Mr. Satpal Gulati, IRS
(IT: 1993)
CIT-(DR) (ITAT)-8
(International Tax Bench) Delhi
satpalgulati@incometax.gov.in
Satpal Gulati IRS 1993 Batch Presently posted as CIT-DR (International Tax Bench)-ITAT Delhi Experience:
Worked as AO and Range Head in assessment wing for 7 years, as DDIT in Investigation wing for 6 years, as Additional Director & CIT(CPC-TDS) in Systems Directorate for 8 years, as CIT(A) in International Taxation for 4 years. Special Achievement: -Won PM award as a team member of System Directorate for contribution in setting up CPC-TDS. Won e-governance Gold award for government process reengineering in rolling out CPC-TDS.
Issue of Notice/Assessment Order in the Name of ‘Deceased Person’ or ‘Amalgamated/Merged Company’
Executive Summary
It is noticed that the department has lost the revenue in number of cases mainly on account of fatal mistake made by the AO in issuance of notice to dead person/ non-existent entity or in framing the assessment order in the name of dead person/non-existent entity. This article is to sensitize the AOs to take serious note of the event of death of person or incidence of amalgamation or merger of company as and when the same is reported to assessing officer and to take on record the legal heir(s) in the case of deceased person. This article delineates the action to be taken by the AO in handling various scenario arising in such cases which is based on the judicial precedents on the issue.
SCHEME OF THE ACT TO ASSESS AN ‘INDIVIDUAL’ IN CASE OF HIS DEATH:
The Provisions of Section 159 Read as Under:
1. ‘159. (1) Where 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.
2. For the purpose of making an assessment (including an assessment, reassessment or recomputation under Section 147) of the income of the deceased and for the purpose of levying any sum in the hands of the legal representative in accordance with the provisions of Sub-section (1),—
a. Any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased;
b. Any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative; and
c. All the provisions of this Act shall apply accordingly.
3. The legal representative of the deceased shall, for the purposes of this Act, be deemed to be an assessee.
4. Every legal representative shall be personally liable for any tax payable by him in his capacity as legal representative if, while his liability for tax remains undischarged, he creates a charge on or disposes of or parts with any assets of the estate of the deceased, which are in, or may come into, his possession, but such liability shall be limited to the value of the asset so charged, disposed of or parted with.
5. The provisions of Sub-section (2) of Section 161, Section 162, and Section 167, shall, so far as may be and to the extent to which they are not inconsistent with the provisions of this section, apply in relation to a legal representative.
6. The liability of a legal representative under this section shall, subject to the provisions of Sub-section (4) and Sub-
section (5), be limited to the extent to which the estate is capable of meeting the liability.’
Further, Section 2(29) defines ‘legal representative’ and assigns its meaning to Clause 11 of Section 2 of Code of Civil Procedure 1908 which reads as under:
1. (11) “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.”
2. Section 2(7) of the Act defines assessee which includes person who is deemed to be an assessee under any provision of the Act. Section 159(3) of the Act provides that the legal representative of the deceased shall be deemed to be an assessee.
3. It is important to note that Section 159(2) empowers the Assessing Officer to take the proceedings against the legal representatives which he should have taken against the deceased if he had survived. Section 159(2) nowhere authorizes the Assessing Officer to take the proceedings against the individual who has already expired, that is why the legal representative under Section 2(7) is regarded to be an assessee.
LEGAL POSITION
The notice issued in the name of a dead person is not a valid notice. This position has been upheld in a number of decisions which include:
- CIT vs. Amarchand Shroff [1963] 48 ITR 59 (SC)
- Hon’ble Andhra Pradesh High Court in the case of Deccan Wine & General Stores vs. CIT, 106 ITR 111
- Delhi High Court in Vipin Walia vs. ITO, W.P.(C) 8273/2015
- Durlabhai Kanubhai Rajpara vs. ITO [R/Special Civil Application No. 16125 of 2010, dated 26.03.2019]
- Delhi High Court in case of Rajender Kumar Sehgal 101 taxmann.com 233 (Delhi) W.P. (C) NO. 11255/2017
The basis of the aforesaid legal position is that an individual under the Income-tax Act, 1961 has ordinarily to be a living person. Consequently, a dead person will not fall within the scope of the expression ‘person’ under Section 2(31) of the 1961 Act. Therefore, any notice issued to a dead person for making assessment or reassessment will be invalid in the eyes of law.
