Income-tax in India, 12th Edn. in 1st Volume at p. 22 and the same is reproduced as it is :
Crawford on Statutory Construction and Interpretation of Laws stated :
Mandatory and directory are permissive words.
Ordinarily, the words 'shall' and 'must' are mandatory, and the word 'may' is directory, although they are often used interchangeably in legislation. This use without regard to their literal meaning generally makes it necessary for the Courts to resort to construction in order to discover the real intention of the legislature. Nevertheless, it will always be presumed by the Court that the legislature intended to use the words in their usual and natural meaning. If such a meaning, however, leads to absurdity, or great convenience or for some other reason is clearly contrary to the obvious intention of the legislature, then words which ordinarily are mandatory in their nature will be construed as directory or vice versa. In other words, if the language of the statute, considered as a whole and with due regard to its nature and object, reveals that the legislature intended the words, 'shall' and 'must' to be directory, they should be given that meaning. Similarly, under the same circumstances, the word 'may' should be given a mandatory meaning, especially where the statute concerns the rights and interest of the public, or where third persons have claim de jure that a power shall be exercised or whenever something is directed to be done for the sake of justice or the public good, or is necessary to sustain the statute's constitutionality....
While the words 'shall', and 'may' are the ones generally involved in determining whether a statute is mandatory or merely permissive, there are other words and expressions which create the same problem, and to which the same principles are equally applicable.
18. The intention of the provisions of Section 159(2) is very clear that the assessment proceedings can continue against the legal representative but here, the legal representative means plurality of legal representatives. If there are more than one legal representative of the deceased person, all must be impleaded to make the representation of the estate complete. In the present case in hand, there are two legal heirs and the AO made the assessment on the dead person. Even, the present case does not fall in any of the exceptions as held by the Hon'ble Supreme Court in the case of Mrs. Suseela Sadanandan. It is a fact that Sri Ravi Prabhakar appeared before the AO on few occasions but he was never impleaded and contested the proceedings. Even otherwise, we presume that he participated in proceedings, then, it does not follow that he did so with the consent either expressed or implied of his brother, who is the other legal representative. There is nothing on record and even before us, the learned Departmental Representative could not adduce any evidence to show that the other legal representative has consented with the first legal representative impliedly or expressly. Even the decision of the Hon'ble apex Court in the case of Addl. ITO v. E. Alfred cited by the learned Departmental Representative, is distinguished by the decision of the Hon'ble apex Court in the case of Mrs. Suseela Sadanandan cited above wherein it has held that there was no question before the Supreme Court whether service of notice on one of the legal representatives, was sufficient for valid proceedings. In view of the above facts of the case, case law cited above and the provisions of Section 159(2) of the Act, the reassessment framed on the deceased person is void ab initio.
18.1 Since the main issue is decided in favour of the assessee, it is not required to deliberate the other legal issues on merits. Accordingly, all these six appeals are allowed.
19. The first and second issue in the appeals of the assessee, Sri A.Y. Prabhkar (HUF) in ITA Nos. 2380 and 2381/Mad/2005, is as regards to reopening of the assessment is bad in law and the reasons recorded for the reopening were not communicated to the assessee.
20. We have heard both the sides and gone through the case records. It is a fact that the assessee, HUF is a regular income-tax assessee and the returns for the asst. yrs. 1997-98 and 1998-99 were filed and the same were processed under Section 143(1) of the Act. Subsequently, the AO discovered that the assessee-HUF has taken a loan of Rs. 9 lakhs from the Indian Bank for construction of the property and the assessee could not repay the principal as well as the interest on such capital of Rs. 9 lakhs. The assessee claimed interest on capital as well as interest on unpaid interest against the income from house property and the same was allowed by the AO while processing the return under Section 143(1) or 143(1)(a) as the case may be. The AO noticed from the records that the excess relief has been allowed to the Assessee on account of interest on unpaid interest and, therefore, he issued notices under Section 148 of the Act in view of the provisions of Section 147 of the Act. Accordingly, the AO reopened the assessments for both the years on the reasons to believe that the income chargeable to tax had escaped assessment for the asst. yrs. 1997-98 and 1998-99 by issuing notices under Section 148 of the Act on 18th Dec., 2003. The AO framed the reassessments on account of interest on unpaid interest claimed by the assessee as deduction against the income from house property and the additions were made. Aggrieved, the assessee preferred an appeal before the CIT(A), who confirmed the action of the AO. Aggrieved by the order of the CIT(A), the assessee came in second appeal before the Tribunal.
