1981 (8) TMI 45 - HC - Income Tax

Deceased person's estate forms one indivisible unit for tax assessment under Section 168 regardless of location

Gujarat HC held that a deceased person's estate, whether situated in India or abroad, constitutes one indivisible estate for tax purposes under Section ... Chargeability of the income from the property in the United Kingdom in the hands of the executors of the estate in India - Nature and quality of the interest of the executor in the estate of the deceased - Interpretation of Section 168 of the Income Tax Act, 1961 - Meaning of word 'estate' - HELD THAT:- In our opinion, the broad submission made on behalf of the assessee with regard to there being separate estates is not well founded in law. The estate of the deceased Maharaja situate within and outside the country is to be treated as one and indivisible for the purposes of the levy of tax under s. 168, irrespective of the fact that there are separate sets of executors appointed under two different wills in respect of the property situate within and without the country. The income from the whole of such estate can be brought to tax in the hands of the executors in the course of a single assessment made against such executors in the status of an association of persons. The clubbing of income which arose or accrued to the executors out of such estate, whether the estate be situate outside India or in India and whether it is vested in general executors or special executors, is permissible under s. 168. In the instant case, the assessment is made on the executors of the estate of the deceased Maharaja. Some at least of the executors were present before the taxing authority. They did not object to the inclusion of the income derived from the property situate abroad in the computation of the total income upon which tax was to be levied in their hands. Indeed, they appear to have furnished the requisite information either in the return or otherwise, which is not clear from the record. The Tribunal has, in terms, found so and although in the statement of case it has been mentioned that a submission was made on behalf of the assessee that an objection was, in fact, taken, the Tribunal has not recorded any further finding on the point. Under these circumstances, the executors must be taken to have exercised the option of abandoning the plea that such income cannot be brought to tax in their hands and they, having not raised an objection at the appropriate time, must be taken to have waived the same (See CIT v. Sumantbhai C. Munshaw [1980 (7) TMI 68 - GUJARAT HIGH COURT]. We are, accordingly of the opinion that the second objection raised on behalf of the assessee is not well founded and that it cannot be entertained. It is true that s. 168 deals with the assessment of the income of the estate of a deceased person in the hands of an executor. The period during which the section applies and remains operative is from the date of the death to the date of complete distribution to the beneficiaries of the estate according to their several interests. The income of the estate during that entire period computed in accordance with the provisions of the Act (after giving effect to sub-s. (4) of s. 168 in the process of such computation) is to be assessed in the hands of the executor by separate assessments made on the total income of each completed previous year or part thereof covered by the said period. If, therefore, the executor becomes functus officio as to any part or whole of the estate and still retains such part or whole in his possession in the character of a trustee either under the provisions of the Will or on account of his dealings, s. 168 would obviously become inapplicable from the point of time the executor has become functus officio. It is only the legal estate that vests in the executor and the vesting is not of the beneficial interest. Still, however, while the administration is incomplete, the executor holds the estate and receives its income on behalf of himself as the person in whom the estate lies vested at that time. It is possible, however, that a will may appoint the same person to be an executor and a trustee or an executor may become a trustee by the manner of his dealings with the estate. However, till the administration has not reached such a point that it could be inferred that the administration has been completed, the executor does not become functus officio and continues to hold the estate and receives income therefrom as an executor and representative of the deceased. As soon as, however, the administration has been completed, say, by the residuary estate having been ascertained and the legacy having been assented to, the executor becomes functus officio and even if he still retains the estate in his possession, he becomes clothed with the character of a trustee. Under such circumstances, the executor loses his vested right of property as an executor and becomes, so far as the title to it is concerned, a trustee under the will and the receipt by him of the income from the estate in his possession is thenceforth in the character of a trustee. Indeed, as pointed out by the Tribunal in the forefront of its order, the wills in question were not even produced before it. The wills have come on the record of the reference only as accompaniments to the statement of case. Under the circumstances, the Tribunal has not at all applied its mind to the above-mentioned aspect of the question, namely, whether qua that part of the estate situate in the United Kingdom, which was the subject-matter of the will dated June 4, 1954, the concerned executors had become functus officio and held such property and derived income therefrom in the character of trustees. The question cannot be answered from that angle merely by the interpretation of the will, for, factual aspects are also involved. Two courses are, therefore, open to us: To call for a supplementary statement of the case from the Tribunal or to decline to answer the question and leave it to the Tribunal to take appropriate steps to adjust its decision in the light of the well-settled legal position referred to earlier. Following the decision of the Supreme Court in CIT v. Indian Molasses Co. Pvt. Ltd. [1970 (8) TMI 9 - SUPREME COURT], we consider it appropriate to decline to answer the question on the ground that the Tribunal has failed to consider and decide the question in all its legal and factual aspects. It will be open to the Tribunal to dispose of the appeals before it in the light of the observations made by this court after determining the said aspect which ought to have been decided. We wish to make it clear, however, that it would not be open to the assessee to raise before the Tribunal the questions which are already concluded by this decision. In the result, for the reasons aforesaid, we decline to answer the question referred to us by the Tribunal for our opinion. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(a) Whether the income arising from the property situate in England, governed by a separate will and administered by different executors, could be taxed in the hands of the executors of the property situate in India under section 168 of the Income Tax Act, 1961;(b) Whether the existence of two distinct wills and two sets of executors created two separate estates for the purposes of income tax assessment, thus precluding the clubbing of income from the two estates in the hands of the executors of the Indian property;(c) Whether the assessment of income from the foreign property could be validly made against the executors of the Indian property without serving notice on all executors and taxing them collectively as an association of persons;(d) Whether section 168 was applicable in the case where executors appointed under the foreign will had become functus officio and were acting as trustees, such that income received by them in the trustee capacity could not be clubbed with income received by the Indian executors and taxed under section 168;(e) The proper interpretation and application of sections 159 and 168 of the Income Tax Act, 1961, in the context of income of a deceased person and income of the estate post-death, including the legal nature of the estate and executors' interests therein;(f) The effect of the Indian Succession Act, 1925, and the general law on succession and executorship on the assessment of income arising from property situate in different countries.2. ISSUE-WISE DETAILED ANALYSISIssue (a) & (b): Taxability of foreign income in hands of Indian executors and existence of separate estatesRelevant Legal Framework and Precedents: Section 168 of the Income Tax Act, 1961, governs the taxation of income of the estate of a deceased person in the hands of the executors. The section treats the estate as a single entity, and if there are multiple executors, they are assessed as an association of persons (AOP). The Indian Succession Act, 1925, defines executors and their powers and contemplates the appointment of executors for limited or specific purposes. Jurisprudentially, the estate of a deceased person has no legal personality; the rights and liabilities devolve upon the legal representatives (executors or administrators).Court's Interpretation and Reasoning: The Court rejected the contention that two separate wills and two distinct sets of executors created two separate estates for income tax purposes. It held that the word 'estate' means the totality of the deceased's property, irrespective of the number of wills or executors appointed for different parts of the property. The estate remains one and indivisible for the purpose of taxation under section 168.The Court relied on authoritative legal definitions from Black's Law Dictionary and Stroud's Judicial Dictionary to emphasize that 'estate' encompasses all property owned by a decedent prior to distribution, including realty and personalty. The Court noted that although for administrative convenience separate executors may be appointed for different properties, this does not create separate estates.Application of Law to Facts: The deceased had executed two wills: one for Indian property and another for English property, appointing different executors for each. However, for income tax purposes, the entire estate, including both Indian and English properties, was to be treated as one. The income from the English property was properly includible in the total income assessed against the executors of the Indian estate as an AOP under section 168.Treatment of Competing Arguments: The assessee argued that separate estates existed because of separate wills and executors, and that income from the English property could not be taxed in the hands of the Indian executors. The Court found this submission to be 'wholly misconceived' and contrary to the legal position and legislative intent behind section 168.Conclusions: The Court concluded that the estate is indivisible for income tax purposes and that income from property situate both in India and England can be brought to tax in the hands of the executors as an association of persons under section 168.Issue (c): Validity of assessment without serving notice on all executors and taxing them collectivelyRelevant Legal Framework: Section 168(1) provides that where there are multiple executors, they are to be assessed as an association of persons. The procedure for assessment requires that all executors be treated collectively.Court's Interpretation and Reasoning: The Court observed that the assessments for the years in question were made against the executors of the estate in the status of an AOP, including income from the foreign property. Although the names of only the Indian executors appeared on the assessment orders, the Court noted that the income from the English property was included with their knowledge and without objection.Key Evidence and Findings: The Tribunal found no indication in the assessment orders or records that the executors objected to the inclusion of foreign income. The Court further noted that the executors appeared to have furnished relevant information regarding foreign income to the tax authorities.Application of Law to Facts: The Court held that since the executors did not object at the appropriate time and allowed the assessment to proceed, they effectively waived the right to challenge the inclusion of foreign income. The Court emphasized that section 168 regulates the method of assessment and does not affect the initial jurisdiction of the tax authority.Treatment of Competing Arguments: The assessee contended that all executors must be served and taxed collectively for the assessment to be valid. The Court rejected this, holding that procedural irregularities that do not affect jurisdiction or are waived do not invalidate the assessment.Conclusions: The Court found the assessment valid despite the absence of formal notice to all executors, as the executors acquiesced in the inclusion of foreign income and did not raise timely objections.Issue (d): Applicability of section 168 where foreign executors have become functus officio and act as trusteesRelevant Legal Framework and Precedents: The role and interest of an executor is legal and fiduciary, vested for the purpose of administration. An executor holds the estate in 'autre droit' (on behalf of the deceased). When administration is complete, the executor becomes functus officio and may become a trustee, holding property beneficially for legatees. Income received by a trustee is not taxable under section 168 