‘PROCEEDINGS’ COVERED IN SCOPE OF SECTION 159 OF THE ACT
Section 159(2) does specify that any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased. Further, it provides that any proceeding which could have been taken against the deceased if he had survived, may be taken against the legal representative.
Based on the above, ‘any proceeding’ say assessment, reassessment, review of order, rectification of order, 133(6), penalty and recovery proceedings can be taken against the legal heir in case of deceased assessee. Any proceeding initiated in the name of deceased person after his death is fatal in nature and is not curable defect. In case of any proceeding is initiated before the death of the deceased person but carried out after the death of such person, then, the concerned authority must bring the legal representative(s) on record, otherwise it will create an irregularity.
As regards recovery proceedings pending against the deceased assessee at the time of the death, the same can be taken up against legal representative(s) as per Rule 85 of Schedule II of the Income Tax Act 1961 (except arrest and detention). The liability of legal heir is limited only to the extent to which the estate left by the deceased is capable of meeting the tax liability. Tax liability imposed upon the deceased assessee cannot be recovered from the legal heirs to whom the notice for the assessment proceedings was not issued. The courts have held that Section 292BB of the Act does not protect such cases.
Scheme of the Act to Assess Entity in Case of Succession to Business Otherwise Than on Death
The provisions of Section 170 read as under:
‘170. (1) Where a person carrying on any business or profession (such person hereinafter in this Section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession,—
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession;
(b) the successor shall be assessed in respect of the income of the previous year after the date of succession.
(2) Notwithstanding anything contained in Sub-section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly.
(3) When any sum payable under this section in respect of the income of such business or profession for the previous year in which the succession took place up to the date of succession or for the previous year preceding that year, assessed on the predecessor, cannot be recovered from him, the [Assessing] Officer shall record a finding to that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from the successor and the successor shall be entitled to recover from the predecessor any sum so paid.
(4) Where any business or profession carried on by a Hindu undivided family is succeeded to, and simultaneously with the succession or after the succession there has been a partition of the joint family property between the members or groups of members, the tax due in respect of the income of the business or profession succeeded to, up to the date of succession, shall be assessed and recovered in the manner provided in Section 171, but without prejudice to the provisions of this section.
Explanation.—For the purposes of this Section, “income” includes any gain accruing from the transfer, in any manner whatsoever, of the business or profession as a result of the succession.’
Section 170(1) provides that the predecessor shall be assessed in respect of the income of the previous year in which the succession took place upto the date of succession. For example, if one business of a company A is hived off to other company B, then company A still exists after hiving off one line of business. Thus, the predecessor (company A) shall be assessed in respect of income of the previous year in which the succession took place up to the date of succession. However, where the predecessor does not exist due to merger/ amalgamation, then, Section 170(2) would be applicable and in such a case the assessment of the income of the previous year in which the succession took place upto the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly. Section 170(3) provides for recovery of sum payable by the predecessor from the successor and the successor shall be entitled to recover from the predecessor any sum so paid. Section 170(4) deals with succession of business in the case of HUF.
