9911796707
TMI Blog2006 (3) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... capital (Rs.) -------------------------------------------------------- 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 regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, the CIT(A) has gone through the provisions of s. 159 of the Act and directed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expiry of A.Y. Prabhakar, Individual- Pan No. AAAPP7642M (G.I. No. 10718-P)-Reg: I would 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, In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted before the AO. But the AO has not brought on record or not impleaded the legal heirs. Even after these facts brought on record, the AO has passed the assessment order on the deceased assessee. He further argued that on the death of a person, his legal entity ceased to exist and no assessment order can be passed against such dead person and in any case if the assessment order is passed against the dead person, that would be null and void. He further argued that there are two legal heirs of the assessee and both are major as per the legal heir 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 defe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO during the course of assessment proceedings and filed appeals before the CIT(A) as well as the Tribunal. He argued that it shows that he was participating in all the matters connected with income-tax proceedings as the legal heir of the deceased assessee. The learned Departmental Representative filed a paper book containing pp. 1 to 17 including the petition, to bring on record the legal representatives before the Tribunal by the Asstt. CIT. The relevant petition is reproduced for clarity of facts as under: Before the ITAT 'A' Bench, Chennai IT(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be noted that even the Hon'ble apex Court and the jurisdictional High Court has defined the meaning of "legal representative" where the word legal representative means all the legal representatives of the deceased. The Hon'ble Madras High Court in the case of Muniyammal vs. Addl. ITO (1960) 38 ITR 664 (Mad) has held that all the legal representatives should concur in applying the copies of statement to the ITO and further, it has also held as under: "(ii) that in a case where a person died leaving more than one legal representative, the estate was represented by all of them jointly, and not by one of them alone. As between co-heirs, one was not the agent of the other. Sec. 24B of the IT Act made a legal representative of a deceased person liable to the tax assessed 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 copi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose who represent his estate or interest-wholly and completely." In view of the case law of the Hon'ble apex Court, jurisdictional High Court and Gujarat High Court, discussed above, we fairly feel that all legal heirs must be proceeded against the deceased particularly when there are more than one legal heir of the deceased as per the legal heir certificate and representation made before the AO. In the present case, the AO was informed much before the completion of the assessment that the assessee has died on 11th Nov., 2004. The AO has not taken any step to implead the legal heirs and the assessment order was passed on the deceased assessee treating the assessee as alive. In the event of death of the assessee, the names of the legal representatives should be substituted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complete details regarding the legal heirs and it was supported by legal heir certificate and death certificate of the assessee. But the AO never tried to bring on record the legal representatives as informed to him. However, the learned Departmental Representative strongly relied on the view that one of the legal representatives, Sri Ravi Prabhakar, who submitted the legal heir certificate and informed the AO before the completion of assessment proceedings, is an assessee before the AO as well as before the first appellate authority. To support the view, he relied on the decision of the Hon'ble Punjab Haryana High Court in the case of Swaran Kanta vs. CIT (1989) 176 ITR 291 (P H). 11. We have gone through the decision cited by the learned Departmental Representative and observed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al after considering: (i) whether the person on whom the notices were served was in possession and management of the entire estate of the deceased, and if so whether he would be the legal representative; (ii) even if he intermeddled only with a part of the estate, whether the ITO bona fide treated him as representative of the estate; (iii) whether he, in fact, represented the estate and the other executors or representatives expressly or impliedly accepted his representation; and (iv) whether the first respondent who was not a party to the assessment proceedings could question the enforceability of the final assessment order against the person on whom notice was served." In the above case law referred by the learned Departmental Representative, either there are exceptional cases 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatives of the deceased, i.e., Shri Raghunandan Prabhakar and Shri Ravi Prabhakar. It is observed from the assessment order that the assessment order is passed on dead person and the relevant assessment order is reproduced in pp. 7 and 8 at para 5 of this order. Both the legal representatives were not impleaded. It is a fact that the assessee died before the completion of the assessment and that also during the pendency of the assessment proceedings. On the death of a person, his legal personality ceases to exist and thereafter no order can be passed against such dead person. If any order is passed against that dead person, that would be a nullity, This view has been held by the Hon'ble apex Court in the case of CIT vs. Amarchand N. Shroff (1963) 48 ITR 59 (SC). While dealing with the 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in response to the notice issued to the deceased but served upon him or his agent allows the assessment proceedings to continue without any objection, then legal representative cannot take objection against the assessment in further appeals. Yes, we agree with this. In the present case, the assessee has taken objection at the initial stage that the assessee has died and information was given to the AO by writing a letter that there are two legal heirs and they filed the copy of the death certificate and legal heirs certificate. Even if we presume that the argument of the learned Departmental Representative is correct, that one of the legal representatives participated in the proceedings but the other legal representative was not present in the assessment proceedings by any expressed or 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed under s. 159(2) of the Act. In this view of the matter, we are of the opinion that the view taken by the Tribunal is correct and both the questions are answered against the Revenue and in favour of the assessee." 