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James Anderson, Admi... v. Commissioner Of Inco...
Structured Summary of the Opinion (Tambe, J.)
Factual and Procedural Background
The opinion concerns a reference under sub-section (1) of section 66 of the Indian Income-tax Act for the assessment year 1948-49 (previous year ending 31 March 1948).
Mr. Henry Gannon died testate on 13 May 1945. His will (dated 18 November 1942) appointed The National Bank of India in England as executors. The bank obtained probate and, since the deceased owned estate in British India, gave a power of attorney to Mr. James Anderson (the assessee). Anderson applied under section 241 of the Indian Succession Act and was granted letters of administration with a copy of the will annexed on 14 August 1946.
The deceased owned 2,674 shares in Gannon Dunkerley & Co. Ltd. Clause 5 of the will bequeathed 450 of those shares to six legatees; transfer documents for those 450 were handed over to the legatees. The remaining 2,224 shares were the subject of a tripartite agreement (executors, the company, and Mr. Morarka) under which the executors agreed to sell those shares to Mr. Morarka for Rs. 1,240 per share, producing Rs. 27,57,760 on completion. The relevant share certificates and transfers were handed over on 12 October 1946 and the sale proceeds were received by the assessee. The sale gave rise to capital gains, assessed under section 12B for assessment years 1947-48 and 1948-49.
Although the sale took place, the transferees' names were not entered in the company's share register; the shares continued to stand in the name of the late Mr. Gannon.
The Income-tax Officer, applying section 23A, deemed certain undistributed profits of the company to have been distributed as dividends among shareholders as at two general meetings (26 May 1947 and 22 December 1947). The net deemed dividend attributable to the 2,224 shares was Rs. 61,051 (as on 26 May 1947) and Rs. 3,73,099 (as on 22 December 1947), totaling Rs. 4,34,150.
On 28 March 1953 the Income-tax Officer issued a notice under section 34(1)(b) to the assessee (addressed to "Mr. James Anderson, administrator, to the estate of the late Mr. Henry Gannon..."), calling for a return for the assessment year ending 31 March 1949 on the ground that income had escaped assessment. After adjournments, the assessee filed a return on 13 October 1953 showing total income Rs. 2,56,602 and excluding the deemed dividend amount of Rs. 4,34,150.
The Income-tax Officer overruled objections and added Rs. 4,34,150 to the assessee's income and, after grossing up, reassessed total income under section 34(1)(b) at Rs. 8,88,093. The assessee appealed to the Appellate Assistant Commissioner (who dismissed the appeal relying on Shree Shakti Mills Ltd.), then to the Income-tax Appellate Tribunal (which also dismissed the appeal). The assessee raised several grounds before the Tribunal and thereafter sought a reference under s.66(1) of the Act. The Tribunal framed two questions for the High Court.
Legal Issues Presented
- Whether, on 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, whether the dividends of Rs. 61,051 and Rs. 3,73,099 deemed to have been distributed as on 26 May 1947 and 22 December 1947 respectively under section 23A were assessable in the hands of the applicant (the administrator)?
Arguments of the Parties
Appellant's (Assessee's) Arguments — as presented in the opinion
- The deemed dividend income (Rs. 4,34,150) might be the income of the late Mr. Henry Gannon and cannot be assessed in the hands of the assessee by resorting to section 34(1)(b); the notice under s.34(1)(b) is invalid.
- The deemed dividend income cannot be clubbed with the income received by the assessee from the estate in the assessment year 1948-49.
- The assessee raised multiple contentions before the Tribunal (summarised in seven points): (1) dividends should be taxed in hands of beneficial owner not registered shareholder; (2) Shree Shakti Mills decision is erroneous and/or not applicable to a deceased shareholder; (3) only Mr. Gannon can be assessed and s.24B does not apply to notional dividends deemed to be received by a deceased shareholder; (4) proceedings are bad because notice and assessment were issued/made in the name of Mr. Anderson in his representative capacity; (5) estate fully administered and liability limited to assets available; (6) company was a party to the 14 August 1946 agreement and bound to complete sale, and the appellant should not suffer because of the company's fraud or failure to notify of meetings or dividends; (7) capital gains tax having been levied and collected proves completed sale so appellant cannot be taxed again on same source.
- Mr. Kolah (for the assessee) specifically relied on an unreported Supreme Court decision (Civil Appeals Nos. 125, 231 and 447 of 1960) to support the proposition that the registered shareholder (or the person in name on books) has a distinct role under section 23A and that a notice under s.34(1)(b) to the administrator was invalid here.