LEGAL POSITION BASED ON JUDICIAL PRECEDENTS
Hon’ble Supreme Court in the case of Pr. CIT vs. Maruti Suzuki India Ltd. (416 ITR 613) held that the basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the amalgamating entity ceases to exist upon the approved scheme of amalgamation. Participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law. Ho’nble Court also relied on the decision in case of CIT vs. Spice Enfotainment, Civil Appeal No. 285 of 2014, dated 02.11.2017. Hon’ble Supreme Court also distinguished decision in case of Skylight Hospitality LLP W.P.(C) 10870/2017 where the Delhi High Court took specific note of the fact that though the notice to reopen had been issued in the name of the erstwhile entity, all the material on record including the tax evasion report suggested that there was no manner of doubt that the notice was always intended to be issued to the successor entity. Accordingly, protection under Section 292B was granted in the case of Skylight Hospitality by Delhi High Court. However, Hon’ble Supreme Court observed that there is no conflict between the decisions in Spice Enfotainment (supra) on the one hand and Skylight Hospitality LLP on the other hand.
ACTION POINTS AT THE END OF THE AO TO AVOID THE FATAL MISTAKE
Situation 1: Where the legal heir filed the return of income and the same has been taken up for scrutiny.
Action Point: To ensure that all legal heirs of the appellant stand identified and the notice must be served on all such legal heirs including the legal heir who filed the return for taking up the case under scrutiny. Hon’ble Supreme Court in the case of CIT vs. Jai Prakash Singh (1996) 219 ITR 737 (SC) held that if the return was filed voluntarily by one out of 10 legal heirs disclosing entire income and the legal heirs complied with the notices under Sections 142(1) and 143(2) and thereafter assessment was completed and in case the legal heirs raising the objection for the first time in appeal that notice had not been issued to other legal heirs, the assessment was irregular and not null and void. Thus, it is clear that the AO must identify all legal heirs and take them on record for issuance of notice in the given case. Finally, the assessment order must be passed only in the name of legal heir(s).
Situation 2: Where the event of death/amalgamation/merger has been informed by the representative on suo-moto basis to the AO without pendency of any proceedings before the AO.
Action Point: To do ‘event marking’ of concerned PAN in PAN database so that at later stage if the case of deceased assesse/amalgamated company is taken up for assessment/reassessment/any other proceeding, the AO would get alerted. This alert facility is not yet rolled out in ITBA. Assessing Officer is required to take on record all legal heirs after making necessary enquiry and the notice in such case must be issued in the name of all legal heirs. There are decisions which hold that defect of not sending notices to all the legal representatives is not curable under this Act (refer ITAT Jodhpur decision in the case of Assistant Commissioner Of Income … vs Late Mangi Lal Through L/H
Badri 83 TTJ Jodh 590). Finally, the assessment order must be passed only in the name of legal heir(s).
Situation 3: Where the event of death/amalgamation/merger has been informed to the Assessing Officer only AFTER issuance of the notice for initiation of proceedings in the name of the deceased assessee whereas such event (death/ amalgamation/ merger) took place PRIOR to the date of issuance of notice.
Action Point: Since the notice issued for initiation of the proceedings in this case is after the event of death/ amalgamation/merger, therefore, such notice is not valid in the eyes of law. At this stage, when the information regarding the event of death/amalgamation/merger has been received by the AO, the AO needs to issue fresh notice to initiate the proceedings against legal heirs, if the same is not barred by time limitation. However, if the issuance of fresh notice to legal heirs to initiate the proceedings is barred by time limitation on the date of receipt of information in the office of the AO regarding the event of death/amalgamation/merger, then, the only recourse left to the AO is to issue subsequent notices in the name of legal heirs after identifying all legal heirs of the appellant. Finally, the assessment order must be passed only in the name of legal heir(s) and the AO must mention the date of receipt of information in the office regarding the event of death/amalgamation/merger in the assessment order. Where AO issues the notice in the name of deceased person and compliance is made in the name of deceased person and subsequently it is informed on behalf of assessee about his death/ amalgamation, AO must mention in his order about compliance made in the name of deceased person.
Madhya Pradesh High Court in Smt. Kaushalyabai vs. CIT [1999] 238 ITR 1008 held that once the legal heir of the deceased assessee had participated in the proceedings, the defect in the notice stood automatically cured. However,
this principle has not been followed by the Hon’ble Supreme Court in the case of Pr. CIT vs Maruti Suzuki India Ltd. (416 ITR 613) where it is held that participation in the proceedings by the appellant in the circumstances cannot
operate as an estoppel against law.
