When it comes to taxation, India is certainly one of those Countries having complex taxation provisions in various forms. While we are living and earning income to create wealth for the security of family, taxes are imposed from the point of start of earning money, spending money and also at the time of creating wealth from savings made. In the past, wealth which is been created during the lifetime, when gets transferred, also was subject to estate duty provisions. Estate duty provisions got abolished in 1986 on the ground that the yield from the estate duty was much lower than the cost of administering that law, even though imposition rate for same were as high as 85% at maximum marginal rates. Now, again since past few years, there is fear that estate duty provisions would be reintroduced.
In this article we will study tax implications under the Income tax laws after death of a person.
Section 159 of the Income Tax Act, 1961 (“the ITA”), when a person dies, the assessment of his income pertaining to the period prior to his death would be pending. Considering that dead person cannot be made appear for the scrutiny proceedings, Supreme Court and Bombay high court[1], have held in the past that an assessment cannot be made on a dead person and, if so made, would be a nullity in the eyes of law. But it would still not be justifying to conclude that upon death of a person, the tax department cannot collect taxes on the income that a deceased had earned prior to death and in respect of which assessments are pending, or even filing of the return may be pending for the last one or two assessment year(s). Accordingly, section 159 of the ITA provides for such gap where it enables assessment of income of a deceased person who earned income during the financial year, but died without filing any income tax return or completing assessment procedures.
Section 159 of the ITA provides that when a person dies, his legal representatives shall be liable to pay any tax or other 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. Thus, there would be separate assessments of income in the hands of the legal representative which he has earned in his personal capacity and that which the deceased had earned prior to his / her death. Both can not be assessed as part of the same return of income of the legal representative. Consequently, therefore, arrears of tax of deceased cannot be adjusted against refund due to the legal representative in his individual capacity[2]. A legal representative is deemed to be an assessee for the purpose of the Act by virtue of Section 159(3) of the ITA. The liability of a representative assessee, however, is limited to the extent to which the estate is capable of meeting the liability and it does not extend to the personal assets of the legal representative[3]. If however, the legal representative has disposed of any asset of the estate or creates charge thereon, then he may become personally liable. In such cases also, the liability will be limited to the extent of the value of the assets disposed of or charged. A legal representative gets assessed in the PAN of the deceased, but in a representative capacity.
Further, Section 168 of the ITA provides for treatment of tax on income arising to deceased after his/her death but before distribution of assets to his/her heirs/ beneficiary/(ies). Section 168 of the ITA provides that income arising to deceased person after his death, shall be liable to tax in the hands of the executor to the estate of the deceased. The executor shall be assessed in respect of the income of the estate separately from his/her personal income. Thus, there would be separate requirement of obtaining a PAN for filling return of income in the capacity of an executor. Accordingly, the Executor shall be liable to charge of tax u/s 168 of the ITA upto the date of completion of distribution of the estate in accordance with the Will of the deceased. If say, estate gets partially distributed in a given year, then, the income from the assets so distributed gets excluded from the income of the estate and gets included in the income of the legatee. Thus, legatee is chargeable to tax on income after the date of the distribution. Even if the executor is the sole beneficiary, it does not necessarily follow that he receives the income in latter capacity. The executor retains his dual capacity and hence, he must be assessed as an executor till the administration of the estate is not completed except to the extent of the estate applied to his personal benefit in the course of administration of the estate[4].
Further, as per Section 163 of the ITA, executor is assessable in the status of an ‘Individual’. In case, there are more executors, then legal status for taxation could also be as if it is an ‘AOP’, where income is charged at maximum marginal rates. In case of G.B.J. Seth[5], Madhya Pradesh High Court had held that even though the assessment is on the executor(s), for all practical purposes it is an assessment of a deceased, and thus, notwithstanding the status of the assessee being an AOP, the executors were entitled to claim set-off on account of the balance of brought forward business loss incurred by the deceased prior to his death.
Section 163 of the ITA applies in cases where deceased has left behind a Will. In case of intestate succession, the income from the assets earned after the date of death becomes assessable in the hands of legal heirs as ‘tenants-in-common’ till the assets of the deceased are distributed by metes and bounds[6]. This entirely can be a complex procedure as legal heirs would be liable to handle the procedure on common ground. So, if there is any disagreement amongst the legal heirs, that can impact the smooth running of tax procedures.
Thus, it is very evident from the above, that an appropriate succession planning helps in resolving tax litigations / assessments of a deceased in more effective manner.
For more detailed discussion on the above subject, please feel free to connect at contact@devadhaantu.in
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[1] Ellis C Reid vs CIT (1930) 5 ITC 100 (Bom), CIT vs Amarchand N Shroff (1963) 48 ITR 59 (SC)
[2] Hasmukhlal Vs ITO 251 ITR 511 (MP)
[3] Union of India vs Sarojini Rajah (MRs) 97 ITR 37 (Mad.)
[4] CIT vs Mrs. Ghosh 159 ITR 124 (Cal)
[5] CIT Vs G.B.J. Seth and Anr (1982) 133 ITR 192 (MP)
[6] CIT vs P. Dhanlakshmi and ORs (1995) 215 ITR 662 (Mad)
