Kerala High Court
P.V. Chandran vs Commissioner Of Income-Tax on 31 October, 2000
Equivalent citations: [2001]248ITR761(KER)
Author: J.B. Koshy
Bench: J.B. Koshy
ORDER J.B. Koshy, J.
1. These two writ petitions are filed by two legal heirs of an assessee who expired on September 1, 1990. The deceased was assessed to income-tax up to the assessment year 1991-92. But, his assessments were revised during the financial year 1994-95 and refunds were ordered to be granted. Accordingly, refunds were given with interest under Section 244(1A) of the Income-tax Act, 1961 (for short "the Act"), to three legal heirs in equal proportion. All the legal heirs received Rs. 2,78,160 each as interest on the refund. During the accounting year 1995-96, when the legal heirs filed the return, they included the "interest on refund" received by them as "income" in the respective return. It was assessed to tax. Subsequently, two of the legal heirs, i.e., the petitioners herein filed revision applications before the Commissioner of Income-tax under Section 264 of the Act claiming exclusion of the interest offered for assessment on the ground that it is not an income in their hands liable to be taxed. By exhibit P-3 common order (produced in both the writ petitions) their revision petitions were dismissed. The petitioners are challenging the above order in these petitions.
2. The short question involved herein is whether the interest received under Section 244(1A) on the refund amount ordered by the Department and received by the legal heirs of the assessee to whom the refund relates is a capital receipt at the hands of such legal heirs or a revenue receipt exigible to income-tax. According; to the petitioners, interest received in this case is the income of the deceased person to his estate and such income accrued after his death when received by the legal heirs, becomes a capital receipt and not a revenue or trading receipt or an income chargeable to income-tax in the hands of the legal heirs. It is also contended that Section 159 is also not applicable and it is applicable only if the income accrued before his death and is received by the legal representatives after his death. Here, interest has accrued only after the death as the assessments were revised in 1994-95 only and the assessee expired as early as in 1990.
3. It is admitted in exhibit P-3 order of the Commissioner of Income-tax also that Section 159 arises only in cases where the income of the deceased person accrued before his death but was received by the legal representatives after his death. In the instant case, during the life time of the deceased, he did not get the right of receiving the interest. It is contended by the Revenue that since Section 159 is not applicable and interest accrued after the death of the assessee and the right to refund and interest arose on reassessment after the death of the assessee, interest cannot be treated as income of the deceased assessee but income of the legal representatives in their hands and hence rightly assessed in their hands.
4. No decision exactly covering the points in question was cited before me by both sides. According" to the senior standing counsel for the Department, it is not the section but Section 168 has to be applied. He also cited the decisions reported in James Anderson v. CIT [1960] 39 ITR 123 (SC) ; Estate of VR. RM. S. Chockalingam Chettiar v. CIT [1960] 40 ITR 429 (Mad) and CIT v. Usha D. Shah [1981] 127 ITR 850 (Bom). Section 168 applies to executors of wills, administrators or persons managing the estate and not mere legal representatives. The Revenue pointed out various decisions to show that interest on refund received by an assessee is an income as defined under Section 2(24). In CIT v. G.R. Karthikeyan [1993] 201 ITR 866 (SC), it was held that definition of "income" in Section 2(24) is not exhaustive but inclusive and any type of income or receipt by an assessee will be covered by its wide net unless it is exempted under Section 10. In Dooars Ten Co. Ltd. v. Commr. of Agrl. I. T. [1962] 44 ITR 6, the Supreme Court held that the word 'income' under Section 2(24) is formidably wide. It was also pointed out that even the insurance receipt was held to be taxable income in Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR 484 (SC). It is not disputed by learned counsel for the petitioners also that if an assessee receives the interest on refund in a particular year, it will be an income in his hands in that accounting year. It will still be so, if Section 159 applies or if there was execution in view of Section 168. It was held as early as in 1953 in CIT v. Maharajadhiraj Sir Kameshwar Singh (No. 2) [1953] 23 ITR 212 (Patna). But, the sole contention is that here interest was received for the estate of the deceased and since it is admitted that Section 159 was not applicable, the said receipt of interest on refund accrued to the estate of the deceased after his death can, at the most, be called capital receipt by the legal representatives and it is not taxable in the hands of the legal representatives. He also cited the decision in CIT v. J.V. Kolte [1999] 235 ITR 239 (Bom), in the matter of payment from approved superannuation fund in the absence of special provisions. Regarding income received from the annuity deposited from the legal representative, the decision of the Supreme Court in Kapil Mohan v. CIT [1999] 235 ITR 278 was cited. In that case, it was held that even though income from annuity deposit is income in the hands of the original depositor, on the original depositor's death when that is received as part of the estate, it cannot be taken as the income in the hands of the legal representative as it became part of the estate of the deceased. The Supreme Court held as follows (page 286) :
'Becoming a part of his estate, his legal representatives became entitled to recover it, and they would under the genera) law be entitled to recover it in one lump sum, paying no tax on it (except estate duty, should a statute levying it be on the statute book at the relevant time). Sub-paragraph 4(a) of the Scheme does no more than recognise that the unpaid balance of the annuity deposit has to he paid over to the original depositor's legal representatives, adding only this : that it would be paid in instalments as annuity. Though so paid in annuity form the repayment is of capital. It cannot be taxed as income in the hands of the legal representative unless the statute were expressly to deem it to be income in his hands.