Situation 4: Where the event of death/amalgamation/ merger has been informed to the Assessing Officer after initiation of proceedings in the name of the deceased assessee and such event (death/ amalgamation/ merger) is AFTER the date of issuance of notice to initiate the proceedings.
Action Point: Since the notice issued for initiation of the proceedings in this case is before the event of death/ amalgamation/ merger, therefore, such notice is valid in the eyes of law. After the date of receipt of information in the office of the AO regarding the event of death/ amalgamation/ merger, the AO may issue subsequent notices in the name of legal heirs after identifying all legal heirs of the appellant and taking them on record. The assessment
order must be passed only in the name of legal heir(s).
Situation 5: Where the event of death/amalgamation/merger was BEFORE the initiation of the proceedings and the same was not informed to the Assessing Officer at any stage during the assessment proceedings and the plea was taken for the first time at appellate stage then the order is null and void as the notice was issued in the name of deceased person. 3.5.1 Action Point: Since the notice issued for initiation of the proceedings in this case is after the event of death/ amalgamation/ change in name of company, therefore, such notice is not valid in the eyes of law. At this stage, when the information regarding the event of death/ amalgamation/ merger has been received by the AO, the AO needs to issue fresh notice to initiate the proceedings against the legal heirs, if the same is not barred by time limitation. The AO may also refer para 3.3.1 and para 3.3.2 above which deal with similar issues.
To save above situation of proceedings in hands of legal heir/ successor etc. having been barred by limitation, during representation before appellate authority, plea be made to issue directions under Section 150 of the Act by drawing attention to the conduct of assessee in not disclosing the fact about death etc.
Situation 6: Where the event of death/amalgamation/ change in the name of the company was after the initiation of the proceedings and the same was not informed to the Assessing Officer at any stage during the assessment proceedings and the plea was taken for the first time at appellate stage that the order is null and void as the ORDER was passed in the name of the deceased person.
Action Point: The matter will be decided by the appellate authority. As per judicial precedents, if the legal representative has responded before the taxing authority upon service not addressed to him but to the deceased assessee, and does not object to the continuance of the proceeding against the deceased person, and has been heard by the Assessing Officer in regard to the tax liability of the deceased and invites an assessment on merits, such a legal
representative must be taken to have exercised the option of abandoning the technical plea that the proceeding has not been continued against him, although in substance and reality it has been so continued. It would not be open to him to take up a plea at the appellate stage as an afterthought that the proceeding taken and the assessment order made against the deceased are a nullity. This position has been upheld in CIT vs. Sumantbhai C. Munshaw (1981) 128 ITR 142 (Guj).
However, there are set of decisions which do not give emphasis on the discharge of onus to report the event of death/ amalgamation/ merger. Hon’ble Supreme Court in the case of Pr. CIT vs. Maruti Suzuki India Ltd. (416 ITR 613) held that participation in the proceedings by the appellant in the circumstances cannot operate as an estoppel against law. Thus, in order to protect the interest of revenue, at the stage when the information regarding the event of death/ amalgamation/ merger has been received by the AO, the AO needs to issue fresh notice to initiate the proceedings against legal heirs, if the same is not barred by time limitation.
Situation 7: Where the event of death/amalgamation/change in the name of the company was after the initiation of the proceedings and the same was informed to the Assessing Officer after passing the draft assessment order in the name of the deceased person and DRP proceedings were in progress.
Action Point: The AO should immediately bring it to the notice of DRP so that DRP may pass order/ direction in the name of legal heir(s)/succeeding entity. In the case when DRP has passed direction in the name of deceased person and the AO has the information about death before passing of final order, he should request DRP to pass direction in proper name as AO cannot suo moto change the name in final order.
