TMI Blog2000 (2) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... ng provisions of section 176(4) of the IT Act, and treating the executors as recipient thereof within the meaning of section 176(4) and thereby erred in deleting the addition made by Assessing Officer under section 176(4) holding that the amount received by the executors vide clause 14(a) of the partnership deed, dated 15-3-1982, is a capital receipt. 2. Mr. Kaikhushroo Engineer, who passed away on 29-2-1988, was a chartered accountant. He was a partner in M/s Sorab S. Engineer Co., a firm of chartered accountants. He retired from the said firm w.e.f. 1-1-1985. In respect of fees received from the firm after the said date, as per clause 14(a) of the deed of partnership, and during his lifetime, he was assessed to income-tax. He died on 29-2-1988. For the year ended 13-3-1990 (assessment year 1990-91), which is the year in appeal, his legal heirs received a sum of ₹ 1,10,856 from the firm as per clause 14(a) of the partnership deed. In the return filed, exemption from income-tax was claimed in respect of the aforesaid receipt on the ground that it was a capital receipt, relying on the judgment of the Bombay High Court in CIT v. Late F. Summersgill 1977 CTR (Bom.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as assessee s income and that at any rate, the decision of the Madras High Court (supra) supported the decision of the Assessing Officer to tax the amount and, therefore, the order of the CIT(A) must be reversed. 7. Mr. Dastur, learned counsel for the assessee, however says that firstly, the matter is concluded in his favour by the judgment of the Bombay High Court in Late Summersgill s case (supra) and, therefore, the receipt is a capital receipt. As regards the applicability of section 176(4), his argument is that the provision admits of only an one time application and cannot be repeatedly invoked if there is only one discontinuance of one profession, that in this case, the discontinuance was on account of Mr. Engineer s retirement from the firm on 1-1-1983, that it cannot be said that there was again a discontinuance of the profession when Mr. Engineer passed away on 29-2-1988, and that after the death of Mr. Engineer, the recipient of the amounts under clause 14(a ) of the partnership deed is different. 8. Mr. Dastur then proceeded to contend that even if it is held, (disagreeing with his contention that section 176(4) is of one-time application and had worke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and challenge the assessment for a later year. A receipt cannot be taxed merely because the assessee has offered the same for assessment without question or that he has not challenged the assessment in earlier years in appeal. If assessability of a receipt is to depend upon the conduct of parties in filing returns of income, then equally it may be said that if a sum is excluded from the return, the same cannot be taxed. Taxability does not depend upon what view the parties may take with regard to their rights, but depends on the true position in law CIT v. C. Parakh Co. [1956] 29 ITR 661 (SC). If a sum is in law taxable as income, the fact that the assessee or even the ITO takes a different view would not matter. Conversely, if a sum in law cannot be taxed, it cannot be brought to tax merely because in the earlier years it was taxed without demur. It is open to the assessee in a later year, on becoming aware of his rights and also the true legal position, to question the assessment of the receipt. It has been held in CIT v. Bharat General Insurance Co. Ltd. [1971] 81 ITR 303 (Del.) that where the assessee included dividend income in the return, but later challenged the validity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound that it belonged to the estate of Summersgill. The AAC and the Tribunal held that the amount was essentially a capital receipt. On a reference to the Bombay High Court, it was held that the commission was paid by the company to the executors in recognition or for consideration for services which the deceased had rendered to the company before he died. It was held further that the amount was not referable to any activity for profit undertaken by the executors. Estate duty had been paid on the commission amount on the basis that it was includible in the principal value of the estate passing on the death of the deceased. Having regard to these aspects, the Hon ble High Court held that the amount would have to be regarded as a capital receipt and was not assessable in the hands of the executor as their income for the relevant assessment year. It is to be noted that this decision was rendered under the 1922 Act, where there was no express provision corresponding to section 168 of the 1961 Act. However, the income of the estate of a deceased person was held liable to income-tax under the general charging provisions of that Act, in the hands of the executors or administrators in whom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits of the continuing firm and that charge would have to be satisfied first before arriving at the distributable profits of the continuing firm to be divided between the partners of the continuing firm, viz : On retirement of Kaikhushroo from the firm and after such retirement coming into effect and in the event of his demise thereafter his legal representatives of his heirs, and in the event of demise of Kaikhushroo whilst he is a partner his legal representatives or heirs shall be paid for each of the eight accounting years immediately following the end of the accounting year in which Kaikhushroo has retired or died, such a fraction of the gross fees received by the firm for each of the said eight accounting years as is equivalent to 1/9th (one-ninth) of Kaikhushroo s profit-sharing ratio at the time of his retirement of death. A perusal of the aforesaid clause shows that even after the retirement from the firm, Mr. Engineer was rendering certain professional services and assistance as may be required by the firm in respect of which he was to be paid certain fees. It cannot be disputed that the amount of ₹ 1,10,856 remained to be paid to Mr. Engi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Madras High Court in the case of The Estate of late A.V. Viswanatha Sastri (supra) on which reliance has been placed by the Assessing Officer for an entirely different purpose supports the argument of Mr. Dastur. In this case also, certain fees due to late Shri Viswanatha Sastri, who was a senior advocate practising in the Supreme Court and who died on 4-1-1966, were received by his son Shri V. Ratnam (who later became Justice Ratnam of the Madras High Court and still later, the Chief Justice of the Himachal Pradesh High Court from where he retired) who was appointed as the executor under a Will left by the deceased. One of the contentions taken by the assessee before the Assessing Officer and reiterated even before the Tribunal and accepted by it, was that the arrears of the professional fees cannot be treated as income from the estate of the deceased. When the matter reached the High Court, at the instance of the Revenue, it was held by the High Court (at p. 277 of the report) as under : As per this section, the income of the estate of the deceased shall