As to the argument based on equity, it has long been recognised that tax and equity are strangers. Just as reliance upon equity does not avail an assessee, so it does not avail the Revenue. The legal representative of a deceased depositor cannot be made to pay income-tax upon the annuity only because the original depositor had not been required to pay income-tax on the amount of the annuity deposit, on the basis that what the Revenue had lost out on then should be recouped to it now.'
5. Since no decision on the point in question regarding income-tax assessment of interest on refund accrued after the death of the original assessee but received by the legal representative is cited by both sides and the question involved in the case is very important, I am of the opinion that this issue has to be decided by a Bench of this court. Therefore, I adjourn the matter to be placed before the Chief Justice for appropriate orders."
Case Note:
Direct Taxation refund - Sections 2 (24), 10, 41, 159, 159 (1), 159 (2), 159 (3), 168, 240, 244, 244 (1A), 264 and 280D of Income Tax Act, 1961 whether interest on amount of refund received by legal representatives of deceased assessee can be deemed to be income of deceased assessee answer in negative interest is income of legal representative and taxable in their hands.
JUDGMENT S. Sankarasubban, J.
6. Both these original petitions challenge the same order. Hence, they are heard together. The challenge in both these original petitions is against exhibit P-3 order passed by the Commissioner of Income-tax, Cochin, under Section 264 of the Income-tax Act, 1961 (for short, "the Act"). The facts which led to the filing of the original petitions are as follows :
One P.V. Swamy was an assessee under the Act. He died on September 1, 1990. He has been assessed to income-tax up to the assessment year 1991-92. During the financial year 1994-95, the assessment of Sri P.V. Swamy for the assessment years 1982-83 up to 1987-88 and 1989-90 were revised and a sum of Rs. 21,52,500 was refunded to the legal heirs under Section 244 of the Act. The refunded amount included an amount of Rs. 8,34,479 being the interest calculated on the actual refund amount under Section 244(1A) based on revised assessment. The petitioners in these two original petitions are the legal heirs of the aforesaid P.V. Swamy. For the assessment year 1995-96 one-third of the interest amount of Rs. 8,34,479 was included as the income of the petitioners in their return. Thus, Rs. 2,78,160 was included as income by both these petitioners for the assessment year 1995-96. Thereafter, the petitioners, according to them, realised their mistake and filed a petition under Section 264 of the Act before the Commissioner of Income-tax for exclusion of the interest offered for assessment on the ground that it is not actually an income in the hands of the petitioners. The revision petitioners were heard by the Commissioner. It was contended before the Commissioner that the petitioners' receipt is only a capital receipt. It is also contended that the amount was actually due to the assessee and under Section 159 of the Act, the petitioners represent the assessee and the original assessee was their father and hence, interest amount cannot be treated as income of the petitioners. The Commissioner of income-tax considered the matter and by exhibit P-3 order held that the amount paid by the Department as interest is having the character of income and it was paid to the legal representatives. The receipt by the legal representative need not be and cannot be in the capacity in which they were paid by the Department. It is against the above order the original petitions were filed. When the matter came up before the learned single judge, the learned single judge referred the matter to the Division Bench on the ground that there was no authoritative pronouncement on this subject.