21. From the above, the facts are very clear and the issue for adjudication is as to whether the AO can reopen the assessment particularly when the assessment was not framed under Section 143(3) of the Act and the return was merely processed under Sub-section 143(1)(a) and 143(1) of the Act as the case may be for these two assessment years or not. The learned Departmental Representative, first of all, relied on the decision of the Hon'ble Allahabad High Court in the case of Pradeep Kumar Har Saran Lal v. AO (All) wherein it has held as under:
In the case at hand, the AO proceeded on a wrong footing by making the adjustment not permissible by the proviso to Section 143(1)(a). He might have proceeded under Section 143(2) as well to bring the profits of the petitioner to tax by making a regular assessment under Section 13(3), but failure on his part in doing so before the processing of the return was completed under Section 143(1)(a) will not take away the jurisdiction of the AO to proceed under Section 147, if the AO is able to establish the requisite conditions of Section 147. For these reasons, the second submission is rejected.
Further, he relied on the decision of the Hon'ble Delhi High Court in the case of MTNL v. Chairman. CBDT to support his view. The Hon'ble High Court has held as follows :
Section. 147 authorizes and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income has escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an in-built idea of fairness to taxpayers. As observed by the apex Court in Central Provinces Manganese Ore Co. Ltd. v. ITO , for initiation of action under Section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is 'reason to believe', but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction [see ITO v. Selected Dalurband Coal Co. (P) Ltd. (1996) 132 CTR (SC) 162 : (1996) 217 ITR 596 (SC); Raymond Woollen Mills Ltd. v. ITO .
The scope and effect of Section 147 as substituted w.e.f. 1st April, 1989, as also Sub-section 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of Section 147, separate Clause (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under Section 147(a) two conditions were required to be satisfied, firstly, the AO must have reason to believe that income, profits or gains chargeable to income-tax have escaped assessment, and, secondly, he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions are conditions precedent to be satisfied before the AO could have jurisdiction to issue notice under Section 148 r/w Section 147(a). But under the substituted Section 147, existence of only the first condition suffices. In other words, if the AO for whatever reason has reason to believe that income has escaped assessment, it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled, if the case falls within the ambit of the proviso to Section 147. The case at hand is covered by the main provision and not the proviso.
He also relied on the decision of the Hon'ble Gujarat High Court in the case of Bharat V. Patel v. Union of India and Ors. (2004) 186 CTR (Guj) 639 : (2004) 268 ITR 116 (Guj) wherein it has held that:
Thus, in the liberalized and simplified tax collection regime, mere acceptance and acknowledgement of return and issuance of refund cannot be elevated to the status of regular assessment and formation of opinion about the incidence of tax on a particular claim or item mentioned in the return of income. And in the absence of any formation of opinion about the taxability of the non-compete fees, in the facts of the present case, there can be no question of change of opinion.
On the other hand, the deeming fiction provided by Expln. 2 to Section 147 of the Act imparts an added obligation in the matter of believing even where an assessment is made, but income chargeable to tax has been underassessed, it has to be deemed that such income has escaped assessment, and after noticing that income chargeable to tax was underassessed and applying the deeming fiction and the ratio of the aforesaid judgment in Praful Chunilal Patel v. M.J. Makwana, Asstt. CIT , the AO can hardly have reason not to believe that any income chargeable to tax has escaped assessment. It is, however, clarified that the legality of the impugned notice under Section 148 of the Act and the very assumption of jurisdiction under Section 147 only being under challenge in this case, it is neither within the scope nor an issue in this judgment to pronounce upon the questions whether the non-compete fees received by the petitioner was a capital receipt or revenue receipt and whether, in fact, there was escapement of income chargeable to tax. These issues are, therefore, left open for decision in accordance with law.
22. In view of the case law cited above, we are of the view that reopening after the processing of return under Section 143(1) of the Act is permissible on fulfillment of other conditions as prescribed under Section 147 of the Act. Accordingly, we uphold the reopening as there is no change of opinion and not at all any opinion formed by the AO at the time of processing of return. In view of this, we confirm the orders of the lower authorities and the assessee fails on this issue for both the assessment years.
23. As regards to communication recorded, the learned Counsel of the assessee fairly conceded that he cannot state with surety as to whether reasons were supplied or not. On enquiry from the Bench, he refused to submit an affidavit to this effect. In view of this fact, we feel that the reasons were supplied as stated by the Departmental Representative. Hence, the assessee has no grievance on this issue and the same is dismissed.
24. The next issue which is common in both the above appeals is that the CIT(A) failed to appreciate that the income has been treated as having escaped in the hands of more than one assessee. At the outset, the learned Counsel of the assessee submitted that he is not pressing this issue. Hence, this issue is dismissed as not pressed.
25. The next common issue in both these appeals is that the CIT(A) failed to consider the fact that the AO had failed to bring on record the other adult members of the HUF in completing the assessment though the Karta of the HUF had died before the completion of the assessment and where the AO had been informed of the same. This issue is also not pressed by the learned Counsel of the assessee. Hence, this issue is dismissed as not pressed.
