2002 (8) TMI 100 - HC - Income Tax

Estate Duty, Net Principal Value, Death Of One Partner - We are of the view that the disclosure made under the Voluntary Disclosure Act relates back to previous years in which the income was earned and the liability arose at the end of the previous year in which the income was earned and consequently it will be a debt incurred prior to the death of a partner. In other words, it was a pre-existing liability and not a new liability which arose subsequent to the date of death of K. Periaswamy. We are also of the view that the object of the declaration under the Voluntary Disclosure Act is to disclose the already existing liability and to enjoy the estate free from liability and without fear of penalty or prosecution proceedings. We hold that the liability to income-tax on the concealed income arose on the last date of the previous year in which the income was earned and since it was a pre-existing liability, that liability is liable to be deducted as a debt in the computation of the principal value of the estate of the deceased.

Summary

Issues:
Interpretation of the Estate Duty Act regarding the deductibility of tax paid under the Voluntary Disclosure Scheme in determining the principal value of the estate passing on death.

Analysis:
The case involved a reference under the Estate Duty Act, 1953, concerning the deductibility of tax paid under the Voluntary Disclosure Scheme in determining the principal value of the estate of a deceased partner in a firm. The accountable person claimed that the tax paid by the firm under the scheme should be considered in determining the deceased's estate value. The Revenue argued that the liability arose after the death, making it inadmissible for deduction. The court analyzed previous judgments and the nature of liabilities under the Act.

The court considered the chargeable event under the Estate Duty Act as the death of a person and the charge on properties passing upon death. It focused on the deductibility of debts and encumbrances under the Act. Referring to Supreme Court and High Court decisions, the court highlighted that liabilities arising after death are generally not deductible in determining the estate value. The court distinguished cases related to deductions for estate duty and marriage expenses, emphasizing the importance of pre-existing liabilities for deductibility.

The court examined the nature of the Voluntary Disclosure Act and the timing of the declaration made by the firm post the deceased's death. It emphasized that the declaration related to income earned in previous years, and the liability to tax was recognized under the Income-tax Act. Citing various court decisions, including those by the Supreme Court and different High Courts, the court established that liabilities under voluntary disclosure schemes are pre-existing debts and deductible in computing the estate value.

Relying on precedents, the court held that tax paid under the Voluntary Disclosure Scheme, relating to income earned in previous years, constitutes a debt owed and is deductible in determining the net wealth of the deceased partner's estate. The court rejected the Revenue's argument and ruled in favor of the accountable person, stating that the tax liability was a pre-existing debt and should be deducted. Consequently, the court answered the referred question in the negative, favoring the accountable person and against the Revenue, with no order as to costs.