Commissioner of Income-Tax, Bombay Vs.
James Anderson [1963] INSC 236 (2 December 1963)
02/12/1963 SHAH, J.C.
SHAH, J.C.
SARKAR, A.K.
HIDAYATULLAH, M.
CITATION: 1964 AIR 1761 1964 SCR (6) 590
CITATOR INFO :
R 1971 SC2591 (1) R 1975 SC2299 (633)
ACT:
Income tax Act (XI of 1922), s. 24B-Scope
of-Death of Shareholder-Liability of legal representative-Extent of.
HEADNOTE:
G, a holder of certain shares of a private
limited company made a will disposing of his estate and died on May 13, 1945.
The respondent obtained Letters of Administration "durante absentia"
to the estate, and in pursuance of an agreement between himself, the company
and one M to sell the shares to M, handed over the share certificates to M
against payment of the price. M failed to present the share certificates for
registration and the name 591 of G remained on the register of shareholders of
the Company. The Income-tax Officer made an order under s. 23A of the
Income-tax Act (as it then stood) that certain undistributed part of the assessable
income of the company shall be deemed to have been distributed as dividend
amongst the shareholders as at the dates of the general meetings, viz., May 26,
1947 and December 22, 1947. The Income-tax Officer then issued a notice under
s. 34(1) (b) to the respondent proposing to re-assess his income and calling
upon him to file a return for the relevant year. The respondent submitted a
return, but did not include the dividend deemed to have been distributed by the
order passed under s. 23A The Income-tax Officer included the dividends in the
total income of the respondent and levied tax. The respondent's appeals to the
Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were
unsuccessful. On reference, the High Court held that the assessment made on the
respondent Administrator to the estate of G (deceased) was not valid in law. In
appeal by special leave:
Held (i) The legal representative does not
acquire in all cases, the right of a share-holder in respect of shares of which
the deceased was registered as holder. But if the estate of a share-holder of a
company is by virtue of the Articles of the Company liable in respect of calls
whether made during the life-time of the holder or after his death, the legal
representative is obliged to satisfy the calls in his representative character.
(ii) There is no special machinery devised by
the Income-tax Act enabling assessment and levy of tax in respect of such
deemed income from the estate of the share-holder, in the hands of his legal representative
when the order of the Income-tax Officer pursuant to which the income was to be
deemed to be distributed becomes effective was made after the death of the
share-holder. The provision in s. 24B for enforcement of liability against the
legal representative of a deceased person to pay tax which would have been
payable if such person had not died, has a limited application.
The expression "tax which would have
been payable under this Act, if he had not died," in s. 24B is intended to
impose liability for tax on income actually received or deemed fictionally to
be received in the year of account in the course of which the taxpayer died.
This expression does not supply machinery for taxation of income received by a
legal representative after the expiry of the year in the course of which such
person died.
Commissioner of Income-tax Bombay v.
Amarchand Shroff, [1963] Supp. I S.C.R. 699 and Commissioner of Income-tax,
Bombay v. Ellis C. Reid. I.L.R. 55 Bom. 312, referred to.
(iii) To assess tax on such receipts after
the expiry of the year in the course of which the original owner died on the
footing that it is the personal income of the legal representative is to charge
tax not in accordance with the provisions of the Act.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 128 of 1963.
Appeal by special leave from the judgment and
order dated September 21, 1961 of the Bombay High Court in Income-Tax Reference
No. 32 of 1959.
N.D. Karkhanis, R.N. Sachthey and B.R.G.K.
Achar, for the appellant.
R.J. Kolah, J.B. Dadachanji, O.C. Mathur and
Ravinder Narain, for the respondent.
December 2, 1963. The Judgment of the Court
was delivered by SHAH, J.-Henry Gannon who was a registered holder of 2674
shares of Gannon Dunkerley & Company--a private Limited Company with its
registered office in Bombay-died on May 13, 1945, having made and published a
will disposing of his extensive estate in the United Kingdom and in British
India.
The National Bank of India Ltd. obtained
probate of Gannon's will in the United Kingdom and appointed the respondent
James Anderson its attorney to administer the estate in British India. Anderson
applied for and obtained in India on August 14, 1946, Letters of Administration
"durante absentia" to the estate of Gannon in British India. 450 out
of the shares were specifically bequeathed by Gannon to certain legatees, and
in the course of administration, share certificates with transfer forms duly
executed were delivered to the legatees in respect of those shares and no
question arises in this appeal in regard to those shares.
By agreement dated August 14, 1946, between
the executor to the estate, the Company and one Morarka, the executor agreed to
sell the remaining 2224 shares of the Company to Morarka and pursuant thereto
the relevant share certificates with transfer deeds were handed over to Morarka
on October 12, 1946, against payment of the price at the rate of Rs. 140 per
share. Morarka, for some reason which is not clear from the record, failed to
present the transfer deeds and the share certificates for registration at 593
the office of the Company and the name of Gannon remained at all material times
on the register of shareholders in respect of those 2224 shares.