as income of the estate but as income of the trustee.Court's Interpretation and Reasoning: The Court explained that section 168 applies only while the executor holds the estate and administers it. Once the executor becomes functus officio and acts as trustee, section 168 ceases to apply to income received in that capacity.Key Evidence and Findings: The Court noted that the Tribunal had not considered whether the foreign executors had become functus officio and were acting as trustees. The wills were not produced before the Tribunal, and the factual determination of whether administration was complete was not made.Application of Law to Facts: Because the Tribunal did not consider this issue, the Court declined to answer the question referred to it, leaving the matter to be decided by the Tribunal after proper consideration of facts and law.Treatment of Competing Arguments: The assessee contended that the foreign executors were trustees and income received by them could not be taxed under section 168 in the hands of the Indian executors. The Court acknowledged this as a valid legal principle but found the factual determination lacking.Conclusions: The Court declined to give a final ruling on this issue and remitted it to the Tribunal for decision after considering the wills and facts.Issue (e): Interpretation of sections 159 and 168 of the Income Tax Act, 1961Relevant Legal Framework: Section 159 deals with assessment of income of a deceased person up to the date of death, extending the legal personality of the deceased for assessment purposes to the legal representative. Section 168 deals with assessment of income of the estate post-death, from date of death to complete distribution.Court's Interpretation and Reasoning: The Court held that section 159 applies only to income of the deceased up to the date of death and does not cover income arising from the estate thereafter. Section 168 governs the assessment of income of the estate from the date of death until distribution is complete. The estate is treated as a single entity for this purpose.Application of Law to Facts: The income from the property situate in England and India, arising after the death of the Maharaja, falls under section 168 and is taxable in the hands of the executors collectively as an AOP.Conclusions: The Court clarified the distinct roles of sections 159 and 168 and confirmed that section 168 governs the assessment of income of the estate post-death as a single entity.Issue (f): Effect of Indian Succession Act, 1925, and general law on succession and executorshipRelevant Legal Framework: The Indian Succession Act defines executors, their powers, and the nature of probate. It recognizes appointments of general and special executors and provides that executors act jointly as one legal representative of the deceased. Sections 211, 224, 248, 255, 257, 311, and 312 of the Act were discussed.Court's Interpretation and Reasoning: The Court emphasized that executors, whether general or special, are legal representatives of the deceased and hold the estate in separate parts but collectively represent the entire estate. The estate does not split into separate estates by virtue of separate wills or executors. The Court cited legal authorities and statutory provisions to support this position.Application of Law to Facts: The two wills and two sets of executors did not create two separate estates under the Indian Succession Act. The executors of the Indian property and the foreign property are collectively legal representatives of the same estate.Conclusions: The provisions of the Indian Succession Act reinforce the view that the estate remains one entity and the executors collectively administer it, supporting the application of section 168 for assessment.3. SIGNIFICANT HOLDINGS'The estate of a deceased person by itself has no legal personality. The rights and liabilities of a dead man devolve upon his heirs, executors and administrators and not upon any fictitious entity known as his estate.''The word 'estate' means the totality or entirety of the property of a deceased, as is evident from the following statement of law explaining the true import of the said word in Black's Law Dictionary, 5th Edition, at page 491: 'The total property of whatever kind that is owned by a decedent prior to the distribution of that property in accordance with the terms of a will... It means, ordinarily, the whole of the property owned by anyone, the realty as well as personalty.'''Section 168 contemplates and takes care of such a situation by providing that the income of the estate of a deceased person shall be chargeable to tax in the hands of the executor, if there are more executors than one, then as if the executors were an association of persons.''The machinery thus provided ensures the entire income of the whole estate being brought to tax in the hands of the executors under a single assessment.''Where there are two or more executors, they are regarded as one person, and they have ordinarily a joint interest in the estate. All co-executors are regarded in the light of an individual person and they have, therefore, a joint and entire interest in the estate of the testator, which is incapable of being divided.''Section 168 applies only while the executor holds the estate and receives income therefrom as executor and representative of the deceased. As soon as the administration has been completed, the executor becomes functus officio and, if still retaining the estate, becomes a trustee. Income received thereafter is in the character of a trustee and section 168 becomes inapplicable.''Section 159 applies to the assessment of income of the deceased only up to the date of his death and not up to the end of the accounting year in which the death occurred. The income of the estate for the period from the date of death to the date of complete distribution is assessable under section 168.'Final determinations:- The estate of the deceased Maharaja situate in India and England is one and indivisible for income tax purposes under section 168.- Income from the entire estate, including foreign income, is taxable in the hands of the executors collectively as an association of persons.- The assessment made against the executors of the Indian property including foreign income was valid, as the executors did not object to inclusion of foreign income and effectively waived procedural objections.- The question whether the foreign executors had become functus officio and were acting as trustees, thereby excluding such income from taxation under section 168, was not decided and was remitted to the Tribunal for consideration.- Sections 159 and 168 operate distinctly: section 159 covers income up to death, and section 168 covers income of the estate post-death.