7. The father of the petitioners, Sri P.V. Swamy, was a partner of the firm, Kerala Transport Company. When the assessment regarding the Kerala Transport Company was revised as per the appellate order, a revision became necessary regarding the assessment of Sri P.V. Swamy for the assessment years 1982-83 up to 1987-88 and 1989-90. The date of the refund order ranges from October 31, 1994, to March 27, 1995. So it was received in the accounting year 1994-95. There are three heirs for Sri P.V. Swamy. The entire refund amount included an interest of Rs. 8,34,479. The question raised is whether the amount of Rs. 8,34,479 which was received as interest should be treated as income of the deceased P.V. Swamy, so that it will be received as capital by the legal representatives and will not be included as assessable income.
8. The refund in this case is ordered under Section 240 of the Act, which says that, "where, as a result of any order passed in appeal or other proceeding under this Act, refund of any amount becomes due to the assessee, the Assessing Officer shall, except as otherwise provided in this Act, refund the amount to the assessee without his having to make any claim in that behalf". Under Section 244(1A) of the Act, for refund of an amount under Section 244(1), the assessee is entitled to simple interest at fifteen per cent, on the amount so found to be in excess from the date on which such amount was paid to the date on which the refund is granted. The interest mentioned is simple interest at the rate of 15 per cent, per annum. The argument of counsel for the petitioners is that this amount is only received by way of inheritance. According to the contention of the petitioners, the refund and interest accrued to it are amounts due to the assessee and hence, such amount becomes part of his estate and is not liable to be included as income personally of the petitioners. Counsel for the petitioners relied on Section 159 of the Act. Under Section 159(1) of the Act, where a person dies, his legal representatives shall be liable to pay any sum which the deceased would have been liable to pay if he had not died, in the like manner and to the same extent as the deceased. Under Sub-section (2) of Section 159, it is stated that for the purpose of making an assessment (including an assessment, reassessment or recomputation under Section 147), any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative from the stage at which it stood on the date of the death of the deceased ; any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative and all the provisions of this Act shall apply accordingly. Sub-section (3) states that for the purposes of this Act, the legal representative of the deceased shall be deemed to be an assessee. Section 168 of the Act states that, the income of the estate of a deceased person shall be chargeable to tax in the hands of the executor.
9. The question before us is whether the interest that was received by the legal representative can be deemed to be the income of the original asses-see. The income has been defined under Section 2(24) of the Act. It is also without doubt that a person is liable to pay tax only for the amount which has accrued as income. If the income has not accrued or the income was not received during the assessment year, the income-tax authorities cannot assess the person to tax. When difficulties arose in assessing such income where an assessee died after the filing of the return or before the finalisation of the assessment, Section 24B was incorporated in the 1922 Act. Section 24B is in pari materia with Section 159 of the Act. The scope of Section 24B was considered by the Supreme Court in the decision in CIT v. Amarchand N. Shroff [1963] 48 ITR (SC) 59. The Supreme Court held as follows (headnote) :
"Section 24B did not authorise the levy of tax on receipts by the legal representative of a deceased person in the years of assessment succeeding the year of account being the previous year in which such person died. The assessee under the Act had ordinarily to be a living person and could not be a dead person because his legal personality ceased on his death. By Section 24B, the legal personality of a deceased assessee was extended for the duration of the entire previous year in the course of which he died and, therefore, the income received by him before his death and that received by his heirs and legal representatives after his death but in that previous year became assessable to income-tax in the relevant assessment year. The section was enacted by the Legislature to bring to tax, after his death, income received during his lifetime, and fill up the lacuna which was pointed out in Ellis C. Reid v. CIT [1930] 5 ITC 100. Any income received in the year subsequent to the previous or the accounting year could not be called income received by the deceased person. The provisions of section 24B did not extend to tax liability of the estate of a deceased person beyond the previous or the account year in which that person died."
10. In that case the Supreme Court further held that the amounts received by the legal representatives of a person could not be taxed in their hands as they could not be said to be income which might be deemed by fiction to have been received by the deceased. The court further held that 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.
