NOTHING IS CERTAIN BUT DEATH AND TAXES

The topic deals with the tax liability after death of an individual. Unlike normal circumstances there may be certain circumstances under which it may not be possible to either impose or collect tax from a person such cases are governed by Chapter XV of the Income Tax Act, 1961 which lays down the liability of various persons who may be liable to tax on such incomes.

Tax liability after the death of an individual

According to section 159 of the Income Tax Act, 1961 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. Such liability is not confined to the extent of amount of tax but also to the liability in respect of penalties, interest  or any other sum that would have been payable by the deceased.

Meaning of Legal Representative [Section 2(29)] 

Legal representative has the meaning assigned to it in clause (11) of section 2 of the Code of Civil Procedure, 1908, accordingly “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”.

On death of an individual assesse following situations can arise vis-a-vis tax payable by him:

1. Income earned during the life time by the assesse remains to be assessed or the taxes on the income, already assessed, are still to be recovered. Such situations shall be covered under section 159.
2. Income of the deceased are received after his death by his legal heirs, executors or administrators. Income of the deceased is normally part of the estate and hence capital in the hands of the legal representative but may be assessable in their hands by virtue of section 176(3) or 176(4) of the Income Tax Act, 1961  i.e. liability in case of discontinued business. Section 176(4) applies only to a profession and not to a business discontinued. Any sum received after the discontinuation shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had it been received before such discontinuance.
3. On death, the assets of the estate vests, by testate or intestate succession on the heirs or legatees in specie  or in specified shares and the income from the time of death accrues or arise to and received by them, the assessment has to be made in normal course in the hands of the heirs or legatees.
4. The estate vests in the executors or administrators   on death of an individual for the purpose of administration, and pending such administration the administrators or executors are in receipt of the income of the estate.  Such situations shall be covered under section 168 of the Income Tax Act 1961, i.e. liability in case of executors.   Section 168 applies to a case where succession is a testamentary succession i.e. by will. In case of intestate succession (i.e. where there is no will) section 168 is not applicable. Explanation to section 168 “executor” includes an administrator or other person administering the estate of the person. 

“Executor” means a person who is appointed by the testator to carry out and execute his wishes and for that purpose, to administer his estate after his death.

“Administrator” is a person not appointed by testator, but who is granted letters of administration by a court to administrator the estate.

Consequences if a legal representative is taxable [section 159(2) and (3)]

For the purpose of making an assessment (including reassessment under section 147) of the income of the deceased and for the purpose of levying any sum in the hands of the legal representatives the following procedure shall apply:

1. Any pending proceeding before the death of the deceased shall be deemed to have been taken against the legal representative and may continue against the legal representative from that stage;
2. Any proceedings, which could have been taken against the deceased if he had survived, may be taken against the legal representative;
3. All the provisions of the Act shall apply;
4. The legal representatives of the deceased shall be deemed to be the assessee; and
5. The liability of the legal representative shall be limited to the extent to which the estate of the deceased is capable of meeting the liability.

Where the deceased has furnished a return and he died before the completion of assessment fresh notice under section 143(2) and 142(1) have to be issued to the legal representative and all the provisions of the Act would apply accordingly.

Personal liability of the legal representative [section 159(4)]

Where the legal representative creates a charge on or disposes of or parts with any asset of the estate of the deceased, while the liability for tax on the income of the deceased remains un-discharged, the legal representative shall be personally liable for any tax payable by him in his capacity as legal representative. However, such liability shall be limited to the value of the asset so charged, sold or parted with. 

Further legal representative, being an assesse for the purpose of Income Tax Act, is liable to a penalty for his own default e.g. penalty under section 221 for his own default in paying tax assessed on him or on the deceased or penalty under section 271(1) for having himself submitted incorrect return of the income of the deceased or having failed to file the return in time. Penalty already imposed on the deceased prior to his death may be demanded from the legal representative and collected out of the estate. However a legal representative is not liable to prosecution   and offences under Income Tax Act.

Liability of an executor / administrator

Executors and administrators are not charged as representative assesse but in their own right as person in whom the estate of the deceased vests until it is completely administered. 

There would be two assessments in respect of the accounting year in the year of death:

1. First for the period commencing from the first day of the accounting year till the date of death, in the hands of legal representatives of the deceased; and
2. Thereafter from the date of death till the end of the accounting year in the hands of the executor / administrator.

Therefore there would be an assessment qua legal representative only for one year that is the assessment year corresponding year of death, where as an assessment against the executor or administrator would be year after year commencing from the assessment year corresponding to the accounting year of death and lasting up-to the year till the completion of administration of the estate.

Status of executor  

Executor shall be deemed to be resident or non-resident according to status enjoyed by the deceased in the year of death.

How income will be charged in the hands of executor:

i. If there is only one executor then as if an executor was an individual; and 

ii. If there is more than one executor then as if executors were as an Association of Persons.

The assessment of a person qua legal representative qua executor or administrator is different from the assessment of these individuals in their private and personal capacity which is to be assessed separately and not to be included in their representative assessment.

In calculating the income of any accounting year, the executor is entitled to deduct any specific legacy distributed to or applied to the benefit of a specific legatee.

Deductions by the executor 

The executor stands in the shoes of the testator and the whole income belongs to the estate. Executor is not entitled to claim any deduction which the deceased himself would not have been entitled to claim had he been alive. Even the sums that might have been paid as death duties are not allowed to be deducted. However any tax paid or payable by the executor will be recoverable from the estate or from the persons on whose behalf it is paid.

Computation and calculation of Tax [Section 159(1)]

Legal representative 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”. These word implies that not only there should be a separate assessment in respect of the deceased estate but also that the computation of the income of the deceased estate shall have to be made in the status applicable to the deceased, granting all reliefs, similar to the relief for which deceased may be entitled to and calculating the deductions, allowances and rebates that the deceased may be entitled to. The tax rate shall be the average rate applicable to the deceased.

Judicial decisions

• In case of death of assesse before proceedings for assessment are completed, legal representatives must be brought on record otherwise the assessment is void ab initio. [CIT v Prabhawati Gupta (1998) 231 ITR 188MP]
• Where the assesse dies, pending assessment proceedings, it is the duty of the Assessing Officer to ensure compliance of section 159(2) (i.e. to bring the legal representative on record) before passing any orders.[CIT v Dalumal Shyamumal (25) 276 ITR 62MP]
• Where the proceedings comes to conclusion during the life time of the deceased but the assessment order was passed in the name of the deceased and by that time Assessing Officer come to know the death, the assessment order has been upheld as valid. [Joseph Joseph v ITO (Ag.) 1973 92 ITR 144 (Ker)]
• Assessment on legal representative without notice to all legal representatives is a procedural irregularity not a nullity. [CIT v Jai Prakash Singh (1996) 85 Taxman 407 (SC)]
• Where the legal representative have in fact appeared voluntarily or in response to a notice and have allowed the proceedings to continue against the deceased without objection the assessment may be only set aside for being done afresh, not annulled. [ CIT  v Roshan Lal (1982) 134 ITR 145 (Del)]  
• Where one of the legal representatives filed a return in response to a notice on the deceased and did not point out to the Assessing Officer that there were also other representatives, the assessment cannot be annulled. [Sajjan Kumar Saraf v CIT (1978) 144 ITR 155 (Cal)]