Taxation Aspects of Income of Deceased Person
The author is an expert in the area of Taxation. She can be reached at snl.sarda@rediffmail.com and eboard@icai.in.
1. Who is a Legal Representative? (Section 159 & Section 2(29))
Section 159 of the Income-tax Act, 1961, titled ‘Legal Representatives’, is the primary section that encompasses the statutory liability of a legal representative of a deceased person. The provision of the said section enables an assessment being made and tax recovered in respect of the income of a natural assessee who was alive during a previous year but died either before assessment proceedings were initiated or before they were completed. It enumerates the substantive rights and liabilities of a legal representative.
Extent of Legal Representative’s Liability
The liability of a legal representative is limited strictly to the extent to which the estate left by the deceased is capable of meeting the tax liability, subject to the specific contingencies mentioned in sub-sections (4) and (5) of Section 159.
To appreciate the scope of the term ‘Legal Representative’, Section 2(29) of the Income-tax Act, 1961 provides that: “legal representative has the meaning assigned to it in clause (11) of section 2 of the Code of Civil Procedure, 1908.”
Section 2(11) of the Code of Civil Procedure, 1908:
“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.”
Another term often used alongside legal representative is ‘Legatee’. Legatees are persons or entities designated within a decedent’s will to receive any gift (a legacy) from the estate—in other words, the beneficiaries under the will.
2. ‘Legal Heir’ versus ‘Legal Representative’: Judicial Pronouncements
A recurring question in estate administration is whether the terms ‘legal heir’ and ‘legal representative’ are one and the same. Judicial authorities have established that the concept of a legal representative is much broader:
A. Supreme Court of India: Custodian of Branches of BANCO National Ultramarino v. Nalini Bai Naique (AIR 1989 SC 1589)
The Supreme Court held that: ‘A “legal representative” as defined in Civil Procedure Code 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 representative character the person on whom the estate devolves on the death of the party so suing or sued. The definition is inclusive in character and its scope is wide; it is not confined to legal heirs only. Instead, it stipulates a person who may or may not be an heir competent to inherit the property of the deceased, but who represents the estate of the deceased person. It includes heirs as well as persons who represent the estate even without title, either as executors or administrators in possession of the estate of the deceased. All such persons would be covered by the expression “legal representative”.’
B. Rajasthan High Court: Smt Kamlawati Gupta vs Kanwari Lal & Ors (21 July, 2011)
The High Court held that: ‘The term is inclusive of not only the heirs but also intermeddlers of the estate of the deceased as well as a person who in law represents the estate of the deceased. It is not necessarily confined to heirs alone. The executor, administrators, assigns or persons acquiring interest by devolution under Order 22 Rule 10 or legatee under a will, are legal representatives. Under the personal law of Hindu Succession Act also, not only class one heirs under Section 8 read with Schedule of the Act but also the executor of the will of the deceased testator are legal representatives within the meaning of Section 2(11) of the CPC.’
3. Testate versus Intestate Succession & Role of Executor (Section 168)
Testate Succession
Refers to a situation where the deceased has left a valid will. The will usually names an executor. If no executor is appointed in the will, beneficiaries apply to the Court for Letters of Administration, and the Court appoints an administrator until probate distribution.
Intestate Succession
Indicates the absence of a will by the deceased. The estate devolves upon legal heirs as per personal succession laws (e.g. Hindu Succession Act, Indian Succession Act). Beneficiaries file for Letters of Administration to administer the estate.
Assessment of Estate in Hands of Executor: Section 168
Section 168 of the Income-tax Act, 1961 provides that the income accruing to the estate of a deceased person shall be chargeable to tax in the hands of the executor. Separate assessments shall be made on the total income of each completed previous year or part thereof included in the period from the date of death to the date of complete distribution to the beneficiaries according to their several interests.
- Partial Distribution: In case of partial distribution, the income distributed shall be excluded from the estate and made taxable in the hands of the legatee.
- Continuation of Assessment: Under Section 168(3), the executor continues to be assessed until the estate is distributed among the beneficiaries according to their several interests [Navneet Lal Sakarlal vs. CIT (1992) 193 ITR 16 (SC)].
- Distinct PAN: The executor must be assessed in respect of the income of the estate under a separate PAN, completely distinct from his personal PAN.
- Assessment Status: The executor is assessed in the status of an “Individual”. If there are multiple executors, they are assessed as an Association of Persons (AOP).