Respondent's (Revenue's) Arguments — as presented in the opinion
- Mr. Joshi (for the Revenue) contended that the shares stood in the name of the late Mr. Gannon but the estate vested in the assessee on 14 August 1946. If Mr. Gannon had been alive, the deemed dividend would have been included in his income; section 24B makes the administrator liable to pay tax in respect of that income.
- The deemed dividend is the income of the estate in the relevant year and can be added to the assessee's (administrator's) income for assessment year 1948-49. The notice issued to the assessee was in his representative capacity and was therefore proper.
- Mr. Joshi relied on prior decisions: Maharaja Of Patiala v. Commissioner Of Income-Tax (Central), Bombay [1943] 26 I.T.R. 202 and Commissioner of Income-tax v. James Anderson [1954] 26 I.T.R. 699 to support the position that an administrator can be treated as an assessee in respect of estate income and that liabilities can be personal to the administrator where income arises after death.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Shree Shakti Mills Ltd. (Bombay High Court decision) | Relied upon by the Appellate Assistant Commissioner to support assessing deemed dividends against the person treated as shareholder under s.23A. | The Appellate Assistant Commissioner relied on this decision to hold the administrator liable; the court records that this decision was followed below but examines its applicability in light of later authorities and the statutory text. |
| Unreported Supreme Court decision — Civil Appeals Nos. 125, 231 and 447 of 1960 (decided 18 July 1961) | Held that the word "shareholder" in s.23A must be read as meaning the shareholder registered in the books of the company, not the beneficial owner; the fiction in s.23A is limited by the plain terms of the statute. | The court treated this Supreme Court ruling as decisive: it interpreted s.23A to apply to persons in whose names shares are registered. On that basis the court concluded that the deemed dividend, if deemed received on the meeting dates, could only be deemed received by the registered shareholder (Mr. Gannon), not by the administrator. |
| Maharaja Of Patiala v. Commissioner Of Income-Tax (Central), Bombay [1943] 26 I.T.R. 202 | Addressed notices issued in relation to the income of a deceased person and whether a notice addressed to a living successor sufficed where the return filed related to the deceased's income. | The court distinguished this case: it held that facts there were different (the return related to deceased's income) and therefore that decision did not validate the notice under s.34(1)(b) in the present case, where the notice did not call for a return of the deceased's income. |
| Commissioner of Income-tax v. James Anderson [1954] 26 I.T.R. 699 | Established that section 24B does not limit an administrator's liability only to cases referred to in that section; an administrator is an assessee like any other and if he carries on business or receives dividends or makes capital gains he is liable to tax personally. | The court cited this decision to explain the distinction between (a) liability under s.24B for tax payable by the deceased (limited to estate) and (b) personal liability of the administrator for income of the estate arising after death under general provisions. The case supported the conceptual distinction used in analysis. |
| Executors of the Estate of J.K. Dubash v. Commissioner of Income-tax (Supreme Court) | Explained the difference between liability to pay tax on profits earned after the testator's death (personal liability of executors under ordinary provisions) and tax on the deceased's lifetime income (liability limited to estate under s.24B). | The court relied on this precedent to emphasise the legal distinction between the deceased's income (for which the administrator's liability under s.24B is limited to the estate) and the estate's subsequent income (for which the administrator has personal liability). This distinction underpinned the court's analysis of which assessment procedure was appropriate. |
Court's Reasoning and Analysis
The court's analysis proceeded by first stressing a fundamental statutory distinction: income of the deceased (tax liability of which is governed by section 24B and is limited to the extent the estate can meet the charge) is conceptually different from income of the estate accruing after death (for which the administrator may be personally liable under the general charging provisions, sections 3 and 4).
The court explained the scope of section 24B (quoted in the opinion): that it creates liability of the executor/administrator to pay 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" and that such liability is limited to the estate. The court further emphasized that subsections (2) and (3) of s.24B treat the deceased as the real assessee for purposes of that income.
The court then observed that liability in respect of estate income accruing after death arises under the normal charging provisions (sections 3 and 4) and is not limited to the assets of the estate — it is a personal liability of the administrator when such income is received or deemed to be received by him.
Applying these principles, the court considered the nature of the income created by an order under section 23A: the court noted that deemed dividend income created by s.23A is fictional/notional income and must be examined to see who, in law, is deemed to have received it. The court relied on the unreported Supreme Court decision (Civil Appeals Nos. 125, 231 & 447 of 1960) which held that "shareholder" in s.23A means the shareholder registered in the books of the company, not necessarily the beneficial owner.
