ESTATE PLANNING
Wills (Part 3): Taxation of Inheritance through a Will

Abstract

In furtherance to the first and second parts where the basics of a Will and other aspects were covered, the author aims to cover the taxation aspects in this article. As there is no consumption of goods or provision of services, the question of Goods and Services tax doesn’t arise. This Article aims to cover the direct tax aspects under the Income-tax Act, 1961 (Act) and Black Money (Undisclosed Foreign Income and Assets) Act, 2015.

1. Introduction

2. In the hands of the Testator

2.1. Filing of Return

2.1.1. By the Legal Representative

2.1.2. By the Executors

2.2. Capital Gains

2.3. Scrutiny

2.4. Recovery

3. In the hands of the Legatee

3.1. Filing of Return

3.2. Inheritance tax

3.3. Gains on Sale of Inherited Assets

4. Dénouement

1. Introduction

In India after the abolition of Estate Duty in 1985 and Wealth tax in 2015, the re-introduction of Inheritance tax is speculated and rumoured in both, professional spheres and High Net Individual Circles. Without indulging in any conspiracy theories, this article will deal with the direct tax implications on inheritances.

2. In the hands of the Testator

2.1. Filing of Return

2.1.1. By the Legal Representative

The term “legal representatives” is defined under section 2(29) of the Act, which adopts the definition under 2(11) of the Code of Civil Procedure, 1908. It states, ‘Legal representative’ means a person who in law represents the estate of a deceased person and includes any person who inter-meddles with the estate of the deceased and where a party sues or is sued in a representative character, the person on whom the estate devolves on the death of the party so suing or sued. The term legal representative includes an heir, executor, administrator or other legal representative.

The term ‘Legal representative’ is different from the term ‘representative assessee’ as used for the purposes of sections 160 to 167 of the Act.

The Hon’ble Supreme Court held that the personality of the deceased assessee, which ceased after his death, is extended for the duration of the entire previous year in the year of death. Therefore, the income received by him before his death and that received by his heirs and legal representatives after his death but in that previous year becomes assessable to income tax in the relevant previous year.1

According to section 159 of the Act, when a person dies, testate or intestate, their legal heirs are responsible for filing the return of the deceased assessee/person. For the purposes of the Act, the legal representative of the deceased assessee would be deemed to be an assessee.2 Section 159 of the Act creates legal fiction only for the purpose of assessment proceedings for that year. Any income accrued during the year of death may be apportioned up to the date of death and legal representative may be charged in respect of the income which accrued to the deceased up to the date of death.

The legal representative is not required to have a separate PAN. The legal representative could be more than one person as under section 13(2) of the General Clauses Act, words used in singular will include their plural also.3

If the assessee died before the assessment proceedings were completed, the assessing officer is required to bring the legal representative of the deceased on record and proceed from the stage where it was as on the date of death of the assessee.4

A penalty can also be imposed on the return filed by the deceased or by the legal representative. Further, penalty proceedings can be initiated or continued against the legal heir for a default committed by the deceased5. However, prosecution for any offence would abate with the death of the deceased. Conversion of the inherited assets into another form will not preclude the department from recovering the dues of the deceased, the new assets would be proceeded against in the same way as the original assets.6

 2.1.2. By the Executors

In the event, that the deceased assessee dies testate and appoints the executor(s) in his or her Will, the executors will take over the estate and will be the assessee for the purpose of the income generated from the estate of the deceased.

The executors will take over the responsibility of administering the estate of the deceased according to the Will. An executor is undoubtedly a legal representative.7 The Explanation to section 168 provides that “executors” include an administrator or other person administering the estate of a deceased person. The reference in the Explanation to “other person” administering the estate of a deceased person” is intended to apply to those persons who are found to be administering without having been appointed by the Court as administrator, the estate of a deceased person who has left behind a will without naming an executor, and in respect of whose will it is not necessary to obtain letters of an administration and have an administrator appointed by a Court.8 It will also include an executor, administrator under the Indian Succession Act, and any person administering the estate of a deceased person.9

However, section 168 of the Act will not apply where a person has died intestate, irrespective of the fact that an administrator has been appointed by a Court.10 

The executor shall be assessed in respect of the income of the estate separately from his personal income. Thus, there would be a requirement to obtain a separate PAN to file an Income-tax return in the capacity of an executor.

In case where there is more than one executor, the income of the estate of a deceased person shall be chargeable to tax as if the executor were an association of persons (AOP). The executor would continue to be chargeable to income tax under section 168 of the Act until the estate of the deceased is distributed completely to the beneficiaries thereof.11

Where the estate is partially distributed, then the income from the assets distributed gets excluded from the income of the estate (executor) and gets included in the income of the beneficiary/ legatee. The Legatee is chargeable to tax on income after the date of distribution. Even, if the executor is the sole beneficiary, it does not necessarily follow that he receives the income in the latter capacity. The executor retains his dual capacity and hence, he must be assessed as an executor till the administration of the estate is not completed except to the extent of the estate applied to his personal benefit in the course of administration of the estate.

Further, the residential status of the executor shall be decided according to the residential status of the deceased person during the year in which his death took place.