AOP Status is Statistical: CIT vs. G. B. J. Seth and Anr (1982) 133 ITR 192 (MP)
The Madhya Pradesh High Court held that though assessment is on the executors, for all practical purposes it is the assessment of the deceased. The status of AOP is merely for statistical purposes; notwithstanding the AOP status, the executors are fully entitled to claim set-off of brought-forward business losses incurred by the deceased prior to his death.
4. Personal Liability of Legal Representative & Section 167 of Indian Succession Act
Personal Liability under Section 159(4) of the Income-tax Act
Section 159(4) states that where a legal representative creates a charge on, disposes of, or parts with any asset of the estate of the deceased while the tax liability on the income of the deceased remains undischarged, the legal representative shall be personally liable for any tax payable in his capacity as legal representative. However, such personal liability is strictly capped at the value of the assets charged, sold, or parted with.
Encumbered Bequests: Section 167 of the Indian Succession Act, 1925
Section 167 provides that where property specifically bequeathed is subject at the death of the testator to any pledge, lien, or incumbrance created by the testator himself, then the legal representative/legatee, if he accepts the bequest, must accept it subject to such pledge or incumbrance, and is liable to make good the amount of such encumbrance.
The liability of any legal representative becomes effective only upon the acceptance of the asset inherited through the will and remains limited to the value of that asset. A general direction in the will for payment of the testator’s debts does not imply a contrary intention. Periodical payments like land revenue or rent do not constitute incumbrances under this section.
Illustration (i): A bequeaths to B the diamond ring given to him by C. At A’s death, the ring is held in pawn by D to whom it had been pledged by A. It is the duty of A’s executor, if the state of the testator’s assets will allow them, to allow B to redeem the ring.
Illustration (ii): A bequeaths to B a zamindari which at A’s death is subject to a mortgage for Rs. 10,000, and interest of Rs. 1,000 is due at A’s death. B, if he accepts the bequest, accepts it subject to this charge, and is liable, as between himself and A’s estate, to pay the sum of Rs. 11,000 thus due.
5. Assessment Proceedings & Validity of Section 148 Reassessment Notice
In case a person dies during the pendency of assessment proceedings, the proceedings can be continued against the legal representatives under Section 159(2)(a). Furthermore, any proceedings that could have been initiated against the deceased while alive can be lawfully initiated against the legal representatives under Section 159(2)(b).
Reassessment Notice Issued to a Deceased Person is Void Ab Initio
“In view of the provisions of section 159(2)(b) of the Act, it is permissible for the Assessing Officer to issue a fresh notice under section 148 of the Act against the legal representative, provided that the same is not barred by limitation; he, however, cannot continue the proceedings on the basis of an invalid notice issued under section 148 of the Act to the dead assessee.”
A reassessment notice issued in the name of a deceased individual is a nullity in law, and participation by the legal representative does not cure this jurisdictional defect.
6. Capital Gains Exemptions & Carry Forward of Losses (Section 78(2))
No Capital Gains on Will or Intestate Transmission
Under Section 47(iii) of the Income-tax Act, 1961, any transfer of a capital asset under a gift or will is not regarded as a ‘transfer’; hence, no capital gains arise.
Similarly, in intestate succession (death without a will), the devolution of assets is not a transfer but a transmission by operation of law without consideration. Hence, no capital gains arise in either testate or intestate devolution.
Recipient Tax Exemption: Section 56(2)(x)
Assets received on inheritance represent capital receipts. While Section 56(2)(x) taxes property received without consideration, the proviso explicitly exempts property received under a will or by way of inheritance.
Under Section 49(1), the cost of acquisition to the legatee shall be the cost to the previous owner, and under Section 2(42A), the period of holding includes the holding period of the previous owner.
Carry Forward and Set-Off of Losses: Section 78(2)
Section 78(2) of the Income-tax Act, 1961 explicitly provides that where a person carrying on any business or profession has been succeeded by another person, the successor shall not be entitled to carry forward and set off the accumulated business loss of the predecessor, except in the case of succession by inheritance.
7. Conclusion & Key Practice Takeaways
The primary professional takeaways in estate taxation include:
- Recognizing the critical legal distinction between a ‘legal heir’ (governed by personal succession laws) and a ‘legal representative’ (broadly encompassing intermeddlers and executors under Section 2(11) of the CPC).
- Differentiating the dual assessments required upon death: Section 159 for income earned by the deceased up to the date of death, and Section 168 for income accruing to the estate thereafter under a separate PAN in the hands of the executor.
- Establishing that the personal liability of a legal representative is strictly bounded by the value of the assets inherited or alienated.
- Ensuring that reassessment notices under Section 148 are issued strictly in the name of the legal representative and never to the deceased person.