1963 (12) TMI 3 - SC - Income Tax

Whether the Act contains machinery for assessing dividends deemed to have been distributed by virtue of an order under section 23A in respect of the shares held by a shareholder when before the date on which the fiction of distribution becomes effective--viz. the date of the relevant general meeting of the company--the registered shareholder has died and his representatives have not been substituted in the register of the company.? Held that - The Legislature not having made any provision generally for assessment of income receivable by the estate of the deceased person the expression any tax which would have been payable by him under this Act if he had not died cannot be deemed to have supplied the machinery for taxation of income received by a legal representative to the estate after the expiry of the year in the course of which such person died. The charge to income-tax has therefore to be in accordance with and subject to the provisions of the Act and the Legislature has not provided that the income received by a legal representative which would but for the death of the deceased have been received by such deceased person is to be regarded for the purpose of assessment as the personal income of the legal representative. To assess tax on such receipts on the footing that it is the personal income of the legal representative is to charge tax not in accordance with the provisions of the Act. We therefore agree with the High Court though for somewhat different reasons. Appeal dismissed.

Issues Involved:
1. Validity of assessment on the administrator of the estate of the deceased shareholder.
2. Assessability of deemed dividends in the hands of the administrator.

Issue-wise Detailed Analysis:

1. Validity of Assessment on the Administrator of the Estate of the Deceased Shareholder:

The court examined whether the assessment made on James Anderson, the administrator of the estate of the deceased Henry Gannon, was valid in law. The Income-tax Officer issued a notice under section 34(1)(b) of the Income-tax Act, 1922, to Anderson, proposing to reassess the escaped income, which included dividends deemed to have been distributed under section 23A. Anderson's appeals against the order were unsuccessful, leading to the referral of the question to the High Court.

The High Court answered in the negative, indicating that the assessment was not valid. The Supreme Court upheld this view, emphasizing that the legal representative of a deceased person cannot be taxed for income deemed to be distributed after the death of the shareholder if their name is not entered in the company's register. The court noted that the legal personality of the deceased extends only to the end of the account year in which they died, as per section 24B of the Income-tax Act. Therefore, the assessment on Anderson was invalid because the dividends were deemed to be distributed after Gannon's death and beyond the relevant account year.

2. Assessability of Deemed Dividends in the Hands of the Administrator:

The court analyzed whether the dividends deemed to have been distributed under section 23A were assessable in the hands of Anderson. The Income-tax Officer's order under section 23A created a notional income, which required an assessment order to make the tax exigible. The court referred to previous judgments, including Commissioner of Income-tax v. Shakuntala and Howrah Trading Co. Ltd. v. Commissioner of Income-tax, which established that only a registered shareholder is liable to be taxed for deemed dividends.

The court highlighted that the legal representative does not automatically acquire the rights of a shareholder unless their name is entered in the register. The obligation to pay tax on deemed dividends is of the shareholder, and the Income-tax Act does not provide special machinery for assessing such income from the estate of a deceased shareholder in the hands of the legal representative. The court cited Commissioner of Income-tax v. Ellis C. Reid and Commissioner of Income-tax v. Amarchand N. Shroff to support the view that tax cannot be levied on income received by legal representatives after the account year in which the deceased died.

The court concluded that section 24B does not authorize the levy of tax on deemed income received by legal representatives after the relevant account year. The argument that legal representatives can be taxed for income received on behalf of the estate was rejected, as the Act does not provide the necessary procedure for such assessments.

Conclusion:

The Supreme Court agreed with the High Court's decision, though for different reasons, and dismissed the appeal with costs. The court confirmed that the assessment on Anderson was invalid and that deemed dividends were not assessable in his hands as the administrator of the estate. The appeal was dismissed, and the judgment emphasized the limitations of section 24B and the necessity for legislative provisions to assess income received by legal representatives.

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