From that authority the court concluded that the deemed dividends (if deemed received on the general meeting dates) could only be deemed to have been received by the registered shareholder — here the late Mr. Gannon — and not by the administrator. The court was careful to state it was adopting an assumption for the purpose of analysis (assuming for the sake of argument the deemed dividend was the income of the deceased).
Given that Mr. Gannon had died in 1945, the court reaffirmed that assessment of his income for the year(s) in question could not properly be effected by reopening the assessee's own assessment for 1948-49 under section 34(1)(b). If the department wished to effect an assessment in respect of escaped income of the deceased, the correct procedure would have been to issue a notice under sub-clause (a) of subsection (1) of section 34 for initial assessment of the deceased's escaped income, and in any event the notice should have been directed to require a return of the deceased's income, not the administrator's personal income from the estate.
The court found that what the department did — issue a notice under s.34(1)(b) directed at the administrator's own assessment year and then add the deemed dividend to the administrator's income by way of reassessment — was impermissible. That procedure improperly converted a notional income of the deceased (if at all deemed to be of the deceased) into a basis for personal reassessment of the administrator, and thereby imposed a personal liability in circumstances where the law (as interpreted) did not permit it.
The court also addressed and rejected the submission that Maharaja Of Patiala validated the department's action: it distinguished that earlier case on factual grounds because there the returns filed related to the deceased's income and the notice there, though imperfectly addressed, did not affect the assessment. In the present case the notice called for the administrator's own income and the deemed dividends were added to the administrator's return — a material difference rendering the current notice not a mere irregularity.
Holding and Implications
Holding: THE FIRST QUESTION IS ANSWERED IN THE NEGATIVE. In other words, the assessment made on Mr. James Anderson, administrator to the estate of the late Mr. Henry Gannon, by issuing a notice under section 34(1)(b) and reassessing the administrator's income by adding the deemed dividend amounts was invalid in law.
Implications and direct consequences (as set out in the opinion):
- The reassessment under section 34(1)(b) that added the deemed dividend amounts to the administrator's (assessee's) income is quashed as bad in law.
- Because the court answered the first question in the negative, the second question (whether the deemed dividends were assessable in the hands of the applicant) does not survive and was not decided on its merits.
- The assessee is entitled to his costs. The court made no order on the notice of motion.
The court relied on statutory distinctions and existing authorities to reach this result and did not purport to lay down any novel rule beyond applying the statutory framework and relevant precedents to the facts. No broader change of precedent was announced; the decision directly affects only the validity of the specific reassessment on these facts.
End of summary.
Tambe, J.:— This is a reference under sub-section (i) of section 66 of the Indian Income-tax Act (hereinafter referred to as the Act). We are concerned with the assessment year 1948-49, the relevant previous year being the year ending on 31st March/1948.
2. One Mr. Henry Gannon died testate on 13th May, 1945, leaving behind his will of date 18th November, 1942, and considerable property. The National Bank of India in England was under the will appointed as executors. The will was probated by the National Bank of India in England. The deceased had left behind some estate in India. The National Bank of India, therefore, gave power of attorney to one Mr. James Anderson, the assessee in this case. The assessee applied to this/court under section. 241 of the Indian Succession Act and was grantedj letters of administration with a copy of the will annexed to the estate/of the deceased in British India. The letters of administration were granted, on 14th August, 1946. The deceased, Mr. Gannon, possessed 2,674. shares of a private limited Indian company known as Gannon Dunkerley & Co. Ltd. (hereinafter referred to as the “company”). By clause 5 of the will the deceased had bequeathed 450 out of the 2,674 shares to six legatees mentioned in the will. In the course of administration the assessee handed over, the share certificates as well as the transfer deeds in respect of the 450 shares to the six legatees. As regards-the remaining 2,224 shares a tripartite-agreement was reached between the National Bank of India Ltd., as the executors of the will of the-deceased, the company and one Mr. Morarka. There were certain other parties to this agreement but we are not concerned with them here. Under this agreement, the executors agreed to sell the said 2,224 shares to Mr. Morarka and the company consented to it. Clause 5-of the agreement provided that the completion of the purchase and sale of the shares to be purchased and sold under the agreement shall be completed within three months from the dale of the agreement and the transferor, i.e; the executors, shall respectively on or before that date furnish to the purchasers transfers duly signed by the transferors with the relative certificates, failing which the company shall be entitled to proceed in the manner authorised by article 22 and to enter in the register the name of the purchaser as the holder of the shares, if any, in respect of which any of the transferors is in default and to hold the purchase monies relating thereto in trust for such defaulting transferor. The price agreed to be paid by Mr. Morarka was Rs. 1,240 per share. The executors, as regards the