In the assessment of the Company for the
assessment years 1946-47 and 1947-48 the Income-tax Officer, Bombay, made an
order on March 26, 1953, under s. 23A of the Income-tax Act, 1922 (as it then
stood) that certain undistributed parts of the assessable income of the Company
shall be deemed to have been distributed as dividends amongst the shareholders
as at the dates, viz., May 26, 1947, and December 22, 1947, of the General
Meetings of the Company. The net dividends so deemed to be distributed in
respect of the shares were Rs.
61,051 and Rs. 3,73,099. The Income-tax Officer
then issued on March 28, 1953, a notice under s. 34(1)(b) of the Incometax Act
addressed to "James Anderson, Administrator to the Estate of late Mr.
Henry Gannon" reciting that he had reason to believe that Anderson's
"income assessable to income-tax for the year ending 31st of March
1949" had escaped assessment and that he proposed to re-assess the escaped
income and for that purpose called upon Anderson to make a return of his total
income and the total world income assessable for the year ending March 31,
1949. In compliance with the requisition Anderson submitted a return, but did
not include therein the dividend deemed to have been distributed under the
order dated March 26, 1953. The Income-tax Officer in his order of assessment
included dividends deemed to be distributed and after processing the amount
under s. 18(5) included it in the total income of Anderson and levied tax
thereon at the appropriate rate.
Anderson's appeals against the order of the
Income-tax Officer to the Appellate Assistant Commissioner and to the
Income-tax Appellate Tribunal, Bombay, were unsuccessful.
At the instance of Anderson the following
questions were referred by the Tribunal to the High Court of Bombay under s.
66(1) of the Income-tax Act:1/SCI/64-38 594 "(1)Whether in the facts and
in the circumstances of the case the assessment made on Mr. James Anderson,
Administrator to the estate in India of Mr. Henry Gannon (deceased) is valid in
law? If the above question is answered in the affirmative (2 ) whether in the
facts and in the circumstances of the case the dividends of Rs. 61,051 and
"Rs. 3,73,099 deemed to have been distributed on 26th May 1947 and 22nd
December 1947 respectively under s. 23A of the Income-tax Act were assessable
in the hands of the applicant?" The High Court answered the first question
in the negative and declined to answer the second question.
With special leave, the Commissioner of
Income-tax, Bombay, has appealed to this Court.
The estate of Gannon to which the Letters of
Administration relate, vested by virtue of s. 211 of the Indian Succession Act,
in Anderson, but he did not take steps to get his name entered in the register
of shareholders maintained by the Company, and the Income-tax Officer sought to
tax the dividends deemed to have been distributed in the hands of Anderson as
administrator of the estate of Gannon. The order made by the Income-tax Officer
under s. 23A gives rise to a notional income: it merely creates a fiction about
distribution and consequential receipt of dividend. The order by its own force
however does not charge the income to tax: it has to be followed by an order of
assessment to make tax on such income eligible.
The sole question in this appeal is whether
the Act contains machinery for assessing dividends deemed to have been
distributed by virtue of an order under s. 23A in respect of the shares held by
a shareholder, when before the date on which the fiction of distribution
becomes effective-viz., the date of the relevant General Meeting of the Company
-the registered shareholder has died and his representatives have not been
substituted in the register of the Company.
595 It was held by this Court in Commissioner
of Income-tax, Bombay City II v. Shakumtala and others(1) following Howrah
Trading Company Ltd. v. Commissioner of Income-tax, Central Calcutta(2) that
the expression "shareholder" in s. 23A of the Indian Income-tax Act,
1922, means a shareholder registered in the books of the company, and such
shareholder alone is liable to be taxed in respect of the dividend deemed to be
distributed. Counsel for the Commissioner submits that the principle of those
cases applies only when the registered share-holder is alive and the beneficial
ownership in the shares is vested as a result of some transaction inter vivos
in a person in whose name the shares do not stand in the Company's register,
but not where by the grant of representation to the estate of a registered
shareholder who has died, the representative is invested, without his name
being entered in the register, with the rights of the shareholder.