be chargeable to tax in the hands of the executor. However, we are inclined to agree with the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Section 176(4) which found a place in the 1961 Act, reads as under : 176(4) Where any profession is discontinued in any year on account of cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance 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. Section 176 appears under Chapter XV under the heading L-Discontinuance of business, or dissolution . The sub-section brings to charge any sum received after the discontinuance of a profession in the hands of the recipient. A fiction is created in the section deeming the receipt to be the income of the recipient. The receipt is to be charged in the year of receipt. The provision also says that such receipt would be charged to tax in the hands of the recipient if it would have been included in the total income of the person who has retired from the profession or who has died, had it been received before the discontinuance of the profession by the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk shall be paid to his nephew. In this case, when the fees are received by his nephew, they will be taxed in his hands as recipient though the chartered accountant might have appointed his wife as the executrix of his Will. If in this case, the chartered accountant had appointed his nephew as the executor of his Will, the recipient and the executor will be the same person. The consequences of the recipient and the executor being one and the same person may be noticed a little later. 16. Having thus briefly noted the difference between section 168 and section 176(4), we may now proceed to notice the facts of the case before us as can be gathered from the record. Mr. Engineer passed away on 29-2-1988. It is not clear whether there was a Will but this much is clear that his wife has been acting as the executrix of the estate. The return filed in respect of the estate of late K.S. Engineer on 18-6-1990, disclosed income of ₹ 4,877 under the head other sources . The arrears of fees of ₹ 1,10,856 received during the previous year was claimed to be exempt on the ground that it is a capital receipt but the claim was negatived by the Assessing Officer who relied on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a change in the position obtaining prior to 1961, when the Income-tax Act was introduced and under the said section, any sum received after the discontinuance of the profession due to the death of the person to earn the income could be brought to tax. He also held that under section 168, the income of the estate of the deceased person should be charged to tax in the hands of the executor and that the executor having collected all fees due to the deceased, the ITO was justified in clubbing the arrears of professional fees with the other income earned by the executor from the estate of the deceased. It may be noted here that such other income was represented by income from properties, dividends and interest due to the estate. The matter was carried to the Tribunal and it was urged, inter alia, that though the arrears of professional fees received by the executor were taxable as deemed income under section 176(4), it could be taxed only in the hands of the recipient and not in the hands of the executor, that though the executor as well as the recipient in this case happened to be the same person (Mr. Ratnam), it does not make the receipt of the professional fees as one received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt proceeded to observe that section 24B of the old Act corresponds to section 159 of the new Act which deals with legal representatives other than executors. As regards the assessment of executors, the High Court noticed that a separate provision has been made in section 168 of the new Act. After noticing the provision, the High Court proceeded to examine the Tribunal s conclusion that the arrears of fees cannot be regarded as the income of the estate and it should be properly regarded as part of the estate itself. The High Court agreed with the Tribunal s view and this part of the decision we have already quoted in the earlier part of this order. Thereafter, at p. 278 of the report, the High Court proceeded to examine the scope of section 176(4). We quote the following observations : .........On the scope of section 176(4), we are of the view that even if section 176(4) treats the recipient as a taxable entity irrespective of the question whether there is a Will or whether the recipient is an executor or not, the amount of arrears of fees due to the deceased has to be treated as the income of the recipient and cannot be taken to be an income of the estate of the dece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to see that the Madras High Court has further held that the assessment under section 176(4) must be separate and independent from the assessment made upon the estate of the deceased under section 168 of the Act. The view taken by the Assessing Officer and his understanding of the decision of the Madras High Court is wholly contrary to what has been expressly decided and laid down in the decision. 20. As a result of the aforesaid discussion, we are of the view that the assessment of the sum of ₹ 1,10,856 in the assessment of the estate of late K.S. Engineer under section 168 of the Act is contrary to law and cannot be upheld. 21. The CIT(A) has disposed of the appeal mainly on two grounds. The first is that the amount received by the executrix was capital in nature as held by the Bombay High Court in the case of Summersgill (supra ). The second is that section 176(4) is no applicable because it talks about discontinuance of a business and in the present case, there is no discontinuance of the business. We are unable to subscribe to the second ground taken by the CIT(A) in deciding the issue in favour of the assessee. There is a discontinuance of the professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Bombay High Court in T.P. Sidhwa s case (supra). In the case of Mrs. Roma Bose, the Calcutta High Court had expressed the view that if an income cannot be charged to income-tax under any of the first five heads enumerated in section 14 of the Income-tax Act, it shall be charged to tax under the head income from other sources which is the residuary head. This decision has been noted by the Madras High Court in the judgment cited supra at p. 278 of the Report. Thereafter, it has been held at p. 279 that the arrears of fees realised by the son of late Viswanatha Sastri are liable to tax under section 176(4) in his hands as income form other sources. It is no doubt true that the view that if an income, for some reason or the other, cannot be brought to tax under any of the first five heads enumerated in section 14, though it is of such nature and character falling properly under any of these heads, then the same cannot be brought to tax under the head other sources was taken by the Bombay High Court in Sidhwa s case (supra) following the judgment of the Supreme Court in the case of Nalinikanth Ambalal Mody (supra) and to that extent the view taken by the Calcutta High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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