PECULIAR SITUATIONS
Whether statement of deceased assessee in search proceedings is binding on legal representative:
The legal representatives of the deceased assesse is a trust and not an individual. The trust being a beneficiary cannot contest or retract from the admitted position. However, the position can be challenged only on legal ground. A retraction can be made only on error or law and not on facts. [refer CIT vs. Late H. Basavraj (2012) 251 CTR 300 (Kar.)]
Whether search warrant can be issued in the name of deceased person or not?
Search warrant issued under Section 132 in the name of a dead person is invalid and void ab initio.
Whether assessment in pursuance to the invalid search warrant issued in the name of deceased person is valid?
Invalid search warrant under Section 132 issued in name of deceased person cannot invalidate consequential block assessment under Section 158BD on legal heir of deceased, as legal heir had participated in proceedings of assessment initiated under Section 158BC (Refer SC decision in the case of Gunjan Girishbhai Mehta [2017] 80 taxmann.com 23 (SC).
Whether notice under Section 133(6) of the Act in the name of the deceased assessee is valid?
Where notice under Section 133(6) was issued against a deceased person, wife of said deceased person would have to comply with said notice for furnishing requisite information under said section – Yes (refer 89 taxmann.com 341
(Karnataka) in the case of Mrs S Savithri).
Where the Assessing Officer for both amalgamating as well as amalgamated companies are same, whether the Assessing Officer has to pass two orders in the year of amalgamation i.e. one for the income of amalgamated company and another for the income of amalgamating company?
It is important to note that there are two separate ITRs filed in this case based on separate books of account because the amalgamating company existed only upto the date of amalgamation in the relevant year and thereafter, the amalgamated company is in existence from the date of amalgamation. Therefore, the AO is required to pass two separate orders in response to two separate returns (one for the period upto the date of amalgamation, and other for period from date of amalgamation to the end of year). Both the orders have to be passed with the PAN of amalgamated company (existing entity). The AO has to handle it manually as the ITBA system does not allow passing two separate orders against single PAN, so far. In the case of assessment of income of amalgamating company (non-existent entity), its erstwhile name and PAN may be mentioned alongwith PAN and name of amalgamated company (existing entity).
Where the Assessing Officer for both amalgamating (Company A) as well as amalgamated company (Company B) are same. Whether the Assessing Officer has to issue single notice or two separate notices, for reopening of case of both entities, based on certain information received after the date of amalgamation, in respect of both companies A & B, for the period when both entities were in existence?
Since the information has been received after the date of amalgamation, therefore, Company A does not exist on the date of issuance of notice under Section 148 of the act. Accordingly, question of issuance of notice to Company A
does not arise. The Assessing Officer should issue one notice on Company B’s PAN. However, the reason to believe must contain the escapement of income in respect of both entities (erstwhile Company A and existing Company B). This position has been accepted by Hon’ble Delhi High Court in the case of Experion Developers Pvt. Ltd. (EDPL) vs. ACIT & Ors. in W.P. (C) No. 11302/2019 and 11303/2019. It is also relevant to add that ITBA system as on date does
not allow simultaneous issuance of two notices under Section 148 of the Act against single PAN. Identification of Legal heir (legal representative) and taking them on record:
1. Legal heir, in the eyes of law, is the person who represents the assets of deceased. The step of identifying all possible legal heirs is very critical procedural step. There are judicial precedents which render the assessment order irregular if the proceedings have not been initiated against all possible legal heirs. The irregular assessment order is curable. However, there are certain decisions which consider the assessment order null and void if the notice under Section 148 of the Act has not been issued to all legal heirs(refer para 3.2.1 above).
2. In this regard, the AO may ask for certificate of surviving family members issued by the local revenue authorities (Municipality, Nagarpalika) from the representative. The AO may also look for the following documents which are acceptable as legal heir certificates:
a. The legal heir certificate issued by the court of law.
b. The certificate of the surviving family members issued by the local revenue authorities.
c. The registered Will of the deceased person.
d. The family pension certificate issued by the State/Central government.
