Proceeding on the death: Taxing the Legal Representatives (Savita Kapila v ITO)
The Troubling Background
Chapter XV of the Income Tax Act, 1961 provides for ‘Liability in Special Cases’. One of those special cases is described in Section 159 which creates a legal fiction holding the legal representatives of the deceased in the capacity of an ‘assessee’. The relevant portion of Section 159 is extracted below:
159. Legal representatives.—(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.
(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.
The Section mandates a responsibility upon the legal representative to file income tax returns for the deceased but to also be liable for any proceeding that is initiated or could have been initiated against the deceased. But the liability cannot be extracted from the legal representative’s own pocket, it must remain circumscribed within the limits of the estate inherited for resolution of any proceeding that is pending or any proceeding that ‘could have been taken against the deceased if he had survived’. This provides a pertinent need to interpret ‘proceeding’. Though the period of limitations for any reassessment proceeding has been proposed to be lowered through the Finance Bill, 2021 to a period of three years. But the position of the legal representatives still remain vulnerable. This vulnerability was evidently reflected in the case of Late Iqbal Hussain v. ITO [(2007) 111 TTJ 717 (ALL)] where the Allahabad Income Tax Appellate Tribunal (‘ITAT’) placed reliance on a single-bench judgment of Calcutta High Court in Keshab Narayan Banerjee v Commissioner of Income-Tax [2001 252 ITR 888 Cal] – which interpreted Section 263 – to hold that as ‘proceeding’ has not been defined in the Section, it cannot be confined to only ‘mean a proceeding for assessment by the Income Tax Officer’ and will ‘cover the proceeding for penalty also’. Similarly the Tribunal interpreted ‘any sum’ to include ‘tax, penalty or interest or any other sum’ while ‘liable to pay’ was construed to include liabilities created in the past and any future liability that may arise ‘on assessment and after levy of penalty’.
The Tribunal provided the ruling based on the fact that the word ‘proceeding’ has not been qualified in Section 159(2). But a bare perusal of Section 159(2) would reveal that it does manifest itself under an implied qualification through its elaborate enumeration of the varieties of assessment under which the Section will be applicable. This covered assessment, reassessment or recomputation under Section 147. It will be wrong to extend the ambit of proceedings to an event that is outside the ambit of assessment.
The Tribunal’s liberal interpretation of liability to include both past and future and the liable sum to also include penalty stands on problematic grounds which have been reflected through several cases, the latest addition to which is Savita Kapila v ITO [W.P. (C) 3258/2020].
Delhi High Court Settles IT: Court Interprets the Responsibilities of Legal Heirs
Savita Kapila was one of the four legal heirs of Mr. Mohinder Paul Kapila who had died in December 2018. The Assessing Officer (‘AO’), unaware of his death, issued a notice in March 2019 based on the information that Mr. Kapila had not disclosed his whole income for the Financial Year 2011-12. None of the legal heirs were apprised of the notice, naturally, no reply was provided to the AO, consequently, two more notices were issued by the AO wherein the last notice demanded a reply as to why the penalty should not be levied against him. When all the three notices went without a reply, the AO finally attempted to verify the whereabouts of Mr. Kapila and a call was made to the residence which was attended by Savita Kapila. She informed the AO of the death and also uploaded the death certificate as the proof. The AO went on to shift the penalty proceeding from the deceased onto the PAN of Savita Kapila. She filed a writ in the Delhi High Court to quash the notices.
It was contended by the Revenue that it cannot be tasked with verifying the status of 44.50 crore PAN holders and that the legal representatives were liable to provide information pertaining to Mr. Kapila’s death. It relied on Jharkhand High Court’s judgment in Sudha Prasad v Chief Commission of Income Tax [(2005) 275 ITR 135] where the Court held the error to be a bona fide mistake and had directed for de novo assessments under Section 148. Moreover, Revenue contended that Savita Kapila’s act of uploading the death certificate was an act of compliance and she stands liable under Section 292BB. Section 292BB states that any assessee who have participated or co-operated in any inquiry relating to an assessment or reassessment without raising any objection before the completion of such assessment or reassessment then he/she will not be precluded merely because the notice was not served upon him or on time or served in an improper manner.
