TaxTMI 
TaxTMI 
TaxTMI 
2006 (3) TMI 274
X X X X Extracts X X X X
X X X X Extracts X X X X
....------------------------------------------------------ 1. 5, Lattice Bridge Road, Chennai 14,54,000 -------------------------------------------------------- 2. 225A, Anna Nagar, Chennai 8,75,000 -------------------------------------------------------- 3. 9, L.B. Road, Chennai 6,30,000 -------------------------------------------------------- The returns were processed under s. 143(1)(a) or s. 143(1) of the IT Act, 1961 as the case may be for all these assessment years. Subsequently, the AO issued notice under s. 148 of the Act for the asst. yrs. 1997-98 to 2001-02 on 12th Nov., 2003 on the reasoning that the assessee could not pay back the principal amount borrowed as mentioned above. He also could not make the payment of interest on the borrowed capital. So, the bank charged interest on interest. The assessee claimed deduction in respect of interest on interest under s. 24(1)(vi) of the Act. The assessee vide letter dt. 27th Nov., 2003 requested the AO to treat the original returns filed as filed in response to the notice under s. 148 of the Act in all these five years. For the asst. yr. 2002-03, the regular assessment was framed after issuance of notice under s. 143(2) of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rected the AO to issue notices to both the representatives to implead both of them as legal representatives and held that "I have also issued notices to both the legal heirs in exercise of my powers under s. 251 of IT Act." Further, the CIT(A) while upholding the order of the AO, has given the following reasoning: "It is clear by continuing the appellate proceedings through the Authorized Representative of one of the legal heirs (it may be mentioned here that Sri Raghunandan Prabhakar has neither appeared before me in response to notice dt. 21st Sept., 2005 nor he has authorized anyone to appear on his behalf before me), the legal heirs have ratified all the submissions filed before the AO and before me after the death of Sri A.Y. Prabhakar. In fact, the submissions made before the AO after the death of Sri A.Y. Prabhakar and made before me during the course of appellate proceedings are quite similar. I, therefore, do not find any force in this technical objection of the Authorized Representative of the legal heirs of the appellant. It may, however, be noted that despite all these opportunities given to the legal heirs of the appellant, no submissions on the merits of the case has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uld like to inform you that my father Mr. A.Y. Prabhakar expired on 11th Nov., 2004. The xerox copy of the death certificate and the legal heirs certificate are enclosed herewith for your records. As per the legal heirs certificate Mr. Raghunandan Prabhakar and Mr. Ravi Prabhakar are the only legal heirs of the deceased Mr. A.Y. Prabhakar. This is for your kind information. Thanking you, Yours faithfully Sd/- (Ravi Prabhakar) Enclosed: 1. The xerox copy of death certificate duly notarized 2. The xerox copy of legal heirs certificate duly notarized." 5. It is seen from the above letter that the death certificate and legal heir certificate were produced before the AO for their records wherein the following persons were declared as the legal heirs of the deceased assessee, viz., (i) Mr. Raghunandan Prabhakar and (ii) Mr. Ravi Prabhakar. It is seen that both the legal heirs/legal representatives are adults. Despite this letter, it is observed from the assessment orders passed for the asst. yr. 1997-98 that the assessment was framed on the deceased assessee, Mr. A.Y. Prabhakar, Individual as if he is alive. The relevant portion of the assessment order is being reproduced as it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ir certificate produced before the AO and both should have been impleaded as legal representatives. He argued that the expression "legal representative" mentioned in s. 159 of the Act takes in plurality of legal representatives. If there are more than one legal representative of the deceased person, then all must be impleaded to make the representation of the estate complete. He further argued that the effort of the CIT(A) to implead the legal heirs at the appellate stage is of no consequence. Once the assessment order is passed on the dead person, the AO cannot implead the legal heir. He further argued that in such circumstances, the defect cannot be cured by setting aside the matter and directing the AO to complete the assessment after issuing the relevant notices and completing the procedure. He further argued that the CIT(A) has given a finding that it is clear that it is not a valid order. He has drawn our attention at p. 18 and the relevant portion starting from third line reads as under: "However, in view of preponderance of case law, it is to be held that in the present case, a defect crept in at the time when the assessment was concluded without issuing notice to one of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(SS)A No. 2000 & 0112004; Asst. yr. 1997-98 to 2002-03 Asstt. CIT, Appellant Business Circle-IV, Chennai-600 034. A.Y. Prabhakar (Late) (Indl.) 51, III Main Road, Respondent Gandhi Nagar, Chennai - 20. Petition to bring on record legal representatives It is ascertained that the (respondent) Sri A.Y. Prabhakar has passed away on 11th Nov., 2004. In view of this, the legal representatives of the respondent are to be brought on record in respect of the above appeal proceedings. In this connection, Sri Ravi Prabhkar, s/o (Late) Sri A.Y. Prabhakar has filed death certificate, heir certificate and also a letter obtained from other legal heir (his brother) Sri Raghunandan Prabhakar nominating him to pursue the appeal (letter enclosed). Hence it is prayed that Sri Ravi Prabhakar, s/o (Late) Sri A.Y. Prabhakar may kindly be impleaded in the above appeal proceedings. Sd/- (S. Chandrasekaran) Place: Chennai-34 Asstt. CIT, Date: 10th Feb., 2006 Business Circle IV, Chennai -34." 