Dead or alive, file your income tax returns

[Pragya Rajpurohit]

1. Introduction:

Death of a family member brings huge dismay to the family and payment of taxes brings further sadness. The month of July is the “taxing month” of the year as individuals get ready to file their income tax returns; however it is not only the alive but also the dead who have to pay their taxes. Benjamin Franklin once said “There are only two things which are certain in life: death and taxes”, this appears very apt in the Indian Income Tax regime too.

I have classified this article into the following parts:

1. Which provision provides powers to tax a dead person?
2. Who is the person liable under the Act?
3. Manner of computation of Income
4. Assessment of income
5. Hurdles in compliance

2. Which provision provides powers to tax a dead person?

There should be a necessary machinery provision for levy of tax under any fiscal law. After death, the assessee does not exist however his liability to the extent of his estate subsists even after his death. The enabling provisions in this regard are contained in Section 159 and Section 168 of the Income Tax Act, 1961. Section 159 casts liability on the legal representative to pay the taxes and file the returns, while Section 168 casts liability on the executors to pay the taxes and file the returns.

3. Who is the person liable under the Act?

As per Section 159, when a person dies, his 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. It is important to note here that legal representatives and legal heirs are not the same.

In case of an intestate death (i.e. there is no valid will) of a person, the estate of the deceased falls unto the legal heirs are the legal representative and they are liable under Section 159.

However in case of a testate death (i.e. there a valid will) it could be possible that the beneficiary of the will is a person other than legal heir or there are multiple beneficiaries of the will.  In such cases Section 168 comes to the rescue.  If there is more than one legal representative, as per Section 168 the executors of the will shall be chargeable to tax on income earned from the date of death till the date of distribution of the estate among the legal representatives. In re Navneet Lal Sakarlal vs. CIT 1991 (10) TMI 2 - SUPREME COURT it was held that the income shall continue to be taxable in the hands of the executor until the estate of the deceased person is distributed among the beneficiaries as per the will executed by him.

In re KR Patel (Decd) v. CIT 1999 (8) TMI 3 - SUPREME COURT it was held that the functions of the trustees and executors as imposed upon them did not come to an end, and it, therefore, cannot be said that there was any trust created under the will till that time. Section 168(3) of the Act makes it clear that the executor will continue to be assessed until the estate is distributed among the beneficiaries according to their several interests.

4. Manner of computation of total income:

Income of the deceased person for the purpose of computation can be time lined into

1. Income earned before the date of death.
2. Income earned after the date of death. 

Thus in the year of death, two returns shall be filed; one in the hands of the deceased and another in the hands of the legal representatives / executors [B.D. Gupta & Sons Vs. ITO 2015 (8) TMI 166 - ITAT DELHI.

Income earned before the date of death:

In respect of the income earned before the death, the income tax returns will have to be filed as if the deceased had not died in the same manner and extent as the deceased did. The legal representative of the deceased person are liable to pay advance tax, self assessment tax, interest, penalty, file return of income etc  for the period starting from the April 1st of the financial year upto the date of the death.

The liability of the legal representative shall be limited to the estate dwelled upon him, i.e. he is not required to pay anything out of his pocket. However, a legal representative wouldn’t be prosecuted for any defaults under this Act.

Income earned after the date of death:

Computation shall depend on the type of death (testate/intestate) and be taxed in the hands of the person liable as provided in para earlier.

Status of the Executor in case of testate death – Section 168:

If there is only one executor, then he will be treated as an individual. In case of more than one executor, they shall be regarded as Association of Persons.The residential status of the executor shall be decided according to the residential status of the deceased person during the year in which his death took place. The executor has the rights to recover or to retain the amount utilised for payment of liability of the deceased person. 

The executor would continue to be chargeable to income tax u/s. 168 until the estate of the deceased is distributed completely to the beneficiaries thereof in accordance with the terms of the Will. Therefore, income up to the date of death shall be assessable u/s 159 of the Act on the legal representatives of the deceased. However, from the date of death till completion of administration of the estate and distribution of the property, it shall be assessable u/s 168 in the hands of the executor or administrator as the case may be.

5. Assessment Procedure:

Any proceeding initiated against the deceased would be deemed to have been initiated, processed and continued against the legal representative. The legal representative of the deceased would be deemed to be an assessee. The liability of the legal representatives would be confined to the extent to which the estate of the deceased is capable of meeting the liability.