Delhi High Court’s Interpretation
The Court rejected the contention that the legal heirs were liable to provide such information as there was no statutory provision to fasten such liability on the legal representatives. It relied on the Supreme Court’s judgment in Pr. Commissioner of Income Tax v. Maruti Suzuki India Limited [(2019) 416 ITR 613] – which had also been relied upon by the Revenue in support of their contentions that their mistake was bona fide and curable in nature, thus, de novo assessments should be ordered rather than quashing the proceedings. The Delhi High Court stated that in Maruti Suzuki, the Department was aware of amalgamation and had still issued the notice to a non-existent company and the Supreme Court held the assessment order to not be a procedural violation under Section 292B but rather a substantive illegality. It is pertinent to note that Section 292B provides that any ‘return of income, assessment, notice, summons or other proceeding’ will not be invalid ‘merely by reason of any mistake, defect or omission’ if it is in substantive conformity with the Act.
The High Court stated that the judgment which was in context of a company and succession to business cannot be relied on to establish an obligation on the legal representatives in absence of a statutory provision.
For purposes of Section 148, it relied upon the Bombay High Court’s judgment in Sumit Balkrishna Gupta v Assistant Commissioner of Income Tax [(2019) 2 TMI 1209] for stating that the sine qua non for having jurisdiction to issue a notice under Section 148 for reassessment is by issuing a notice to the ‘correct person’. As the notice was issued to a dead person, the essential requirement to establish jurisdiction itself remains unfulfilled and the notice was held to be invalid.
Thus, the Delhi High Court has reiterated its verdict in Rajender Kumar Sehgal v. ITO [2018 (12) TMI 697] where a similar interpretation of Section 148 was held.
As for Section 159, the Court held it to be inapplicable as the proceedings were not initiated/pending during the lifetime of Mr. Kapila and as the legal representatives had not ‘stepped into the shoes of the deceased assessee’ Section 159 could not be invoked against them to hold them liable. It relied on the Madras High Court judgment in Alamelu Veerappan v. Income Tax Officer [2018 (6) TMI 760] where the Court held that ‘Section 159 can be invoked only if the proceedings have already been initiated when the assessee was alive and was permitted for the proceedings to be continued as against the legal heirs.’
The judgment remains significant as it recognises the vulnerability of the legal representatives and protects them from any liability which results from an accrual of the Revenue’s absence of due diligence while initiating action and holds that not all ‘bona fide’ mistakes can be held to be curable in nature. The Delhi High Court provided a distinction between curable mistakes as it reiterated the settled law by placing a reliance on its judgment in the Skylight Hospitality LLP v. Assistant Commissioner of Income Tax [(2018) 405 ITR 296] – which had been relied upon by the Revenue to establish that they had acted bona fide and any defect in the notice issued stands to be curable under Section 292B. The High Court pointed out that in the Skylight case, the notice was issued to Skylight Hospitality Pvt. Ltd. instead of Skylight Hospitality LLP where the assessee was aware of the notice and the nature of the proceedings that were initiated against it and the assessee had disputed the notice on the ground that it was issued to a non-existent company. It was an instance of a mere clerical error, which had been held as a curable error by the Supreme Court while dismissing the Special Leave Petition.
The judgment also emphatically erodes the ground established in Late Iqbal Hussain case as it holds that the department cannot erect any future liabilities on the heads of legal representatives and also limits the extent of past liabilities to be revived in the future. It also extinguishes the ground to levy any subsequent liabilities through penalty on the legal representatives if the AO has not conducted due diligence before issuing such notices through which the liability has been incurred.