holding of the 2,224 shares of the late Mr. Gannon were to receive Rs. 27,57,760 on handing over the share certificates and transfers duly signed in favour of the purchasers. The relevant share certificates and the transfer deeds were handed over to the purchaser, Mr. Morarka, on October 12, 1946, and the assessee received the sale price. The sale of the shares effected resulted in capital gains. The sale of these shares was the subject-matter of an assessment for capital gains in the assessment years 1947-48 and 1948-49 when sums of Rs. 20,13,738 and Rs. 1,51,963 respectively were brought to assessment under section 12B of the Income-tax Act. The names of the transferees, however, were not brought on record in the share-register of the company. The shares continued to stand in the names of the previous owner, viz., the late Mr. Henry Gannon. For the assessment years 1946-47 and 1947-48 the Income-tax Officer concerned applied the provisions of section 23A of the Act and by his order dated the 26th of March, 1953, ordered that the undistributed portion of the assessable income of the company of the relevant previous year as computed for income-tax purposes and reduced by the amount of income-tax and super-tax payable by it in respect thereof shall be deemed to have been distributed as dividends among the shareholders as at the date of the relevant annual general meetings held on May 26, 1947, and December 22, 1947, respectively. The net dividend income thus deemed to have been distributed in respect of the said 2,224 shares amounted to Rs. 61,051 as on May 26, 1947,; and Rs. 3,73,099 as on December 22, 1947. Two days after making this order, i.e, on 28th of March, 1953, the Income-tax Officer issued a notice under section 34(i)(b) of the Act to the assessee, calling upon him to deliver a return of his total income and total world income assessable for the assessment year ending 31st March, 1949, as in his view the assessee's income assessable, to income-tax for the year ending 31st March, 1949, had escaped assessment and he, therefore, proposed to reassess the said income that has escaped assessment. A notice was addressed to “Mr. James Anderson, administrator, to the estate of the late Mr. Henry Gannon, C/o The National Bank of India Ltd., Mahatma Gandhi Road, Bombay”. The, assessee, after obtaining some adjournments, filed a return on October 13;. 1953, whereunder he returned an income of Rs. 2,56,602. It is to be noticed that, in the return filed, the assessee had not included the aforesaid deemed dividend income amounting to Rs. 61,051 and Rs. 373099; total Rs. 4,34,150. Before the Income-tax Officer the assessee objected to the addition of the said amount of Rs. 4,34,150 to his income on various grounds. The Income-tax Officer, however, over-ruling the objections raised by the assessee, added the said amount of Rs. 4,34,150 to the assessee's income. After grossing up the dividend income, the Income-tax Officer reassessed the total income of the assessee-under section 34(i)(b) of the Act at Rs. 8,88,093. Against this order of the Income-tax Officer, the assessee took an appeal to the Appellate Assistant Commissioner. The assessee, inter alia, contended before the appellate authority that the shares were sold in 1946; that the department had already collected capital gains tax on the same and that would clearly establish that the shares had already been sold and, 1 therefore, the assessment was wrongly made. The assessee further contended that at any rate the dividend income cannot be added to his assessment, as the shares stood in the name of the late Mr. Henry Gannon and the assessment, if at all it can be made, should have been made on this person and not on the administrator. The assessee also contended that the notice that was issued to the assessee as an administrator to the late Mr. Gannon was not rightly issued and the assessment made was null and void. The Appellate Assistant Commissioner found that the shares, no doubt, were sold in the year 1946; the shares, however, continued to stand in the name of the late Mr. Gannon. Relying on the case of Shree Shakti Mills Ltd.1, he held that the assessee was liable to be assessed in respect of the aforesaid deemed dividend income. In this view of the matter, the Appellate Assistant Commissioner dismissed the appeal. A second appeal was taken by the assessee to the Income-tax Appellate Tribunal and before the Tribunal the following seven contentions were raised:
(1) That the income from dividends should be taxed only in the hands of the beneficial owner and not the registered shareholder;
(2) that the decision of the Bombay High Court in Shree Shakti Mills Ltd. v. Commissioner of Income-tax is erroneous and in any event does not apply to the case of a deceased shareholder;
(3) that it is only Mr. Gannon that can be assessed and that section 24B has no application to a case of notional dividend deemed to be received by a deceased shareholder;
(4) that the proceedings are bad as the notice and the assessment order were issued to, and made on, respectively in the name of Mr. James Anderson, administrator to the estate of Mr, Gannon;
(5) that the estate has been fully administered and as the appellant, if iat all, could be made liable only to the extent of the assets available, the assessment cannot be made as the estate is not capable of bearing the charge;
(6) that in any event the company being a party to the agreernent dated August 14, 1946, was bound to complete the sale and the appellant cannot be made to suffer because of the fraud played on him by the company; it cannot also be said that the rectification remedy was open to the appellant as in fact no notice of any meeting or the declaration of any dividend was issued to the appellant; and
(7) that capital gains tax having been levied and collected clearly established the completed sale and thereafter the appellant cannot be made liable to tax in respect of the same source of income.