11. Learned counsel for the petitioner relied on the decision in CIT v. Hukumchand Mohanlal [1971] 82 ITR 624 (SC). In that case, what happened was that the assessee's husband died and she succeeded to the business carried on by him. A firm which had recovered certain amounts towards sales tax from the assessee's husband succeeded in an appeal against its sales tax assessment and refunded that amount to the assessee, as a result of the order in appeal. This amount which was received by the assessee was treated as income of the assessee by the Department. The Supreme Court held that the Income-tax Act did not contain any provision making a successor in business or the legal representative of an assessee to whom an allowance had already been granted, liable to tax under Section 41(1) in respect of the amount remitted and received by the successor or the legal representatives. It further held that Section 41 did not apply to this case because the assessee sought to be taxed was not the assessee contemplated by that section. The assesses within Section 41(1) having died, the Revenue could not take advantage of its provisions. The facts in the above case are entirely different from the case in hand.
12. Learned counsel for the petitioner also relied on the decision of the Supreme Court in Kapil Mohan v. CIT [1999] 235 ITR 278. The facts of that case were as follows :
One N. Mohan had deposited the sum of Rs. 1,57,250 under the Annuity Deposit Scheme framed under Chapter XXII-A of the Income-tax Act, 1961. The same was refundable to him in ten equal instalments of principal and interest under the provisions of Section 280D of the Act. The said Mohan died on July 15, 1969. The instalment of principal and interest in the sum of Rs. 12,013 payable to him under Section 280D was paid to the assessee, his son and executor. For the assessment year 1970-71, the Income-tax Officer treated the sum of Rs. 12,013 as income in the hands of the assessee. On appeal, the Appellate Assistant Commissioner held that the said sum was not taxable in the assessee's hands. The Tribunal reversed the order of the Appellate Assistant Commissioner and at the behest of the assessee, referred the question to the Delhi High Court and the High Court held against the assessee. In considering the question of the Supreme Court held as follows (headnote) :
"On the original depositor's death, the balance of the annuity deposit that he had made becomes part of his estate and is liable to tax as such. Becoming a part of his estate, his legal representatives become entitled to recover it, and they would under the general law be entitled to recover it in one lump sum, paying no tax on it (except estate duty, should a statute levying it be on the statute book at the relevant time). Sub-paragraph 4(a) of paragraph 6 of the Annuity Deposit Scheme, 1964, does no more than recognise that the unpaid balance of the annuity deposit has to be paid over to the original depositor's legal representatives. It cannot be taxed as income in the hands of the legal representative."
13. In the above decision, as a matter of fact, the Supreme Court at page 286 held as follows :
"The annuity deposit, when made, became capital. When returned, either as a whole or by instalments, it was not liable to tax as income. For this reason Section 2(24)(viii) was enacted, whereby the instalment or annuity was treated as income, provided it was received under Section 280D, that is to say, the annuity was to be treated as income if received by the original depositor. On the original depositor's death, the balance of the annuity deposit that he had made became part of his estate . . ."
14. It is also pertinent to point out that, the Supreme Court also relied on the scheme which stated that unpaid balance of the annuity deposit has to be paid over to the original depositor's legal representative and that it would be paid in instalments as annuity. Though so paid in annuity form, the repayment is of capital.
15. The above decision can be distinguished because, the observations have been made on the basis of the facts of those cases. As already stated, in this case, it cannot be said that the interest on the refund accrued at the time before the death of the original assessee. The legal fiction under Section 159 of Act is only restricted for the purpose of completing the assessment proceedings for that year. Any income which was received before the death of the original assessee and which was paid subsequent to his death and received by his heirs and legal representatives but paid in the same year should be treated as income of the assessee and the legal representatives will be assessed on behalf of the original assessee. As observed by the Supreme Court, at the time when the income was received, the persons should be alive. Here, refund is availed only when it is ordered and it could be received only subsequently. The fiction cannot be extended beyond what it was intended. It was then submitted that on the basis of equity, this interest should have been treated as income of the deceased. As it is well known, tax and equity are strangers. Hence, according to us, income received by the petitioners as interest on refund of the amount deposited by the father, the original assessee, is to be treated as income of the petitioners.
16. The original petitions are dismissed.