Dixit, C.J. -
(1.) THIS is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act) at the instance of the Commissioner of Income-tax. Madhya Pradesh, Nagpur and Bhandara The question which has been propounded by the Tribunal for our decision is:--
"Whether the sum of Rs. 24,341 was liable to lax under Section 41(1) of the Income-tax Act 1961?"
(2.) THE material facts are that one Kanhaiyalal used to carry on business as selling agent of Messrs Mohanlal Hargovinddas of Jabalpur under the name and style of "Messrs Hukumchand Mohanlal". On or about 17th February 1960 Kanhaiyalal died His widow Hira Laxmi succeeded to the business of selling agent carried on by her husband and continued it under the same name and style, namely. "Messrs Hukumchand Mohanlal". THE firm of Mohanlal Hargovinddas had recovered from Kanhaiyalal an amount of Rs. 24.341 as sales tax for transactions effected during the period from 26th January 1950 to 31st March 1951. Kanhaiyalal was allowed deduction on account of this amount of sales tax paid by him in the relevant assessment year. Subsequently, when the Assistant Commissioner of Sales Tax, Jabalpur, held in an appeal filed by Messrs Mohanlal Hargovinddas that the sales effected during the period from 26th January 1950 to 31st March 1951 were not liable to sales tax and the Government refunded to the firm of Mohanlal Hargovinddas the amount of Rs. 24,341, the firm of Mohanlal Hargovinddas in its turn paid back to the assessee-firm Messrs Hukumchand Mohanlal the sum of Rs. 24,341 by a draft. This draft was received by the assessee on 9th November 1961 that is after the death of Kanhaiyalal and in the accounting year beginning from 1st April 1961 and ending on 31st March 1962
The Income-tax Officer, Ujjain taxed this amount in assessment proceedings against the assessee for the assessment year 1962-63. He did so under Section 41(1) of the Act rejecting the contention of the assessee Hira Laxmi that the amount of Rs. 24.341 received by draft on 9lh November 1961 was the income of her deceased husband Kanhaiyalal and not her own income The decision of the Income-tax Officer was upheld in appeal by the Appellate Assistant Commissioner The assessee then preferred a second appeal before the Income-tax Tribunal, which was allowed. The Tribunal upheld the contention advanced on behalf of the assessee that it was her husband and not she who had obtained an allowance or deduction in respect of Rs. 24,341 in assessment proceedings against him and, therefore. Section 41(1) of the Act did not in terms apply The Tribunal has not given any elaborate reasons for allowing the assessee's appeal It first staled the argument of counsel appearing for the assessee thus:--
"The principal point made by Shri S. P. Mehta, who appeared for the assessee before us was based on the wording of Section 41(1) of the 1961 Act, which corresponds to Section 10(2-A) of the 1922 Act. He contended that these Sections create an artificial liability of the assessee and that, therefore, they have to be construed strictly. He said that but for these Sections, the amount of Rs. 24,341 in the present case would not have been the income of the assessee. If, therefore, Section 41(1) is to be applied, the changeability arises if the allowance of deduction had been made in an earlier assessment in respect of expenditure or trading liability incurred by the same assessee Shri Mehta contended that the allowance or deduction had been made in respect of the expenditure or liability incurred by the assessee's husband in the letter's assessment and that, therefore, Section 41(1) did not apply in terms He conceded that if the assessee's husband had been alive and were to be assessed in respect of the business in the assessment year under appeal, the inclusion of the amount in question in his total income would have been correct. His objection was as regards the present assessee being held chargeable under Section 41(1)".
Then the Tribunal staled its conclusion after simply observing:--
"We are inclined to agree with Shri Mehta's said argument. In the circumstances, the addition made must be deleted."
On the wording of the question placed before us for decision in this reference, the question whether the amount of Rs. 24,341 can be brought to tax in the assessment proceedings for the year 1962-63 against the assessee Hira Laxmi has to be decided with reference to Section 41(1) of the Act That provision is as follows-
"41(1) Profits chargeable to tax: Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure, or trading liability incurred by the assesses and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not".