8. In view of the facts narrated above and considering the arguments of the learned counsel of the assessee as well as the learned Departmental Representative, first of all, we have to go through the d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssed as payable by the deceased, the liability being however limited to the extent of the estate left by the deceased. The word "legal representative" in s. 24B, sub-s. (1), meant all the legal representatives collectively, if there were more than one. When there was a plurality of legal representatives all of them should concur in applying for the inspection of the statements made to the ITO or for obtaining certified copies. But where they did not agree, one of them alone could not be held to represent the deceased and, therefore, one of them alone could not have inspection;" 9. According to the general rule, if a person dies leaving behind him more than one heir, under s. 159 of the Act, the AO is under obligation to proceed to assess the total income of the deceased against all the legal representatives. The expression "legal representative" in s. 159 of the Act takes in plurality of legal representatives. Thus, if there are more than one legal representative of the deceased person, all must be impleaded to make the representative of the estate complete and if notice is served on only one of the legal representatives, there would not be complete representation of the estate an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ituted and there may be anyone of the five contingencies, in respect of an assessment year. In the present case only one contingency will apply, i.e., the assessment was taken up but could not be completed and the assessee dies before such completion In the circumstances, the AO has to bring all the legal representatives on record and continue the proceedings on the legal representatives as legal representatives of the assessee. No doubt, the proceedings have to be continued from the point where the death took place, and the income of the deceased is to be assessed in the hands of the legal representative as if the latter was the assessee. The s. 159(2) extends the personality of the deceased and treats the legal representative as the assessee in respect of all the proceedings even against the deceased already taken. Thus, where the assessee died before the proceedings were completed, it is incumbent under s. 159(2) on the AO to bring the legal representative of the deceased on record and to proceed from the stage it was left at the time of death of the deceased. 10. Now, we have to go through the provisions of ss. 159(1), (2) and (3) of the Act which reads as under: "159(1) Wher....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bserved that in that case, the legal representative was impleaded and then the assessment was completed. No doubt, the assessment was completed in the name of the deceased person instead of the legal heir and there was a finding of the Tribunal that since the legal heir of the deceased was impleaded and was heard, it could not be said that the assessment order was passed on a dead person. Here, in the present case, the legal representatives were not impleaded despite receipt of information by the AO, the assessment order was passed on a dead person. Further, the learned Departmental Representative relied on the decision of the Hon'ble Madhya Pradesh High Court in the case of Smt. Kaushalyabai vs. CIT (1998) 149 CTR (MP) 205 : (1999) 238 ITR 1008 (MP). In this case, the Hon'ble High Court found that there is only legal representative, i.e., widow of the assessee who has fully participated in the proceedings and the defect if any, stands automatically cured. In view of this fact, the Hon'ble Madhya Pradesh High Court has answered this question against the assessee and in favour of the Revenue. In the present case in hand, there are two legal representatives and both have not been imp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... or service of notice to one of the legal representatives was sufficient, or there was only one legal representative who participated in the proceedings. But in the present case in hand, there are two legal representatives and the AO was informed before the completion of the assessment that the assessee died leaving behind two legal heirs and copy of legal heirs' certificate along with death certificate was filed. However, the assessment was completed on the dead person. There may be cases where there are several legal representatives but one may represent whole interest of the deceased and in such cases there being complete representation of the interest of the deceased before the AO, the assessment made would bind the estate of the deceased. We agree with the learned Departmental Representative that such cases may arise, where one legal representative is managing the entire estate of the deceased and, he, therefore, completely represents the interest of the deceased. This view has been fortified by the Hon'ble Gujarat High Court in the case of Chooharmal Wadhuram and the Hon'ble apex Court in the case of Mrs. Suseela Sadanandan & Anr. Then there may be cases, where one legal repr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he situation, the Hon'ble apex Court has held as under: "The correct position is that apart from s. 24B no assessment can be made in respect of the income of a person after his death: see Ellis C. Reid vs. CIT (1930) 5 ITC 100. In that case, and that was a case before s. 24B was enacted, a person was served with a notice under s. 22(2) of the IT Act but no return was made within the period specified and he died. It was held that no assessment could be made under s. 23(4) of the Act after his death. At p. 106 it was observed: 'It is to be noticed that there is throughout the Act no reference to the decease of a person on whom the tax has been originally charged, and it is very difficult to suppose the omission to have been unintentional. It must have been present in the mind of the legislature that whatever privileges the payment of income-tax may confer, the privilege of immortality