26. The first legal issue raised in ITA No. 2384/Mad/2005 for the asst. yr. 2002-03 is as regards to non-fulfillment of statutory requirements under Section 143 of the Act while completing the assessment.
27. We have heard both the sides and gone through the case records. The learned Counsel of the assessee could not adduce anything at the time of hearing and he has not mentioned as to what type of statutory requirements were not completed while completing the assessment under Section 143 of the Act. The main argument of the learned Counsel of the assessee is that no notice under Section 143(2) of the Act was issued. On a query from the Bench whether the assessee can file an affidavit to this effect so that the records of the Revenue can be summoned, but the learned Counsel for the assessee declined to file an affidavit to this effect. He specifically stated that as per their knowledge no notice under Section 143(2) of the Act was issued. Here, there is no question of knowledge or conjecture or surmises. The real fact brought out by the learned Departmental Representative is that notice under Section 143(2) of the Act was issued and statutory requirements under Section 143(2) of the Act were fulfilled by the assessing authority. Accordingly, the assessee has no case on this issue. Accordingly, we dismiss this issue.
28. The next common issue in all these three appeals is as regards to merits of the case which reads as under:
For that the CIT(A) failed to appreciate the fact that the interest claimed is the actual interest due to the bank towards the amount taken for the construction and development of the property.
29. We have heard both the sides and gone through the facts of the case. The facts of the case are that the assessee has taken a loan of Rs. 9 lakhs from the Indian Bank for construction of house property. The assessee could not repay the principal as well as the interest on this capital of Rs. 9 lakhs. The assessee while filing the returns of income for all these three years, claimed interest on capital as well as interest on unpaid interest as deduction against the income from house property. The AO disallowed the claim and added to the returned income to the extent of interest on unpaid interest on such capital amount of Rs. 9 lakhs. The learned Counsel of the assessee relied on the case law of the Hon'ble apex Court in the case of Shew Kissen Bhatter v. CIT and argued that the interest on interest was allowable in view of the principle laid down by the Hon'ble apex Court in this case. On the other hand, the learned Departmental Representative also relied on the above decision and argued that it is clear from the principle laid down by the Hon'ble apex Court that interest on unpaid interest cannot be allowed in view of the provisions of Section 24 of the Act where deduction is to be allowed on income from house property. The Hon'ble apex Court has observed as under:
The question is whether the assessee is entitled to deduct the compound interest payable by him in accordance with the terms of the contract referred to earlier or whether he is only entitled to deduct simple interest at the rate of 6-3/4 per cent per annum. It must be borne in mind that what the law permits is the deduction of the 'amount of any interest on such mortgage or charge'. The interest payable by the assessee on the capital charge was at the rate of 6-3/4 per cent per annum. But if he fails to pay that in accordance with the terms of the contract, he was liable to pay compound interest. In other words, if he fails to pay interest in accordance with the contract, he was liable to pay interest on interest. Or, to put it differently, when the interest payable is not paid, the same became a part of the principal and, thereafter, interest has to be paid not only on the original principal but also on that part of the interest which had become a part of the principal. It cannot be said that the interest which became a part of the principal can be considered as the capital charge. What the assessee is entitled to deduct is the interest payable by him on the capital charge and not the additional interest which because of his failure to pay the interest on the due date had been considered as a part of the loan. In fact, the real capital charge is that which was originally due. The other portion is merely an interest on which the assessee has agreed to pay interest. Hence we are unable to accept the contention of the assessee that the interest paid on interest is an interest paid on the capital charge. Mr. Chagla, the learned Counsel for the assessee, contended that the law permits his client to deduct any interest paid by him on the capital borrowed or charged and 'any interest' included compound interest also. This, to our minds, appears to be a fallacious argument. The compound interest is payable not on the capital charge but on that part of the interest on which he has agreed to pay interest. That is not the capital taken note of by Section 9(1)(v). If we accept Mr. Chagla's contention as correct, then the door will be open for evasion of tax. All that the debtor need do is not to pay interest regularly but utilize that amount for other purposes and make the Revenue pay compound interest payable by him and thus derive advantage out of his own omission. Such an interpretation is impermissible.
It is seen from the above case law of the Hon'ble apex Court that the principle laid down is that in case of capital charge, the compound interest is not permissible. Here, in the present case in hand, the assessee is claiming deduction on account of interest on unpaid interest to the bank on original capital. In view of this, on merits, the assessee has no case.