15. From the above facts and circumstances of the case, it is seen that the assessment order was passed on the dead person. One of the legal heirs has informed the AO during the pendency of the assessment proceedings that the assessee has expired on 11th Nov., 2004. Before the AO, complete details like legal heir certificate and xerox copy of the death certificate were filed. Now, as the principle laid down and exception provided by the Hon'ble apex Court in the case of Mrs. Suseela Sadanandan, the first exception is that: "If it had been established that E.D. Sadanandan 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the legal representatives has participated in the assessment proceedings and there was complete representation of the estate of the deceased. Here, we cannot agree with the contention of the learned Departmental Representative. The learned Departmental Representative overlooked the basic principle that in order to assess the income of a deceased person the assessment must be made on all those who represent his interest or estate wholly and completely and there must be complete representation of the estate of the deceased in the proceedings. Otherwise, the position would be as if the deceased is not before the ITO and obviously no assessment of income of a person can be made in his absence. In the present case, Shri Ravi Prabhakar, one of the legal representatives does not represent the 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 requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he words 'shall' and 'may' are mandatory and this 'may' and 'shall' will be treated as 'shall'. The above words are mandatory or directory will depend on the context and this has been explained in V.S. Sundaram's Law of Income-tax in India, 12th Edn. in 1st Volume at p. 22 and the same is reproduced as it is: "Crawford on Statutory Construction and Interpretation of Laws stated: 'Mandatory and directory are permissive words. Ordinarily, the words 'shall' and 'must' are mandatory, and the word 'may' is directory, although they are often used interchangeably in legislation. This use without regard to their literal meaning generally makes it necessary for the Courts to resort to construction in order to discover the real intention of the legislature. Nevertheless, it will always be presumed by 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice of notice on one of the legal representatives, was sufficient for valid proceedings. In view of the above facts of the case, case law cited above and the provisions of s. 159(2) of the Act, the reassessment framed on the deceased person is void ab initio. 18.1 Since the main issue is decided in favour of the assessee, it is not required to deliberate the other legal issues on merits. Accordingly, all these six appeals are allowed. 19. The first and second issue in the appeals of the assessee, Sri A.Y. Prabhkar (HUF) in ITA Nos. 2380 and 2381/Mad/2005, is as regards to reopening of the assessment is bad in law and the reasons recorded for the reopening were not communicated to the assessee. 20. We have heard both the sides and gone through the case records. It is a fact that the assessee, HUF 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 R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 173 (Del) to support his view. The Hon'ble High Court has held as follows: "Sec. 147 authorizes and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the AO has cause or Justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income has escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an in-built idea of fairness to taxpayers. As observed by the apex Court in Central 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tus of regular assessment and formation of opinion about the incidence of tax on a particular claim or item mentioned in the return of income. And in the absence of any formation of opinion about the taxability of the non-compete fees, in the facts of the present case, there can be no question of change of opinion. On the other hand, the deeming fiction provided by Expln. 2 to s. 147 of the Act imparts an added obligation in the matter of believing even where an assessment is made, but income chargeable to tax has been underassessed, it has to be deemed that such income has escaped assessment, and after noticing that income chargeable to tax was underassessed and applying the deeming fiction and the ratio of the aforesaid judgment in Praful Chunilal Patel vs. M.J. Makwana, Asstt. CIT (1998) 148 CTR (Guj) 62 : (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of statutory requirements were not completed while completing the assessment under s. 143 of the Act. The main argument of the learned counsel of the assessee is that no notice under s. 143(2) of the Act was issued. On a query from the Bench whether the assessee can file an affidavit to this effect so that the records of the Revenue can be summoned, but the learned counsel for the assessee declined to file an affidavit to this effect. He specifically stated that as per their knowledge no notice under s. 143(2) of the Act was issued. Here, there is no question of knowledge or conjecture or surmises. The real fact brought out by the learned Departmental Representative is that notice under s. 143(2) of the Act was issued and statutory requirements under s. 143(2) of the Act were fulfilled by the assessing authority. Accordingly, 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 deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the principal can be considered as the capital charge. What the assessee is entitled to deduct is the interest payable by him on the capital charge and not the additional interest which because of his failure to pay the interest on the due date had been considered as a part of the loan. In fact, the real capital charge is that which was originally due. The other portion is merely an interest on which the assessee has agreed to pay interest. Hence we are unable to accept the contention of the assessee that the .interest paid on interest is an interest paid on the capital charge. Mr. Chagla, the learned counsel for the assessee, contended that the law permits his client to deduct any interest paid by him on the capital borrowed or charged and 'any interest' included compound interest also. This, to our minds, appears 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 regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to late Smt. Kanthi Prabhakar (wife of Sri A.Y. Prabhakar) and late Smt. Padhmavathi Ammal (cousin of Sri A.Y. Prabhakar). Smt. Kanthi Prabhakar made a Will on 31st Dec., 1986 vide which all her movable and immovable properties devolved equally on her two sons namely, Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar. She expired on 15th Dec., 1990. Similarly, Smt. Padmavathi Ammal wife of late Sri K. Ramalingam made a Will on 27th Oct., 1993 willing all her movable and immovable properties to her cousin Sri A.Y. Prabhakar and his two sons namely Sri Raghunandan Prabhakar and Sri Ravindran Prabhakar equally. She died on 18th April, 1994. Her husband predeceased her and she did not have any children. Sri Prabhakar was appointed as the sole executor of both the Wills. However, these Wills were never probated. Therefore, both 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 equ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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