is not amongst them. Every person liable to pay tax must necessarily die and, in practically every case, before the last instalment has been collected, and the legislature has not chosen to make any provisions expressly dealing with assessment of, or recovering payment from, the estate of a deceased p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....implied consent, what will be the consequence of the order passed on a dead person. Now, under the general law, it is a fundamental principle, well established, that a decree passed by a Court without jurisdiction is a nullity and that its validity could be set up whenever and whatever, it is sought to be enforced or relied upon, and even at the stage of execution and even in collateral proceedings. A defect of jurisdiction whether it is pecuniary or territorial, or whether it is in respect of the subject-matter of the action, strikes the very authority of the Court to pass any decree and such a defect cannot be cured by the consent of the parties. This view has been strongly supported by the Hon'ble apex Court's decision in the case of Kiran Singh vs. Chaman Paswan AIR 1954 SC 340, 342. The provisions of s. 159(2) of the Act makes it very clear that any proceedings of assessment commenced before the death of the deceased may continue but only against the legal representative and in proceeding which could have been taken against the deceased if he had survived, may be taken but only against legal representative and no order can be passed on a dead person. No doubt, the legal repres....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndan had alone been managing the entire estate, the Court could have come to the conclusion that he was the legal representative of the deceased and, therefore, represented the estate in the assessment proceedings." Further, the Hon'ble apex Court has laid down the exception as under: "Though notices served only on one of the executors, the proceedings might show that the estate was properly represented by E.D. Sadanandan with the consent, express or implied, of the other executors and heirs." Further, the principle laid down is that the cases in which the situation may arise is where the ITO bona fide and diligently believes one or more persons to be the only legal representatives of the deceased and initiates proceedings by serving notice on them and subsequently it is found that, besides those served, there were also other legal representatives of the deceased. Then there is no reason why in such cases the general rule evolved in the field of civil law should not be applied. 16. No doubt, the Hon'ble apex Court has laid down the general rule of application but this cannot be applied blindly in the income-tax proceedings. If the principle laid down by the Hon'ble apex Court i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... deceased as both the legal representatives together represented him and therefore, they must all be before the AO in order to enable him to make a valid assessment on the income of the deceased. The assessment which is made on the income of the deceased cannot be valid as against one legal representative and invalid as against another. Once the assessment is made in compliance with the requirement of s. 159 of the Act, it is a valid assessment and the amount of tax assessed can be recovered from all the legal representatives as provided in s. 159(2) of the Act as claimed by the learned Departmental Representative. Then this would lead to a highly anomalous situation that the assessment of income of the deceased person made on participation of one of the legal representatives of the deceased person would be enforceable against another legal representative though he is not impleaded and had no opportunity of contesting the assessment proceedings, the legislature surely have not intended to bring about such an extraordinary result. As per the provisions of s. 159(2)(a) of the Act that any proceedings commenced before the death of the deceased may be continued thereafter against the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Court that the legislature intended to use the words in their usual and natural meaning. If such a meaning, however, leads to absurdity, or great convenience or for some other reason is clearly contrary to the obvious intention of the legislature, then words which ordinarily are mandatory in their nature will be construed as directory or vice versa. In other words, if the language of the statute, considered as a whole and with due regard to its nature and object, reveals that the legislature intended the words, 'shall' and 'must' to be directory, they should be given that meaning. Similarly, under the same circumstances, the word 'may' should be given a mandatory meaning, especially where the statute concerns the rights and interest of the public, or where third persons have claim de jure that a power shall be exercised or whenever something is directed to be done for the sake of justice or the public good, or is necessary to sustain the statute's constitutionality........ 'While the words 'shall' , and 'may' are the ones generally involved in determining whether a statute is mandatory or merely permissive, there are other words and expressions which create the same problem, a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is a regular income-tax assessee and the returns for the asst. yrs. 1997-98 and 1998-99 were tiled and the same were processed under s. 143(1) of the Act. Subsequently, the AO discovered that the assessee-HUF has taken a loan of Rs. 9 lakhs from the Indian Bank for construction of the property and the assessee could not repay the principal as well as the interest on such capital of Rs. 9 lakhs. The assessee claimed interest on capital as well as interest on unpaid interest against the income from house property and the same was allowed by the AO while processing the return under s. 143(1) or 143(1)(a) as the case may be. The AO noticed from the records that the excess relief has been allowed to the Assessee on account of interest on unpaid interest and, therefore, he issued notices under s. 148 of the Act in view of the provisions of s. 147 of the Act. Accordingly, the AO reopened the assessments for both the years on the reasons to believe that the income chargeable to tax had escaped assessment for the asst. yrs. 1997-98 and 1998-99 by issuing notices under s. 148 of the Act on 18th Dec., 2003. The AO framed the reassessments on account of interest on unpaid interest claimed by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tral Provinces Manganese Ore Co. Ltd. vs. ITO (1991) 98 CTR (SC) 161 : (1991) 191 ITR 662 (SC), for initiation of action under s. 