It is relevant to add that Hindu Succession Act 1956 provides that Class I heirs are sons, daughters, widows, mothers, sons of a pre-deceased son, widows of a pre-deceased son, son of a pre-deceased sons of a predeceased son, and widows of a pre-deceased son of a predeceased son.
PROTECTION UNDER SECTION 292B
Delhi High Court in the case of Spice Infotainment Ltd. vs. CIT [2012] 247 CTR (Del.) 500 held that once it was found that the assessment was framed in the name of a non-existent entity, it did not remain a procedural irregularity of the nature which could be cured by invoking the provisions of Section 292-B. Further, in case of Skylight Hospitality LLP, the revenue could show that reason to believe clearly recorded the fact of conversion of company into LLP.
Thus, Delhi High court in this case considered the issuance of notice under Section 148 in the name of erstwhile company as curable mistake and held that:
‘Re-assessment notice issued in name of erstwhile private limited company despite company ceasing to exist as it had been converted into LLP would not invalidate re-assessment proceedings as same was not a jurisdictional error, but an irregularity and procedural/technical lapse which could be cured under Section 292B.’
Based on judicial precedents, it transpires that if notice to assume jurisdiction (say notice under Section 143(2)/ Section 148/ Section 263 etc.)
by the officer concerned was issued to a non- existent entity/ dead person, then, it is a case of substantive illegality and not a procedural violation of the nature adverted to in Section 292B.
In the case of Rudra Gouda (Karnataka High Court- IT APPEAL NO. 100042 OF 2017), subsequent to death of original assessee, appellant, as a legal heir of deceased assessee, filed return of income and the assessment was completed in the name of deceased assesse. Hon’ble Karnataka High Court, in this case, held that it is correct to remand the matter back to the Assessing Officer for de novo assessment order on legal representative of deceased assesse. Thus, effectively, the court considered it to be a case of curable mistake. However, the AO must avoid such mistakes as most of the courts are not considering it to be curable mistake.
To sum up, the AO must take serious note of information related to death of person/ incidence of amalgamation or merger of company as and when the same is received in the office. Such information, if pending for action, must be handed over to the successor of the AO in case of transfer of the AO. Further, the AO is required to strictly adhere to the action points (refer para 3.1 to 3.7.1 above) in the case of death of person/ incidence of amalgamation or merger of company because any lapse in compliance to the same is a fatal mistake in the eyes of law. The above discussion also dealt with peculiar situations at para 4 (4.1 to 4.6.1) which are quite relevant for the AO. The following points are reiterated as the same are vital in nature:
- Notice issued in the name of a dead person is invalid and therefore, the AO has to ensure the issuance of notice to initiate the proceedings only in the name of legal heir of the deceased person.
- Where the person died during the course of Income-tax proceedings, the AO has to continue with the proceedings after taking on record all legal heirs and the assessment order must be passed in the name of legal heir.
- Identification of all possible legal heirs and taking them on record is very important step(refer para 5 above).
- Notice to assume jurisdiction (say notice under Section 143(2)/ Section 148/Section 263 etc.) by the officer concerned in respect of a non-existent entity/ dead person is a case of substantive illegality and not a procedural violation of the nature adverted to in Section 292B (refer para 6 above).
- Notice issued in the name of non-existent entity is invalid and therefore, the AO has to ensure the issuance of notice to initiate the proceedings only in the name of succeeding entity carrying on the business of the non-existent entity.
- Where the company got merged/amalgamated during the course of Income-tax proceedings, the AO has to continue with the proceedings in the name of succeeding entity carrying on the business of the non-existent entity and the assessment order must be passed in the name of succeeding entity.
- The above action points related to assessment equally apply to all types of proceedings say reassessment, review of order, rectification of order under Section 133(6), penalty and recovery proceedings which can be taken against the legal heir in case of deceased assesse or in case of non-existent entity(refer para 1.7 to 1.9 above).
Source- Taxalogue 3- April to June 2020
Commendable comprehensive coverage. Very useful.