3. The Tribunal took the view that, as the provisions of section 24b were applicable to the facts of the present case, any error in addressing the assessee in the notices is not a matter of any substance and that the assessment was properly made. As regards the contention of the appellant that the tax on capital gains having been levied on the assessee, it was not open to the department to assess him in respect of the deemed dividend income, the Tribunal observed:
“We see the force of the assessee's argument and we also admit that the equities are with the assessee. Equity and income-tax are, however, said to be strangers. We have to administer the law as it stands. Under section 23A artificial income is created and is deemed to be the income of the shareholder in spite of the fact that it neither accrues nor is received by the shareholder. It is not possible for us to distinguish the authority referred to hereinabove and relied upon by the department. In these circumstances, we are compelled to reject the contentions of the assessee.”
4. In this view of the matter, the appeal of the assessee was dismissed by the Tribunal. On an application made by the assessee under subsection (1) of section 66 of the Act, the Tribunal, raising the following two questions, has submitted a statement of the case to this court. The questions referred to us are:
“(1) Whether, on 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, on 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 as on May 26, 1947, and December 22, 1947, respectively under section 23A of the Income-tax Act were assessable in the hands of the applicant?”
5. Mr. Kolah contends that the aforesaid deemed dividend income deemed to have been distributed as on May 26, 1947, and December 22, 1947, under section 23A of the Indian Income-tax Act might be the income of the late Mr. Henry Gannon. That income cannot be assessed in the hands of the assessee by resorting to the provisions of section 34(1)(b) of-the act. Deemed dividend income cannot be added or clubbed-together with the income received by the assessee from the estate of Mr. Gannon in the assessment year 1948-49. The notice issued to the assessee under section 34(i)(b) is, therefore, invalid in law and conse quently the assessment made on the assessee in respect of the said deemed-dividend income under section 34(1)(b) of the Act is bad in law. Mr. Kolah referred to us an unreported decision of the Supreme Court in Civil Appeals Nos. 125, 231 and 447 of 1960, decided on 18th July, 1961.
6. Mr. joshi, on the other hand, contends that the shares stood in the name of the late Mr. Gannon and the estate of Mr. Gannon vested in the assessee on August 14, 1946. Had Mr. Gannon not died the deemed dividend income would have been included in the income of Mr. Gannon. Section 24B of the Act makes the administrator liable to pay tax in respect of this income. In the assessment year 1948-49 the asses-see had been assessed only in respect of the income of the estate received by him. The deemed dividend income was the income of that year. That income, therefore, can be added or clubbed to the income of the assessee of that year. The notice issued on the assessee was in his representative capacity as representing the estate of the deceased and was, therefore, proper. He referred us to the decisions in Maharaja Of Patiala v. Commissioner Of Income-Tax (Central), Bombay [1943] 26 I.T.R 202. and Commissioner of Income-tax v. James Anderson [1954] 26 I.T.R 699.. According to Mr. Joshi the decision of the Supreme Court to which our attention was drawn by Mr. Kolah has no application to the facts of the present case. In that case the registered shareholder was alive at the time the order under section 23A was made. That decision, therefore, has no application to a case where the registered shareholder had died prior to the date of making an order under section 23A of the Act. On the death of a shareholder, the shares held by him vest in his administrator from the date of his death. The administrator is the owner of those shares. Any dividend that is: declared subsequent to the death of the registered shareholder is pay able to the administrator; if any bonus shares are-issued, they are delivered to the administrator; if any liability remains in respect of the unpaid shares, that can be recovered from the administrator. The deemed dividend income, therefore, is the income of the assessee, who is the administrator of the estate in India of the late Mr. Gannon. That income can, therefore, be added to the other income from the estate of the deceased received or recovered by the assessee.