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is 'reason to believe', but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the AO is within the realm of subjective satisfaction [see ITO vs. Selected Dalurband Coal Co. (P) Ltd (1996) 132 CTR (SC) 162 : (1996) 217 ITR 596 (SC); Raymond Woollen Mills Ltd. vs. ITO (1999) 152 CTR (SC) 418 : (1999) 236 ITR 34 (SC)]. The scope and effect of s. 147 as substituted w.e.f. 1st April, 1989, as also ss. 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....: (1999) 236 ITR 832 (Guj), the AO can hardly have reason not to believe that any income chargeable to tax has escaped assessment. It is, however, clarified that the legality of the impugned notice under s. 148 of the Act and the very assumption of jurisdiction under s. 147 only being under challenge in this case, it is neither within the scope nor an issue in this judgment to pronounce upon the questions whether the non-compete fees received by the petitioner was a capital receipt or revenue receipt and whether, in fact, there was escapement of income chargeable to tax. These issues are, therefore, left open for decision in accordance with law." 22. In view of the case law cited above, we are of the view that reopening after the processing of return under s. 143(1) of the Act is permissible on fulfillment of other conditions as prescribed under s. 147 of the Act. Accordingly, we uphold the reopening as there is no change of opinion and not at all any opinion formed by the AO at the time of processing of return. In view of this, we confirm the orders of the lower authorities and the assessee fails on this issue for both the assessment years. 23. As regards to communication record....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccordingly, the assessee has no case on this issue. Accordingly, we dismiss this issue. 28. The next common issue in all these three appeals is as regards to merits of the case which reads as under: "For that the CIT(A) failed to appreciate the fact that the interest claimed is the actual interest due to the bank towards the amount taken for the construction and development of the property." 29. We have heard both the sides and gone through the facts of the case. The facts of the case are that the assessee has taken a loan of Rs. 9 lakhs from the Indian Bank for construction of house property. The assessee could not repay the principal as well as the interest on this capital of Rs. 9 lakhs. The assessee while filing the returns of income for all these three years, claimed interest on capital as well as interest on unpaid interest as deduction against the income from house property. The AO disallowed the claim and added to the returned income to the extent of interest on unpaid interest on such capital amount of Rs. 9 lakhs. The learned counsel of the assessee relied on the case law of the Hon'ble apex Court in the case of Shew Kissen Bhatter vs. CIT 1973 CTR (SC) 293 : (1973) 89....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to be a fallacious argument. The compound interest is payable not on the capital charge but on that part of the interest on which he has agreed to pay interest. That is not the capital taken note of by s. 9(1)(v). If we accept Mr. Chagla's contention as correct, then the door will be open for evasion of tax. All that the debtor need do is not to pay interest regularly but utilize that amount for other purposes and make the Revenue pay compound interest payable by him and thus derive advantage out of his own omission. Such an interpretation is impermissible." It is seen from the above case law of the Hon'ble apex Court that the principle laid down is that in case of capital charge, the compound interest is not permissible. Here, in the present case in hand, the assessee is claiming deduction on account of interest on unpaid interest to the bank on original capital. In view of this, on merits, the assessee has no case. 30. Alternatively, the assessee's counsel submitted that no opportunity of being heard was allowed after the death of late Sri A.Y. Prabhakar, who was Karta of HUF. No doubt, Shri Ravi Prabhakar, Karta was substituted in place of late Sri A.Y. Prabhkar but he was no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h these ladies are to be treated as having died intestate. Accordingly, their properties were distributed as per the relevant provisions of Hindu Succession Act, 1956. According to these provisions, Sri A.Y. Prabhakar, Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar being the only persons to succeed to the properties are bound to divide the properties equally among themselves. Sri A.Y. Prabhakar, Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar have been showing 1/3 share of rental income from the properties which originally belonged to Smt. Kanthi Prabhakar and Smt. Padmavathi Ammal. The AO, however, has assessed the 1/3 share of the appellant, Sri A.Y. Prabhakar on protective basis because according to him Sri A.Y. Prabhakar was not entitled to any share of rental income from the properties belonging to both the ladies mentioned above. Besides this, I find that the AO has reopened the assessments of the estate of (late) Smt. Kanthi Prabhakar and the estate of (late) Smt. Padmavathi Ammal for asst yrs. 1996-97 and 1997-98. In my order of even date in ITA Nos. 133/2004-05 and 134/2004-05 dt. 28th Sept., 2005, I have held that no assessment can be made on the estates of b....