Notice Issued in the name of dead person is invalid:

In the case of Durlabhai Kanubhai Rajpara Versus Income Tax Officer Ward 1 (3) (7) , 2019 (4) TMI 784 –HC (Guj.) it was held that any notice issued in the name of a dead person is not valid and bad in law. The Assessing Officer is under obligation to should drop the original proceedings and issue fresh notices to legal representatives to proceed further in the assessment, subject to bar of limitation. 

In the case of CIT vs. Amarchand Shroff, 1962 (10) TMI 51 - SUPREME COURT]it has been held that the individual has ordinarily to be a living person and there could be no assessment on a dead person. Revenue could not bring any material to show that the assessment order was passed after issuing any notice to the legal representative of the deceased individual, hence decided against revenue.

In the case of Chandreshbhai Jayantibhai Patel vs. ITO [2019 (1) TMI 353 - GUJARAT HIGH COURT]. It was held that in view of the provisions of section 159(2)(b) it is permissible for the AO to issue a fresh notice under section 148 of the Act against the legal representative, provided that the same is not barred by limitation; he, however, cannot continue the proceedings on the basis of an invalid notice issued under section 148 of the Act to the dead assessee. Further held that the notice u/s 148 which is a jurisdictional notice, has been issued to a dead person. Upon receipt of such notice, the legal representative has raised an objection to the validity of such notice and has not complied with the same. The legal representative not having waived the requirement of notice under section 148 and not having submitted to the jurisdiction of the Assessing Officer pursuant to the impugned notice, the provisions of section 292B would not be attracted and hence, the notice under section 148 has to be treated as invalid. In the absence of a valid notice, AO has no authority to assume the jurisdiction under section 147 of the Act and, hence, continuation of the proceeding u/s 147 pursuant to such invalid notice, is without authority of law.

Hon’ble Mumbai High Court in the case of Sumit Balkrishna Gupta. v.Assistant Commissioner of Income-tax, Circle 16(2), Mumbai [2019 (2) TMI 1209 (HC (Bom)] held that the notice issued on a dead person is invalid unenforceable in law - thus notice u/s 148 on a dead person is invalid and accordingly quashed.

In re CIT v. Jai Prakash Singh 1996 (3) TMI 7 (SC) that lack of notice to the legal representatives does not amount to the revenue authority having no jurisdiction, but the assessment was defective by reason of want of notice. It was also observed that an assessment proceeding does not cease to be a proceeding under the Act merely by reason of want of notice.

Validity of Levy of penalty on the legal heir:

In re CIT Vs. Smt. S. Gowri, 2019 TMI 1165 – HC (Mad.), it was held that since the provisions of Section 271 (1) (c) of the Act depend upon the guilty animus or mens rea on the part of the assessee concerned, naturally, as legal representative, the wife cannot be held liable to defend those penalty proceedings or be held guilty of any mens rea on the part of the husband. Therefore, unless the penalty proceedings are concluded against a living assessee, the legal heirs cannot be held liable to face those proceedings or pay any sum determined as penalty payable under Section 271 (1) (c) of the Act.

Search proceedings against a dead person:

In re Late Smt. Laxmibai Karanpuria Versus ACIT, 2010(3) TMI 768, ITAT, Indore it was held that Section 159(2) is subject to sub-section (1)(a) that any proceedings taken against the deceased before his death shall be deemed to have taken against the legal representatives and may be continued against the legal representatives from the stage at which it stood on the date of the death of the deceased. It can be said that no proceedings were taken against the assessee before his death as the search took place even after about 7 months of the death of the assessee, therefore, sub-section (2) of section 159 of the Act is not applicable to the present appeal. - since in the present case the proceedings were initiated after the death of the assessee, consequently, the AO was not justified in farming the assessments.

6. Hurdles in complaince:

Filing of return of Income of the deceased / assessment proceedings are not far from hurdles as practically it could be difficult to obtain details of income as the legal representatives may not be aware about the activities done by the deceased prior to his death. Further in case of any pending tax litigation or tax arrears and if the assets of the deceased do not have sufficient liquidity then the legal representative might be left with no other choice but to sell the assets in order to remit the liabilities.