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.

B.D. Gupta & Sons Versus ITO, Ward-31 (2), New Delhi.

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 ... Business and interest income - whether should be included in the assessee HUF’s total income? - Held that:- Hon’ble Delhi High Court vide its interim order dated 17.2.1984, determined 60% share as undisputed leaving 40% as disputed. Accordingly, a Receiver was appointed to collect rent from all the tenants and also make inventory of goods in the business of M/s Gupta Sports House. A final settlement was arrived at amongst all the family members only in the year 2004. It shows that up to November, 2014, there were no determined shares of the litigants in the house properties and business under the name and style of Gupta Sports House. Going by the prescription of section 168, total income from the estate of late Shri B.D. Gupta, except to the extent of distributed to or applied for the benefit of specific legatees, is required to be charged to tax in the hands of the executor and not the assessee HUF. It is obvious that once an income has arisen from the estate of a deceased and there are provisions under the Act mandating the charge thereon, such income cannot go tax free. Therefore, direct the AO to tax the income from the estate of late Shri B.D. Gupta for the year under consideration in terms of section 168 of the Act. In so far as the assessee under consideration is concerned, there cannot be any inclusion of business or interest income in its hands. 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.