7. In our opinion the first question will have to be answered in favour of the assessee. If we may, with respect, say, the error that had crept in in the assessment made on the assessee in respect of the deemed dividend income and in the order of the Tribunal, has arisen as a result of riot keeping in view the distinction and material difference in respect of the income, profits and gains of the deceased derived by him from whatever sources, which were either received or deemed to have been received by him or accrued or arose to him or are deemed to accrue or arise to him within the meaning of the Act, and the income of the estate of the deceased subsequent to the death of the deceased, that is, received or deemed to have been received by the administrator or accrued or arose to the administrator or deemed to accrue or arise to the administrator within the meaning of the Act. The liability of the administrator to be assessed and pay tax in respect of the income of the deceased arises under section 24B of the Act, while the liability of the administrator;to be assessed and pay tax in respect of the income of the estate of the deceased either received or recovered by him arises under the general provisions of the Act, apart from those of section 24B of the Act. There is a difference as regards the extent of liability of the administrator to pay tax in respect of the income of the deceased and the income of the estate of the deceased arising after the death of the deceased. subsection (1) of section 24b is the substantive provision as regards the tax on the income of a deceased person payable by his representative. It reads:
“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.”
8. It will be noticed that the liability of the executor, administrator or other legal representatives of the deceased created by this sub-section relates to the tax that was payable by the deceased: the tax which, in fact, had been ascertained in his lifetime in an assessment or the tax which would have been payable by the deceased, in respect of his income, if he had been alive. The liability to pay the said amount of tax is limited only to the extent of the estate of the deceased person. In other words, in an assessment in respect of the income of the deceased, the administrator is not personally liable. Sub-sections (2) and (3) relate to the procedure to be followed in an assessment relating to the income of the deceased on which he would have been liable to pay tax had he been alive. On a reading of these sub-sections, it would be clear that the real assessee in respect of this income is the deceased person; the executor, administrator or other legal representative of the deceased is only treated as if he is an assessee for the purpose of the completion of the assessment. It is common knowledge that section 24B was inserted by section 11 on 11th September, 1933, by an amending Act to get over the effect of certain decisions wherein it had been held that, where a person dies after the commencement of a financial year but before his income for that year had been assessed to tax, his estate is not liable to pay the tax.
9. Now, as already stated, the liability of the administrator to be assessed and pay tax in respect of the income of the estate arising or accruing subsequent to the date of the death of the deceased arises under the general provisions of law. Sections 3 and 4 of the Income-tax Act fasten a liability on every person to pay income-tax on the total income, profits and gains derived by him from whatever source. The liability arises when the income is received or deemed to have been received within the meaning of the Act. If a person is a resident, the liability is there, even if the income, profits and gains are not received but have accrued whether in the taxable territories or outside the taxable territories. If the person is not a resident, the liability is in respect of income that has accrued or deemed to have accrued within the taxable territories in addition to the income received or deemed to have been received by him. It is under these provisions that the administrator's liability in respect of the subsequent income arises. The liability is not limited only to the extent of the estate in his hands; the liability is a personal liability.
10. In Executors of the Estate of J.K Dubash v. Commissioner of Income-tax, the difference between these two kinds of assessments have been clearly stated by the Supreme Court in the following terms:
“As already pointed out, their liability to pay the tax on the profits earned after the testator's death arises under section 10(1) and, being that of assessees carrying on the business, is personal to them, although as between them and the estate they would be entitled to be indemnified in respect of the tax paid; while their liability to pay tax on the profits earned during the testator's lifetime arises under section 24B and, being that of legal representatives of the testator, is limited ‘to the extent to which the testator's estate is capable of meeting the charge’.”
11. It is true that the case with which their Lordships of the Supreme Court were dealing was a case in which the executors were carrying on the business as directed under the will of the deceased, but that fact would make no difference. The principle stated in the case would be equally applicable to the facts of the present case. At page 189 of the report it is observed by Patanjali Sastri J.:
“The Income-tax Act directs its attention primarily to the person who receives the income, profits or gains rather than to the ownership or enjoyment thereof.”
12. Further the following observations of Lord Cave have been cited with approval:
“The fact is that, if the Income-tax Acts are examined, it will be found that the person charged with tax is neither the trustee nor the beneficiary as such, but the person in actual receipt and control of the income, which it is sought to reach.”
