Report No. 12
Chapter XV
Liability in Special Cases
Notes to clause 168
General
Existing section 24B is meant to deal with the case of death of the assessee and the proceedings to be taken against the legal representative. The language of sub-section (1), however, is not direct enough to bring out in proper perspective the main idea behind this section. Further, it does not deal step by step with the various stages at which the proceedings might stand at the time of death. In the draft, therefore, verbal alterations have been made in order to make it clear that the following possible situations are to be covered by this section:-
(1) where a person dies before any proceedings for assessment of his income have been commenced;
(2) where proceedings for assessment have been commenced by the issue of notice, ,but the assessment has not been completed;
(3) where proceedings for assessment have been completed, but the notice of demand has not been served, so that no "arrears" have come into being; and
(4) where assessment has already been made and the notice of demand also served, but the actual realisation of the tax has not been completed, so that the amount of the tax is in "arrears".
Sub-clause (1).- It has been made clear that the liability of the legal representative is to be arrived at "in the like manner and to the same extent" as the deceased. Compare existing sections 40(1) and 41(1).
Sub-clause (2).- This is mainly intended to preserve the continuity of the proceedings and to ensure that all the possible situations referred to in the beginning of the notes to this clause under the head "General" are covered by the combined operation of sub-clauses (1) and (2).
Sub-clause (3).- This is intended to remove any doubts as to whether a legal representative is or is not an assessee. It has to be read with the draft definition of assessee and the notes thereto. Compare also the last words of existing section 24B(2), "as if such executor were the assessee".
Sub-clause (4).- is intended to apply, to legal-representatives, certain useful provisions which have been incorporated in the group of sections dealing with "representative assessees".
Sub-clause (5) - does not need any comments. Sub-clause (6)-does not need any comments.
Notes to clause 169
General
The assessments under existing sections 40, 41 and 42(1) are really "representative assessments" as they are styled under the South African Income-tax Act. This will be clear from the following analysis:-
(i) Section 40(1) relates to persons under disability. The persons under disability enumerated in the section are, "minors, lunatics and idiots". In these cases, the guardian etc., of the minor, or the manager or committee of the lunatic or the idiot would have no ownership in the property or income. The income really belongs to the persons under disability, and all that the sections provides is a machinery or enforcing the liability of the incapacitated person. The tax is recoverable from the guardian etc. in the like manner and to the like amount as it would be leviable upon the person under disability if of full age and in direct receipt of the income. This is a case where income received by the guardian etc., on behalf of the incapacitated person is taxed in the hands of guardian etc., and can therefore be treated as a representative assessment.
(ii) Section 40(2), dealing, with trustees or agents of non-residents, also limits the liability of the trustee or 'agent by the words "in the like manner and to the same amount" as the liability of the beneficiary if in direct receipt of the income. Here again, the income which a trustee etc. received on behalf of the beneficiary is taxed in the hands of a trustee etc. It is therefore a representative assessment.
(iii) Section 41 relates to income received on behalf of a beneficiary by the Court of wards, Administrator-General, the Official Trustee, trustee appointed under a deed of trust etc. The section makes these persons liable to be assessed in respect of income received by them "on behalf of" the beneficiary and "in the like manner and to the same amount" as the beneficiary. (There are two provisos which are not relevant for the purposes of the present discussion). The assessment is thus a representative one.
(iv) Section 42 relates to the agent of a non-resident and empowers the department to treat the agent as the assessee in respect of tax leviable on certain income of the non-resident deemed to arise in India. The income does not belong to the agent, but, for facilitating the collection of tax he is made liable and "is deemed to be the assessee for all the purposes" of the Act. He is thus a representative assessee.
It would, therefore, contribute to clarity if all these provisions are simplified and treated in a uniform manner. The substance of these provisions is the same, namely, that the tax is leviable and recoverable from A even though normally it would be recoverable and leviable from B. The treatment of all these provisions in one section will also avoid the unnecessary repetition of the words "the tax shall be leviable and recoverable" or words like " shall be deemed to be the assessee" etc.
The scheme adopted, therefore, is to collect these provisions at one place (in so far as the rules applicable are common to all the cases), under the head "Representativeassessees".
General Scheme of sections relating to representative assessees.
The group of sections begins with definitions, followed by the substantive provisions defining the liability of the representative. Special provisions applicable only to special classes of representative assessees are placed at the end.
Assistance has been taken from the South African Income-tax Act in framing these provisions. The following, sections of that Act have been drawn upon:-
Section 69.- Definitions.
Section 70.- Liability of representative assessee.
Section 71.- Right of representative assessee to recover the tax from the beneficiary.
Section 72.- Personal liability of representative assessee in cases where he parts with the estate without making provision for tax.
Section 75.- Remedies of the department against property with agent or trustee to be the same as the remedies against the property of the principal or the beneficiary.
Sub-clause (1)-Item (i).-Existing section 42(1), main para, latter part, making the agent liable for the tax on certain income of non-resident, has been incorporated here. (The earlier part of the main para of the section has already been incorporated in the group of sections relating to deemed income). The first proviso to section 42(1) has been dealt with in a separate clause in this Chapter, while the second and third provisos have been embodied in another separate clause in this Chapter.