Whether on the death of a shareholder his
executor or administrator may enforce the rights of the shareholder or incur
liability in respect of the shares to the Company, depends upon the nature of
the right and the obligation, and terms of the statute and the articles of the
Company which create those rights and obligations. The legal representative of
a deceased person cannot vote on behalf of the shareholder and may not become a
director of the Company on the strength of the representation alone. Again by
the express provision contained in s. 35 of the Indian Companies Act, 1913, a
transfer of the share or other interest of a deceased member by his legal
representative although he is himself not a member is as valid as if he were a
member at the time of the execution of the transfer. This implies that the
legal representative does not acquire in all cases the rights of a shareholder
of a company in respect of shares of which the name of the deceased was registered
as holder. But if the estate of a shareholder of a company is by virtue of the
Articles of the Company liable in respect of calls upon shares whether made
during the lifetime of the holder or after his death, the legal representative
is obliged to satisfy the calls in his representative character. This
obligation arises not because the legal representative becomes, by virtue of
probate or Letters of Administration, a shareholder in place of the person whose
estate is vested in him, but because as a representative it is his duty to
discharge the obligations enforceable against the estate.
Under an order made by the Income-tax Officer
under s. 23A of the Indian Income-tax, 1922, dividend is deemed to be distributed
among the shareholders and by the express provision contained in the statute
the proportionate share of the dividend of each shareholder has to be included
in the total income of such shareholder for the purpose of assessing his total
income. The statute therefore in terms applies to the shareholder and makes the
dividend taxable as his income. The obligation to pay the tax on the dividend
so deemed to be distributed is of the shareholder, and may be enforced against
him or his legal representative in the manner and to the extent the statute
permits. There is no special machinery devised by the Income-tax Act enabling
assessment and levy of tax in respect of such deemed income from the estate of
the shareholder in the hands of his legal representative when the order of the
Income-tax Officer pursuant to which the income was to be deemed to be
distributed becomes effective was made after the death of the shareholder, and
the general provision in s. 24B for enforcement of liability against the legal
representative of a deceased person to pay tax which would have been payable if
such person had not died, has a limited application.
In Commissioner of Income-tax Bombay v. Ellis
C. Reid(" it was observed by the Bombay High Court in rejecting the claim
made by the Income-tax Department to assess a deceased person's estate (1)
I.L.R. 5 Bom. 312: 5 I.T.C 100.
597 in the hands of his legal representative
to tax, that the definition of "assessee" in s. 2(2) of the Indian
Income-tax Act, 1922 (as it stood at the material date) in terms only applied
to a living person, the words being "a person by whom income-tax is
payable" and not "a person by whom or by whose estate Income-tax is
payable", and in the absence of appropriate provisions, for collecting tax
from the estate of a deceased person in the Act, the claim of the Income-tax
Officer to make an assessment under s. 23(4) must fail.
The Court also observed that throughout the
Income-tax Act there is no reference to the decease of a person on whom the tax
had been originally charged, and it was difficult to suppose that the omission
was unintentional. In Reid's case(" the tax payer had died after the
commencement of the financial year but before the income of the previous year
was assessed, and it was held that the executors under the will of the
tax-payer were not liable to pay tax on receipt of income due to the deceased,
notwithstanding that he died while assessment proceedings were pending, because
the proceedings could not be continued and the assessment could not be made
after the tax-payer's death.
To rectify the lacuna in the machinery of
assessment the Legislature enacted s. 24B, by the Indian Income-tax (Second
Amendment) Act, 18 of 1933. The first sub-section of s. 24B provided:
"Where a person dies, his executor,
administrator or other legal representative shall be liable to pay out of the
estate of the deceased person to the extent to which the estate is capable of
meeting the charge the tax assessed as payable by such person, or any tax which
would have been payable by him under this Act if he had not died." In
interpreting that enactment this Court held in a recent case: Commissioner of
Income-tax, Bombay City 1 v. Amarchand Shroff (2) that by the incorporation of
s. 24B the Legislature has extended the legal personality of a deceased person
for the duration (1) I.L.R. 55 Bom. 312: 5 I.T.C. 100.
(2) 48 I.T.R. 59.
598 of the entire previous year in the course
of which he died, and therefore the income either received by him before his
death or by his heirs and representatives after his death in that previous year
becomes assessable to tax in the relevant assessment year, but not the income
received in the year subsequent to the previous or account year. In Amarchand
Shroff's case(1), 'A' who was a partner in a firm of solicitors which
maintained accounts "on cash basis" died on July 7, 1949.
Outstandings of the firm in respect of professional services rendered prior to
the death of 'A' were realized during five years subsequent to 'A's death and
were divided between the partners of the firm and certain sums were paid to the
heirs and legal representatives of 'A' as his share. The Income-tax Department
sought to assess the amounts received by the legal representative of 'A' as his
share to tax under s. 34-(1)(b) read with s. 24B. It was held that s. 24B did
not authorise the levy of tax on receipts by the legal representative of a
deceased person in the years of assessment succeeding the year of account in
which such person died and accordingly the income received by him before his
death and that received by his heirs and legal representatives after his death
in that previous year became assessable to income-tax in the relevant
assessment year, but not receipts by the legal representatives after the expiry
of the account year in which 'A' died.