13. The view taken by the learned Chief Justice is also the same. At page 186 it is observed:
“… on the day of the death of the deceased the estate including the business got vested in the executors, and the executors carried on the business within the meaning of section 3 read with section 10 of the Act and as such became personally liable as assessee.”
14. This court in dealing with the liability of the assessee to pay the tax on the capital gains made by the assessee by selling the shares has also pointed out the difference between the two kinds of assessments. In Commissioner of Income-tax v. James Anderson, the learned Chief Justice observed:
“Section 24B casts a liability upon the executor or the administrator to pay tax which the testator would have been liable to pay if he had not done so. But section 24B does not limit the liability of the administrator or the executor only to the cases referred to in section 24B. An administrator or an executor is as much an assessee under the Act as any other individual and if he carries on business or makes profit or receives dividends or makes capital gains, he is as much liable to pay tax as any other individual.”
15. Keeping this distinction in view, the facts of this case will have to be approached. We are here concerned with the alleged liability of the assessee to pay tax in respect of the deemed dividend income deemed to have been distributed as on May 26, 1947, and December 22, 1947, as a result of the order made under section 23A of the Act on March 26, 1953. The shares stood in the name of the late Mr. Gannon. It has to be seen whether the deemed dividend income is, in law, the income of the assessee, i.e, the income of the estate of the deceased accruing or deemed to be accruing to the assessee. Now, it is well settled that the deemed dividend income deemed to have been distributed as a result of an order made under section 23A of the Act is only fictional or notional income. The income, in fact, is never received by the person to whom-the income is supposed to have been distributed. It has to be seen by whom this fictional or notional income is in law deemed to have been received. The question came to be considered by their Lordships of the Supreme Court in the aforesaid unreported decision (Civil Appeals Nos. 125, 231 and 447 of 1960). The facts were that 1,842 shares in a company called the Cotton Export and Import Limited belonged to a Hindu undivided family and the family was the beneficiary of those shares. The shares, however, stood in the individual names of certain coparceners in the family; 815 shares stood in the name of Nanalal Haridas, who was the karta of the family; 877 shares stood in the 1 name of Tribhuvandas Haridas, another member of the family, and 150 shares in the joint names of Nanalal Haridas and Tribhuvandas Haridas. The company was a private limited company in which the public had no interest. An order under section 23A was made against the company. The proportionate amount of dividend of 1,842 shares, after: being grossed up, came to Rs. 54,307. This amount, the Income-tax Office added to the income of the joint family. The joint family challenged the adding up of this amount to its income. It claimed that the dividend deemed to have been distributed under section 23A should be assessed in the hands of the shareholders, that is, the members of the family in whose names the shares stood registered in the books of the company and not in the hands of the Hindu undivided family.though it was the beneficiary of those shares. This contention of the Hindujoint family was negatived by the income-tax authorities but was upheld by this court. An appeal from the decision of this court was taken to the Supreme Court on special leave obtained by the Commissioner of Income-tax. The view taken by this court was upheld by the Supreme Court and the appeal was dismissed. On behalf of the Commissioner of Income-tax it was contended before their Lordships of the Supreme Court that the expression “shareholder” in section 23A means the person who owns the share irrespective of the circumstance, whether that person is registered in the books of the company as a shareholder or not. It was also contended that the legal fiction created by section 23A must be carried to its logical conclusion. The legal fiction created is that profits must be deemed to have been distributed as dividend amongst the shareholders as at the date of the general meeting. This fiction must be carried to its logical conclusion by holding that the dividend had.been actually distributed and received by the beneficial owner, viz, the Hindu undivided family. Both these contentions were negatived by their Lordships of the Supreme Court and in repelling them it has been observed:
“The section does not talk of the beneficial owner of the share. It talks of the shareholder only. Section 18(5) of the Act deals with grossing up of dividend and two expressions occur therein: ‘owner of the security’ and the ‘shareholder’. So far as the expression ‘owner of the security’ is concerned it may perhaps include a beneficial ‘owner but it has been decided by.this court that the expression ‘shareholder’ in section 18(5) means the shareholder registered in the books of the company. As we have earlier said, no good reason exists as to why the expression ‘shareholder’ in section 23A shall not have the same meaning… The fiction enacted by the Legislature must be restricted by the plain terms of the statute.”
