2015 (8) TMI 166 - AT - Income Tax

Income Tax Appeal: Taxation of HUF income in executor's hands per Section 168. Family settlement not retroactive.

The Tribunal held that the business and interest income should not be taxed in the assessee HUF's hands but in the executor's hands as per section 168 of ... Only the right person is to be assessed - income of the estate of a deceased chargeable to the executor - legal representative liable for income of the deceased up to date of death - no HUF where no valid Hindu undivided family came into existence - income is taxable only in the hands of the person to whom it belongsNo HUF where no valid Hindu undivided family came into existence - income is taxable only in the hands of the person to whom it belongs - Whether business and interest income could be included in the total income of B.D. Gupta & Sons (HUF). - HELD THAT: - The Tribunal examined the interim judgment of the Hon'ble Delhi High Court which found that the properties and the business were self-acquired by Shri B.D. Gupta and that the HUF had not validly come into existence. The Court noted that mere filing of a return in the name of HUF does not make HUF liable to tax unless the income actually belongs to the HUF and that section 171 can be invoked only if a valid HUF pre-existed. Reliance was placed on the principle that only the person liable as per law is to be assessed; taxation cannot be sustained merely on the basis of an inadvertent return by a wrong person. On these findings the Tribunal held that the CIT(A)'s direction to tax the business and interest income in the hands of the HUF was unsustainable. [Paras 5, 6]Business and interest income are not includible in the hands of B.D. Gupta & Sons (HUF).Legal representative liable for income of the deceased up to date of death - income of the estate of a deceased chargeable to the executor - only the right person is to be assessed - Who is the correct person to be assessed in respect of the income arising from the properties and business of the deceased for the year in question. - HELD THAT: - The Tribunal analysed sections 159 and 168 and held that income of the deceased up to the date of death is assessable to the legal representative under section 159, while income arising from the estate after death until complete distribution is assessable to the executor/administrator under section 168 on a year-to-year basis. Noting that the family settlement which fixed shares occurred only in 2004 and that, prior thereto, a receiver had been appointed and shares were undetermined, the Tribunal directed that the income from the estate for the year under consideration must be assessed in terms of section 168. The Tribunal further applied the principle from Ch. Atchaiah that where a wrong person has been taxed the Assessing Officer must tax the right person in accordance with law. [Paras 8, 9, 10, 11, 12]Income from the estate of late Shri B.D. Gupta for the year under consideration is to be assessed in the hands of the executor/administrator in terms of section 168; the AO is directed to tax the estate accordingly.Final Conclusion: The Tribunal allowed the assessee's appeal to the extent that business and interest income shall not be includible in the HUF's income and directed the Assessing Officer to assess the income from the estate of the deceased in accordance with section 168; the appeal was disposed of on these terms. Issues Involved:1. Taxability of business and interest income in the hands of the assessee HUF.2. Taxability of income from house property.3. Application of sections 159 and 168 of the Income Tax Act regarding the estate of a deceased person.4. Validity of the Family settlement and its impact on the taxability of income.Issue-wise Detailed Analysis:1. Taxability of business and interest income in the hands of the assessee HUF:The primary issue was whether the business and interest income should be included in the assessee HUF's total income. The Tribunal noted that the Hon'ble Delhi High Court had previously determined that the properties and business were self-acquired by Shri B.D. Gupta and not by the HUF. The Court had appointed a receiver to manage the business, indicating that the business income should not be considered HUF income. The Tribunal emphasized that merely filing a return in the capacity of HUF does not make the HUF liable for tax unless the income actually belongs to the HUF. The Tribunal relied on the Supreme Court's judgment in ITO Vs. Ch. Atchaiah, which states that only the right person should be assessed. Consequently, it was held that the decision of the CIT(A) to tax business and interest income in the hands of the HUF was not sustainable.2. Taxability of income from house property:The CIT(A) had divided the total income into business income, interest income, and house property income, holding that the house property income belonged to individuals and not the HUF. This was based on the Family settlement, which partitioned the house properties among the litigants. The Tribunal did not find any material to dispute this finding and thus did not include the house property income in the hands of the HUF.3. Application of sections 159 and 168 of the Income Tax Act regarding the estate of a deceased person:The Tribunal discussed the applicability of sections 159 and 168 of the Income Tax Act. Section 159 deals with the liability of legal representatives to pay tax on behalf of the deceased, while section 168 pertains to the income of the estate of a deceased person being chargeable to tax in the hands of the executor. The Tribunal clarified that the income of the deceased up to the date of death is taxable in the hands of the legal representatives, and the income from the estate after the death till complete distribution is taxable in the hands of the executors. Since the Family settlement defining the shares of the beneficiaries occurred in 2004, the income prior to this settlement should be taxed as per section 168.4. Validity of the Family settlement and its impact on the taxability of income:The Tribunal considered the Family settlement dated 5.11.2004, which defined the shares of the beneficiaries. It was held that the Family settlement could not be considered to have a retrospective effect for tax purposes. Therefore, the income arising from the estate of Shri B.D. Gupta before the settlement should be taxed in the hands of the executor as per section 168, and not in the hands of the HUF. The Tribunal directed the AO to tax the income from the estate of late Shri B.D. Gupta in terms of section 168, ensuring that the income does not go tax-free.Conclusion:The Tribunal concluded that the business and interest income should not be included in the hands of the assessee HUF. Instead, the income should be taxed in the hands of the executor as per section 168 of the Income Tax Act. The appeal was disposed of in these terms, with the decision pronounced on 31st July 2015.