In the case before us Gannon died in May
1945, and the dividend in respect of which orders under s. 23A were passed was
deemed to be distributed in the year of account ending March 31, 1949. The
legal personality of Gannon as held in Amarchand Shroff's case(1) came to an
end for the purpose of s. 24B at the end of the account year in which Gannon
died and no tax could be levied under s. 24B on the dividends deemed to have
been received by him or his legal representatives after the end of that year.
Counsel for the Commissioner sought to rely on the following observations made
by Kapur, J, who spoke for the Court in Amarchand Shroff's case
"In the present case the amounts which
are sought to be taxed and which have been held not to be liable to tax are
those which were not received in the previous year and are there-fore not
liable to tax in the several years of assessment. It cannot be said that they
were income which may be deemed by fiction to have beer received by the dead
person and therefore they are not liable to be taxed as income of the deceased,
Amarchand, and are not liable to be taxed in the hands of the heirs and legal
representatives who cannot be deemed to be assessees for the purpose of
assessment in regard to those years", and on the latter part of the
opinion sought to raise two arguments (1) that even if after the expiry of the
year of account receipts which if the person earning had not died would have
been treated as his income, ceased to be liable to assessment as income of the
deceased, they could still be taxed as his income in the hands of the legal
representatives and (2) that where the income was notional as under s. 23A the
legal personality of the deceased must be regarded as extended to the end of
the year in which such notional income must be deemed to have been received by
the legal representatives of the deceased. The first argument is plainly
inconsistent with what was decided in Amarchand Shroff's case(1). In that case
the Court held that the receipts by the heir or legal representative for
professional services rendered by the deceased solicitor were liable to be
brought to tax in the hands of the legal representatives only to the limited
extent permitted by s. 24B. The second argument involves the importation into
the expression "deemed by fiction to have been received" a concept
which was wholly alien to what was decided by the Court, for in Amarchand
Shroffs case(1) the Court was dealing not with a fiction of distribution by an
order under s. 23A of dividends which never reached the shareholder or his
legal representative, but to a fiction of receipt by a deceased person of
income by extending (1) 48 I.T.R. 59.
600 his legal personality. Section 24B does
not warrant the application of two different interpretations in the matter of
extension of the legal personality of the deceased according as the income is
actual or notional. Section 24B in terms refers to the liability of the legal
representative to pay tax assessed as payable by such deceased person, or any
tax which would have been payable by him under the Act if he had not died, and
if the expression "tax which would have been payable under this Act, if he
had not died" is intended to impose liability for tax on income received
in the year of account in the course of which the tax-payer died, a different
interpretation of the same expression in the context of notional income would
be impermissible. The Legislature not having made any provision generally for
assessment of income receivable by the estate of the deceased person, the
expression "any tax which would have been payable by him under this Act if
he had not died" cannot be deemed to have supplied the machinery for
taxation of income received by a legal representative to the estate after the
expiry of the year in the course of which such person died.
It was then urged that apart from s. 24B, the
legal representatives of a deceased person also represent his estate in the
matter of taxation of income and it is competent to the taxing authorities to
assess them on income received on behalf of the estate. Counsel did not rely
upon any specific provision of the Act in support of the contention, and merely
asserted that the Act seeks to tax all assessable incomes, and income received
by a legal representative of the estate of a deceased person should not be
permitted to escape tax to the detriment of public revenue. But if the
Legislature has failed to set up the procedure to assess such income, the
Courts cannot supply it. The expression "assessee" in s. 2(2) as
substituted by the Indian Income-tax (Amendment) Act, 25 of 1953, with effect
from April 1, 1952, means a person by whom income-tax or any other 601 every
person in respect of whom any proceeding and this Act has been taken for the
assessment of his income or of the loss sustained by him or of the amount of
refund due to him.
By s. 3 where income-tax is chargeable for
any year at any rate or rates prescribed by the Act of the Central Legislature,
tax at that rate shall be charged for that year in accordance with and subject
to the provisions of the Act in respect of the total income of the previous
year of every individual, Hindu undivided family, company and local authority,
and of every firm and other association of persons or the partners of the firm
or the members of the association individually. The charge to income-tax has
therefore to be in accordance with and subject to the provisions of the Act,
and the Legislature has not provided that the income received by a legal
representative which would, but for the death of the deceased, have been
received by such deceased person, is to be regarded for the purpose of
assessment as the personal income of the legal representative To assess tax on
such receipts on the footing that it is the personal income of the legal
representative is to charge tax not in accordance with the provisions of the
Act.
We therefore agree with the High Court,
though for somewhat different reasons. The appeal therefore fails and is
dismissed with costs.
Appeal dismissed.
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