2011 (8) TMI 78 - HC - Income Tax

Reassessment - Addition - Recovery from legal heirs - Inherited property versus gifted property - whether it is necessary to issue notice to all the legal heirs and in case notice is not issued to the legal heirs, are the entire assessment proceedings vitiated or not - as per the law if the donor dies then the tax payable by the donor cannot be recovered from the gifted property but can only be recovered from the estate inherited by the legal heirs from the donor - Nonissuance of notice to some of the legal heirs of the deceased is merely an irregularity and does not affect the validity of re-assessment of the notice - the legal heir to whom notice has been issued cannot challenge the validity of the re-assessment proceedings on the ground that notice has not been issued to all the legal hairs - It is made clear that she will be liable to pay this amount only out of the estate inherited from her mother and not out of the gifted property - Decided against the assessee

Summary

Issues:
1. Validity of assessment of gift under Gift-tax Act.
2. Necessity of issuing notice to all legal heirs in assessment proceedings.
3. Impact of non-issuance of notice to all legal heirs on assessment proceedings.

Analysis:
1. The judgment concerns the assessment of a gift under the Gift-tax Act, focusing on whether the Income Tax Appellate Tribunal (ITAT) was correct in canceling the assessment due to a defective notice issued under Section 16(1) of the Act. The question of law framed pertained to the correctness of the cancellation based on non-issuance of notice to all legal heirs of the assessee, challenging the jurisdiction and legality of the assessment.

2. The case involved a situation where a survey revealed ownership of a residential flat claimed to be gifted to the assessee by her deceased mother. The Assessing Officer treated it as a deemed gift under Section 4 of the Gift-tax Act and issued a notice to the assessee. However, the notice failed to specify the capacity in which it was addressed to the assessee, leading to contentions regarding the nature of the property ownership and the tax implications.

3. The Assessing Officer's decision was upheld by the Commissioner Income Tax, but the ITAT allowed the appeal on the grounds of the defective notice, emphasizing the necessity of issuing notice to all legal heirs. The judgment referred to various legal precedents, including a Division Bench ruling of the Punjab and Haryana High Court, to establish that non-issuance of notice to all legal heirs is an irregularity that does not invalidate the assessment proceedings.

4. Ultimately, the High Court set aside the ITAT's order, holding that the legal heir to whom notice was issued cannot challenge the validity of the reassessment proceedings based on non-issuance of notice to all legal heirs. The court clarified that the assessee is liable to pay the assessed amount only out of the estate inherited from the deceased mother, not from the gifted property. The judgment emphasized that this ruling does not bind other legal heirs, leaving room for the revenue to pursue appropriate actions against them if necessary.

5. In conclusion, the High Court answered the legal question posed, disposing of both appeals without costs, and establishing the legal principle that the validity of reassessment proceedings is not affected by the non-issuance of notice to all legal heirs, clarifying the tax liability of the assessee and the scope of recovery from the inherited estate.