30. Alternatively, the assessee's counsel submitted that no opportunity of being heard was allowed after the death of late Sri A.Y. Prabhakar, who was Karta of HUF. No doubt, Shri Ravi Prabhakar, Karta was substituted in place of late Sri A.Y. Prabhkar but he was not familiar with the facts of the case. Hence, the assessment was framed within the last two months without giving opportunity of being heard. Further, the learned Counsel of the assessee argued that the assessee is unable to place all facts and he was not aware whether the actual interest on unpaid interest is disallowed or entire interest is disallowed. For this he requested the Bench to set aside this issue to the file of the AO for verification and also for limited purposes. In view of this, we have no hesitation in setting aside the issue to the AO to verify this issue. We accept the alternative plea of the assessee and remit this issue back to the file of the AO to examine and verify this issue and accordingly, disallow the correct amount of interest on unpaid interest and not the entire interest paid on capital. The AO shall give reasonable opportunity of being heard to the assessee.
30.1. In the result, all these three appeals are partly allowed for statistical purposes.
31. The only issue raised in the Revenue's appeal in ITA No. 201/Mad/2006 is that the CIT(A) has erred in directing the AO to assess the l/3rd share of rental income from the estate of late Smt. Kanthi Prabhakar and from the estate of Late Smt. Padmavathy Ammal on substantive basis.
32. We have heard both the sides and gone through the facts of the case. The facts are narrated in detail at para 6 of the order of the CIT(A) which reads as under:
6. The appellant has been showing 1/3 share of rental income received from the properties which originally belonged to late Smt. Kanthi Prabhakar (wife of Sri A.Y. Prabhakar) and late Smt. Padhmavathi Ammal (cousin of Sri A.Y. Prabhakar). Smt. Kanthi Prabhakar made a Will on 31st Dec., 1986 vide which all her movable and immovable properties devolved equally on her two sons namely, Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar. She expired on 15th Dec., 1990. Similarly, Smt. Padmavathi Ammal wife of late Sri K. Ramalingam made a Will on 27th Oct., 1993 willing all her movable and immovable properties to her cousin Sri A.Y. Prabhakar and his two sons namely Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar equally. She died on 18th April, 1994. Her husband predeceased her and she did not have any children. Sri Prabhakar was appointed as the sole executor of both the Wills. However, these Wills were never probated. Therefore, both these ladies are to be treated as having died intestate. Accordingly, their properties were distributed as per the relevant provisions of Hindu Succession Act, 1956. According to these provisions, Sri A.Y. Prabhakar, Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar being the only persons to succeed to the properties are bound to divide the properties equally among themselves. Sri A.Y. Prabhakar, Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar have been showing 1/3 share of rental income from the properties which originally belonged to Smt. Kanthi Prabhakar and Smt. Padmavathi Ammal. The AO, however, has assessed the 1/3 share of the appellant, Sri A.Y. Prabhakar on protective basis because according to him Sri A.Y. Prabhakar was not entitled to any share of rental income from the properties belonging to both the ladies mentioned above. Besides this, I find that the AO has reopened the assessments of the estate of (late) Smt. Kanthi Prabhakar and the estate of (late) Smt. Padmavathi Ammal for asst yrs. 1996-97 and 1997-98. In my order of even date in ITA Nos. 133/2004-05 and 134/2004-05 dt. 28th Sept., 2005, I have held that no assessment can be made on the estates of both these ladies. Since the estate of both Smt. Kanthi Prabhakar and Smt. Padmavathi Ammal has been distributed among the legal heirs/beneficiaries, only these legal heirs/beneficiaries are entitled to the income therefrom. I, therefore, direct the AO to assess the 1/3 share from rental income arising out of the house properties which were originally belonging to Smt. Kanthi Prabhakar and Smt. Padmavathi Ammal substantively in the hands of the appellant and not on the protective basis. With this, objection of the appellant that the same income is stated to have escaped in the hands of more than one person is also met. This income is now to be assessed at only one place, i.e., 1/3rd each in the hands of Sri A.Y. Prabhakar, Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar.
In view of the above facts, the learned' Departmental Representative fairly relied on the order of the AO and the grounds of appeal raised before us. It is seen from the above facts that the CIT(A) has rightly directed the AO to assess 1/3rd share from rental income arising out of the house property which were originally belonging to late Smt. Kanthi Prabhakar and late Smt. Padmavathy Ammal substantively in the hands of the assessee and not on protective basis. The CIT(A) has rightly held that this income is to be assessed at only one place, i.e., 1/3rd each in the hands of Sri A.Y. Prabhakar, Shri Raghunandan Prabhakar and Sri Ravindran Prabhakar. Accordingly, we uphold the order of the CIT(A) on this issue. Accordingly, the Revenue's appeal is dismissed.
33. In the result, ITA Nos. 2458 to 2463/Mad/2006 are allowed, ITA Nos. 2380, 2381 and,2384/Mad/2005 are partly allowed for statistical purposes and ITA No. 201/Mad/2006 is dismissed.