Taxation Aspects of Income of Deceased Person

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Taxation Aspects of Income of Deceased Person

Did you realize that the estates of the deceased might be taxed? It may sound strange that a deceased person’s income tax returns must be submitted if he/she has taxable income. His legal heir/representative is responsible for filing the return on his behalf for the income generated till death. The legal successor may register on the Income Tax website for filing the return on behalf of the dead. Let us discuss Legal Heir in Taxation Aspects of Income of Deceased Person in this article..

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Section 159 of the Income Tax Act,1961 defines ‘Legal Representatives’. The provisions of the above section allow for an assessment to be made and tax to be recovered in respect of the income of a natural assessee who was alive during the previous year but died either before or after the assessment processes were commenced or finished. It outlines a legal representative’s rights and responsibilities. However, such representative’s obligation is restricted only to the extent that the deceased’s estate is capable of satisfying the tax due, as per sub-section (4) and (5) of Section 159.

Legal Representative in Taxation Aspects of Income of Deceased Person

Section 2(29) of the Income Tax Act, 1961 states that “legal representation has the meaning accorded to it in paragraph (11) of section 2 of the Code of Civil Procedure, 1908.” According to Section 2(11) of the Code of Civil Procedure, a “legal representative” is “a person who in law represents the estate of a deceased person, and includes any person who interferes with the estate of the deceased, and where a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued.”

Another term that is frequently used as a replacement for legal representation is legatee. Similarly, Legatees are the individuals or entities named in a decedent’s will to receive any gift (a “legacy”) from the estate. In other words, the legatees are Will’s beneficiaries.

Difference between Testate v/s Intestate

The term “death by testate” refers to a case in which the dead has left a will. The absence of a will by the dead person is intestacy. In the case of testate succession, the will normally name an executor. However, there are some cases where the executor’s name is not there in the will. Beneficiaries submit letters of administration if no executor is in the will or if the dead did not leave a will. As a result, the Court appoints an executor until the deceased’s inheritance is distributed through probate.

Executors Role in Taxation Aspects of Deceased Person

Section 168 of the Income Tax Act, 1961 states that income flowing to a deceased person’s estate is taxable in the hands of the executor. It goes on to say that separate assessments will be made on the entire income of each completed preceding year or portion thereof that is included in the period from the date of death to the date of complete distribution to the estate’s beneficiaries based on their various interests. In the event of partial distribution, the income distribution from the separation of the estate becomes taxable in the hands of the legatee.

Liability of Legal Representative in Taxation Aspects of Deceased Person

According to Section 159(4) of the Income Tax Act, 1961, if a legal representative creates a charge on, disposes of, or parts with any asset of the deceased’s estate while the deceased’s liability for tax on income remains unpaid, the legal representative is personally liable for any tax payable by him in his capacity as the legal representative. Such obligation, however, is binding up to the value of the assets charged, sold, or parted with. 

Please keep in mind that in this scenario, the legal representative’s personal obligations are binding upon him up to the amount of tax owed not any interest or penalty penalties.

Furthermore, Section 167 of the Indian Succession Act of 1925 states that where property specifically bequeathed is subject to any pledge, lien, or encumbrance created by the testator himself at the death of the testator, the legal representative, if he accepts the bequest, shall accept it subject to such pledge or encumbrance, and shall be liable to make good the amount of such pledge or encumbrance. It does not, however, imply that they will contain any clauses requiring the legal representative to pay the deceased’s obligations. Any legal representative’s responsibility shall be effective only upon acceptance of the asset through inheritance by him by will. Further, the responsibility may bind the legal representative up to the value of such asset.

Proceedings of Assessment

If a person dies while his evaluation procedures are pending, the processes may be in a continuous state against his legal representatives. Furthermore, any proceeding may takes place against the legal representative in place of the deceased person.

Implications of Capital Gains

According to Section 47 of the Income Tax Act, 1961, the transfer of a capital asset under a will does not act as “transfer,” and hence, no capital gains result. 

The question therefore becomes, what is the consequence of a capital asset transfer intestate (death without a will)? It is important to understand that the transfer of assets on death is not a transfer but rather a transmission. There is no consideration for the same. As a result, no capital gains will be acting in the event of a testate or intestate transfer

The assets received are capital receipts for the receiver, not income. Section 56(2)(x), on the other hand, levies tax on the receipt of assets without due consideration. The provision thereof exempts receipts by will or inheritance, therefore such receipts are exempt in the hands of the legatee. The cost of acquisition shall equal the cost to the prior owner. Further, it shall also include the duration of holding of the previous owner’s holding period.

Set Off and Carry Forward of Loss

Except in the case of succession through inheritance, Section 78(2) of the Income Tax Act, 1961 expressly specifies that the successor shall not carry over the losses of the predecessor. As a result, a legal successor will be able to carry over and set off the deceased’s losses, but the question is whether the same will apply to other legatees as well.

Relevant Case Laws

  • Custodian of Branches of BANCO National Ultramarino v. Nalini Bai NaiqueAIR 1989 SC 1589: In this Case, the court states that; ‘legal representative,’ as per the Civil Procedure Code, is a person who represents the estate of a deceased person. Further, includes any person who interferes with the estate of the deceased. Further, where a party sues or issued in representative character, the person to whom the estate devolves on the death of the party suing or sued. The term is extensive in nature and broad in reach; it does not limit itself to legal heirs alone; rather, it specifies a person who may or may not be heir, competent to inherit the property of the dead, but who should represent the estate of the deceased person and It comprises heirs as well as individuals who represent the estate even without a rifle, such as executors or administrators in possession of the deceased’s inheritance. The term “legal representative” would apply to all such individuals.
  • Madhya Pradesh High Court has held, in the case of CIT vs. G. B. J. Seth and Anr(1982) 133 ITR 192 (MP): In this case, the court states that, despite the fact that the evaluation is on the executor or executors, it is, for all practical reasons, the assessment of the deceased. The position of AOP is only for statistical reasons and that, regardless of the assessee’s status as an AOP. The court entitles the executors to set off of the carried forward losses suffered by the dead previous to his death.
  • Bipinbhai Bachubhai Kataria Vs ITO (Gujarat High Court) Special Civil Application No. 7850 of 2019: In this case, the court held that; According to Section 159(2)(b) of the Act, the Assessing Officer may issue a fresh notice under Section 148. Further Assessing Officer may issue this notice against the Legal representatives. However, he cannot continue the proceedings on the basis of an invalid notice issued under Section 148 of the Act.

Takeaway

The main takeaway is to understand the distinction between the words legal heir and legal representative. Further, death by testate and intestate, the scope of a legal representative’s obligation. Further, the two evaluations of income are in the hands of the executor and legatee. Without the considerable knowledge of these terms in taxation aspects of income of the deceased person, some issues may arise. In order to avoid any such issue successor should keep in mind the important aspects before filing the ITR
To know more about Taxation Aspects of Income of Deceased Person kindly connect to our team of Experts.

CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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