Existing section 42(2) has already been incorporated in the Chapter relating to provisions against avoidance of liability to income-tax, while section 42(3) has been incorporated in the group of sections relating to deemed incomes.
Item (ii).- This represents a part of existing section 40(1). There seems, however, to be no reason why there should be two provisions, one in section 40(1) and the other in section 41(1), for trustees. Convenience requires that all trusts should be dealt with in one section. Accordingly, the reference to trustees in existing section 40(1) should be omitted. This will, of course, lead to the result that oral trusts not covered by section 41 will not be covered by the new provision.
However, this would not create any practical difficulties, as the trustee will be still chargeable under the main charging section, namely, section 3; moreover such instances will be very few. As a matter of fact, it becomes difficult to administer existing section 40(1) in the case of oral trusts; in the first place, it is not easy to verify the existence of a trust, and in the second place, even if the trust is ascertained, it is not easy to find out with certainty the shares of the beneficiaries. Oral trusts should not, it is suggested, be included in the ambit of the provisions relating to representative assessments.
Existing section 40(2) will be covered by another clause that follows in this chapter, defining "agent" in relation to non-residents.
Items (iii) & (iv).- Existing section 41(1) has been broken into these two items, for the sake of clarity. Trustees or authorities appointed under law, like the Official trustee, the Administrator General, the Court of wards, or receivers or managers appointed by the court have been dealt with in item (iii), while trustees appointed under a trust deed have been dealt with in item (iv). In both the items, it has been made clear that income which the trustee, the court of wards etc. receives in fact would be also governed by the item, vide the words "receives or" added before the words "entitled to receive". This change has been made on the lines of existing section 40(1).
Sub-clause (2).- This sub-clause is intended to make it clear that the persons liable as representative assessees are to be deemed to be assessees. This will place them within the scope of "assessee" as proposed to be defined in the draft, (vide also notes to clause 2, definition of "assessee"). Existing sections 40(1) and 41(1) achieve this result by providing that the tax shall be leviable from the guardian etc., while existing section 42(1) main para last words, straightaway provides that the agent shall be deemed to be an assessee.
The sub-clause adopts the method used in section 42(1).
Notes to clause 170
General
The liability of the representative assessee is dealt with in this section. The notes to the clause defining "Representative assessee" may also be perused as to the general scheme of these sections.
Sub-clause (1).- A uniform provision has been made as to the nature and extent of the liability of the representative assessee. The existing sections on the subject, i.e. sections 40(1), 41(1) and 42(1), express themselves in different ways; for example, section 40(1), after providing that the guardian etc. is to pay the tax (vide the words "the tax shall be levied ") goes on to say that "all the provisions of this Act shall apply accordingly". Section 40(2) also employs the same language. Section 41(1) is also on the same lines. Section 42(1), main para, last line, provides that the agent "shall be deemed to be for all the purposes of this Act, the assessee" in respect of the tax payable by the non-resident.
It is desirable that this diversity of language be replaced by the same formula for all these cases, since such diversity unnecessarily causes confusion and gives rise to doubts as to whether any difference in substance is intended or not. Draft sub-clauses (1) and (2), therefore, make it clear that the representative assessee is subject to the same duties, liabilities etc. as if the income were his own income. It further provides that he is liable to assessment in his own name. The category under which he is to be assessed and the computation of tax, however, are to be governed by the principals that would have been applicable to the beneficiary himself, and this has been made clear in the draft.
The words "representative capacity" will, incidentally, remove one lacuna existing in the present Act. When a trustee is charged in respect of income of the trust in his hand, the question might arise whether his individual income derived from his personal properties can be included in the same assessment. In other words, the question is, whether the assessment of a trustee qua-trustee to be kept completely separate from his assessment in his private capacity. On principle the two should be kept separate as the capacities are different, but there is no provision in the present Act giving clear guidance on this point. The words "representative capacity only", as used in the draft sub-clause under discussion, will make the position clear.
Existing section 41(1) etc. are limited to "tax". The position regarding penalty or any other sum due under the Act should not, however be different, and the provision as drafted will cover penalties and other sums also.
Sub-clause (2).- The provision that a representative is liable only to the extent of the asset with him at present appears only in the case of a legal representative liable under section 24B(1). There is however no reason why this protection should not extend to representative assessees, such as guardians, trustees, agents, etc. It is therefore put in a general form in this sub-clause. (There are, of course, special remedies available against certain representative assessees, which have been saved in the draft clauses on the subject that follow in this Chapter.)
Sub-clause (3).- Persons liable as representative assessees, especially as trustee, guardian or manager etc. (i.e. the assessees governed by existing sections 40 and 41) are, at present, liable to be charged directly under section 3 also. In any case, the absence of a specific provision lends support to the opinion expressed by some commentators that the Act leaves an option with the Department to assess the trustee etc. either under section 3 or under section 40 or 41. Since assessment under section 3 might be more onerous than under section 40 or 41, it seems desirable to make it clear that it is obligatory on the Department to apply the provisions of sections 40 and 41 in cases where they are applicable, leaving the general liability under section 3 to be applied only in cases which are outside sections 40 and 41. The draft sub-clause under discussion is intended to achieve this object.
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