Under the general law. once a trading liability has been allowed as a business expenditure and if this liability is remitted in any subsequent year, the amount remitted cannot be taxed as the income of the year of remission; nor can the account for the year in which the liability was allowed be reopened and adjusted. This is clear from the decision of the House of Lords in British Mexican Petroleum Co. Ltd. v. Jackson (1932) 16 Tax Cas 570. Section 41(1) supersedes this principle, as also Section 10(2-A) of the 1922 Act did, and lays down that where an allowance is granted in any year in respect of any loss, expenditure or trading liability and subsequently during any previous year the assessee receives, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure, or the assessee is benefited by the remission or cessation of the trading liability, the amount received or the amount of the liability which is extinguished is chargeable as business profits of that previous year. It is clear from the wording of Section 41(1) that the assessee made liable thereunder must he the same to whom an allowance had been granted earlier. There can be no doubt that if Kanhaiyalal had been alive and had himself received the amount of Rs. 24,341 during his life-time, he would have been liable to pay tax on that amount under Section 41(1). The question is whether when the amount of Rs. 24,341 was received by Kanhaiyalal's widow after she succeeded to the business of her husband on his death, it is taxable in her hands under Section 41(1).
(3.) IN answering this question, no assistance is available by the definition of the word "assessee'' given in Section 2(7) of the Act. According to that definition, "'assessee' means a person by whom income-tax or super tax or any other sum of money is payable under this Act, and includes--(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person; (b) every person who is deemed to be an assessee under any provision of this Act; (c) every person who is deemed to be an assessee in default under any provision of this Act."
Even if the word "assessee" as used in Section 41(1) for the second lime is taken to have the meaning given by the aforesaid definition, the question would still remain whether the widow of Kanhaiyalal is a person by whom tax is payable under Section 41(1) on the amount of Rs. 24,341 received by her. There is no provision in the Act deeming a successor in business or the legal representative of an assessee to whom an allowance had already been granted as an assessee for tax-liability under Section 41(1) of the amount remitted and received by the successor or the legal representative. Section 170(2) of the Act, which deals with an assessment on the successor in respect of the income of the predecessor when the predecessor cannot be "found", that is to say when he is dead or has disappeared, has no applicability here. Under that provision, the assessment can be made on the successor only in respect of the income of the previous year in which the succession look place up to the date of succession and of the previous year preceding that year. Here, the amount of Rs. 24,341 was not received by Kanhaiyalal in the account year in which he died and in which his widow Hira Laxmi succeeded to the business. It was received by Hira Laxmi in the account year ending on 31st March 1962. It cannot, therefore, be urged that Hira Laxmi is liable to pay tax on Rs. 24.341 as successor to business and, therefore, she is an "assessee" within the meaning of Section 2(7) of the Act.
The liability of a legal representative has been dealt with by Section 159. The first sub-section of that Section lays down:
"Where a person dies, his legal representative shall be liable to pay any sum which the deceased would have been liable to pay if he had not died in the like manner and to the same extent as the deceased"
It will he seen that under this provision the liability of a legal representative is only for the payment of that sum which "the deceased would have been liable to pay under the Act if he had not died" and in the like manner and to the same extent as the deceased. A similar provision occurred in Section 24B of the Income-tax Act. 1922 In construing that provision the Supreme Court said in Commissioner of Income-tax Bombay v. Amarchand N. Shroff 1963-48 ITR (SC) 59 = (AIR 1963 SC 1448) and Commissioner of Income-tax Bombay v. James Anderson 1964-51 ITR 345 = (AIR 1964 SC 1761) that Section 24-B did not authorize the levy of tax on receipts by the legal representative of a deceased person in the years of assessment succeeding the year of account being the previous year in which such person died; that Section 24-B extended fictionally the legal personality of a deceased person only for the duration of the previous year in the course of which he died and the income received either by him before his death or by his heirs and representatives after his death in that previous year alone became assessable to tax in the relevant assessment year, but not the income received in any year subsequent to that previous or accounting year; and that Section 24-B did not have the effect of supplying the machinery for taxation of income received by a legal representative on behalf of the estate after the expiry of the year in the course of which such person died. Section 159(1) of the Act must also be similarly construed, and it must be held that under that provision the amount received by a legal representative of a person cannot be taxed in his hands if it cannot be said to be income which might be deemed by fiction to have been received by the deceased and for which the deceased would have been liable to pay tax if he had not died. On this construction, it is plain that the amount of Rs. 24,341, which was received by 'Kanhaiyalal's widow not in the previous year in which Kanhaiyalal died but subsequently in the account year ending on 31st March, 1962, cannot be taxed in the hands of Hira Laxmi as the legal representative of her deceased husband Kanhaiyalal.