16. It is true that in the case with which their Lordships were dealingy the registered shareholders were at the material time alive, but the decision has not turned on that fact. On the other hand, the rule laid down is that the fiction created has to be restricted to the plain terms of that section and the deemed dividend income deemed to have been distributed among the shareholders would be deemed to be the income and deemed to have been received by those persons in whose names in the books of the company the shares are registered. The aforesaid observations of their Lordships are, in our opinion, a complete answer to the contentions raised by Mr. Joshi. It is, therefore, not possible to hold that the deemed dividend income is deemed to have been received by the assessee as on May 26, 1947, and December 22, 1947. If at all it could be deemed to have been received by anybody on those dates, it could only be by the late Mr. Gannon and none else. We would like to make it clear that we do not hold that the said deemed dividend income was, in law, deemed to have been received by Mr. Gannon on those dates. ‘We would only examine the case on such an assumption.’ Assuming then that the deemed dividend income was the income of the late Mr. Gannon and assuming that Mr. Gannon's estate was liable to pay any tax in respect thereof, the procedure that should have been followed by the income-tax department was not the procedure followed by them but should have been altogether a different procedure. As already stated, deemed dividend income could, if at all, be the income of the deceased, Mr. Gannon. It is deemed to have been notionally received by him on May 26, 1947, and December 22, 1947. It is an admitted position that Mr. Gannon died in the year 1945 and in the assessment year 1948-49 he could have no income. The question of adding the said deemed dividend income by reopening an assessment of his income of that year and making a reassessment thereof, therefore, did not and could not arise. It is true that proceedings for a fresh assessment could be started under section 34 but then for effecting an initial assessment of an escaped income under section 34, the notice that has to be issued is a notice under sub-clause (a) of sub-section (1) of section 34 of the Act: Further, assuming that the notice under section 34(1)(a) could have been issued on the assessee with the aid of section 24B, the notice should have been for the assessment of the escaped income of the 1 deceased and not for reassessment of the escaped income of the assessee, i.e, income received by the assessee from the estate of the deceased. Inother words, the notice should have been for calling upon the assessee to file a return of the income of Mr. Gannon and not the income of the assessee. We have already pointed out the difference between an assess-1 ment of an administrator in respect of the income of the deceased and an assessment of an administrator in respect of the income of the estate of the deceased received by him in the course of the administration of the estate subsequent to his death. What the department has done is, reopening the assessment of the assessee by a notice under section 34(1)(b) of the Act in respect of the income of the estate of the deceased received by the assessee in the assessment year 1948-49 and, adding the deemed dividend income to that income of the assessee by way of reassessment. This, as already pointed out, was not permissible to the income-tax authorities to do under the Act. It is obvious that as a result of this assessment the rate of tax, at which tax has been levied, is much higher than the rate at which the assessee might have been liable to pay tax had proper steps been taken. Further, by this reassessment, the liability cast on the assessee to pay the tax is apersonal liability, which, in law, is not permissible in respect of the income of the deceased. In our opinion, therefore, the notice issued under section 34(1)(b) ofthe Act to the assessee and the consequent reassessment is bad in law.
17. The decision in Maharaja Of Patiala v. Commissioner Of Income-Tax (Central), Bombay to which our attention was drawn by Mr. Joshi has, in our opinion, no application to the facts of the present case. The facts of the case, were,; the late Maharaja, who had income from property and business in British India, died on March 23, 1938. On November 23, 1938, the Income-tax Officer, Bombay, sent printed notices under sections 22(2) and 38 of the Income-tax Act addressed to the Maharaja of Patiala, requiring him to make a return of his income from all sources for the assessment years 1937-38 and 1938-39. The return was made under the authority of the then Maharaja, but it was made in respect of the income of the late Maharaja. A contention was raised that the notice was bad inasmuch as the notices were issued in the name of the then living Maharaja and without disclosing that the notices were issued in the capacity as representing the estate of the late Maharaja. In view of the fact that the return made was of the income of the late Maharaja, it was held that though the notice was bad, inasmuch as the notice was not in accordance with the provisions of law, it did not materially affect the assessment. The facts of this case, however, are different. The notice issued to the administrator under section 34 of the Act did not mention that he was required to deliver a return in respect of the income of the deceased. On the other hand, he was called upon to make a return of his income relating to the assessment year 1948-49. The return made by the assessee in fact related to his income of the assessment year 1948-49. The deemed dividend income has been added by the Income-tax Officer to the income of the assessee. These being the facts of the case, it is difficult to hold that the issuance of a notice under section 34(1)(b) was a mere irregularity not affecting the merits of the case.
18. For reasons stated above, our answer to the first question is in the negative.
19. In view of our answer to the first question, the second question does not survive. The assessee will be entitled to his costs. No order on the notice of motion.
20. First question answered in the negative.
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