In case of a testate death (where a valid Will is created before the death) income earned after the date of death shall be taxable under section 168 of the Act in the hands of the Executor/ Administrator.12 Therefore, in the financial year in which the person expires, two income-tax returns shall be filed. One by the legal representative till the date of his death under section 159 of the Act and thereafter as legal representative/executors for income on his estate under section 168 of the Act.13 It is clear that sections 159 and 168 operate in different spheres. The former is concerned with the income of the deceased and the latter with the income from the estate of the deceased.14

It is mandatory for the department to assess the income of the deceased in the hands of the executors and it is not up to their discretion.15

2.2. Capital Gains

When a person dies and there is a Will in place, the assets will be transferred to the beneficiaries according to the Will.

According to Section 47(iii) of the Act, any transfer of capital assets by way of a Will shall not amount to transfer. Hence, there will not be an incidence of Capital Gains tax on such inheritance by Will. The language employed in section 47(iii) of the Act will apply only to actual transfers and not deemed transfers.16

It is pertinent to note that where the deceased person entered into a transaction that resulted in capital gains and subsequently passed away, the legal heirs could avail of the deduction under section 54 or 54F of the Act, if applicable. A legal representative cannot be differentiated from the deceased assessee, where the deceased assessee was liable to pay the tax, they cannot be denied the benefit of section 54 of the Act which forms part of the scheme of taxation of capital gains.17 The word “assessee” must be given wide and liberal interpretation so as to include his legal heirs also.18

On the issue regarding the taxability of the unutilised deposit amount in the case of an individual who dies before the expiry of the stipulated period, the Central Board of Direct Taxes (CBDT) vide Circular No 743 dated May 06, 1996 [1996] 219 ITR (St) 50 had clarified that the said amount cannot be taxed in the hands of the deceased. This amount is not taxable in the hands of legal heirs also as the unutilised portion of the deposit does not partake the character of income in their hands but is only a part of the estate devolving upon them.

According to Rule 13 of the Capital Gains Account Scheme, 1988, if a depositor in respect of whose deposit account a nomination is in force, dies, the nominee or legal heir, if they desire to close the account or accounts and obtain the payment of the balance standing to the credit in the account of the deceased depositor, shall make an application to the deposit office in Form H or as near thereto as possible with the approval of the Assessing Officer who has jurisdiction over the deceased depositor, and the deposit office shall pay the amount of balance standing to the credit in the account of the deceased depositor including amount of interest accrued, by means of crediting such amount to any bank account of the nominee.

Where there is more than one legal heir of the deceased depositor, the legal heir making the claim individually may do so by producing the letter of disclaimer or letter of authorisation from other legal heirs in their favour.

Before granting the approval for closure of the account the Assessing Officer shall obtain from the legal heir a succession certificate issued under Part V of the Indian Succession Act, 1925, or a probate of the will of the deceased depositor, if any, or letter of administration to the estate of the deceased in case there is no will in order to verify the claim of such legal heir to the account of the deceased depositor.

2.3. Scrutiny

Where the assessee expires before the initiation of assessment proceedings, the Assessing Officer is required to issue a Notice in the same of the legal heirs of the deceased assessee. Issuance of a Notice in the name of a deceased person is bad in law.19

The assessing officer is required to bring the legal representative of the deceased on record and proceed from the stage where it was on the date of death of the assessee.20 The legal heirs of the deceased assessee are under no obligation to inform the income-tax department about the death of the taxpayer and therefore, whether the PAN record was updated or not or whether the department was made aware by the legal representatives or not is irrelevant.21 However, it would be prudent for the legal representative or the executor as legal heir to register on the income-tax e-filing portal.22

2.4. Recovery

According to Sections 159(6) and 168 of the Act, the tax liability of the legal representative/heir or the executors of the deceased shall be limited to the estate of the deceased person.

The personal properties of the legal representative cannot be proceeded against for recovery of the tax due by the deceased by invoking section 159 of the Act, except in a case where it is found that the assets of the deceased have come into his hands and he has not properly accounted for the same.23

3. In the hands of the Legatee

3.1. Filing of Return

Once the assets are distributed, the legatee should include the same in their books and income, if any, generated from the said inherited assets should be included in the return of the legatee.

In the event of a partial distribution of assets, the legatee should include the assets so distributed in their return of income and any income generated from the same should be offered to tax in the capacity of a legatee.

3.2. Inheritance tax

With a view to avoid hardships in genuine cases section 2(24) i.e., the definition of “income” was amended vide Finance Act, 2004, inter alia, to exclude receipts under a Will or by inheritance.

Similarly, receipt of money, movable property or immovable property without consideration under a Will or by inheritance, irrespective of whether the testator is a relative or not is exempted from tax by virtue of proviso (III) to section 56(2)(x) of the Act.

Even a sum received by the taxpayer from the legal heir of a deceased in consideration of the taxpayer giving up his right to contest the Will of the deceased is not chargeable to tax under the then prevailing section 56(2)(vii) of the Act (Now corresponds to present section 56(2)(x) of the Act). 24

3.3. Gains on Sale of Inherited Assets

 

According to section 49 (1) of the Act, in the case where the property is acquired by way of gift, will or inheritance i.e., without consideration; on sale of the said property by the recipient, for the purpose of computation of Capital Gains, they would be allowed the cost of acquisition by the previous owner and the period of holding since the acquisition by the previous owner.25,26

4. Dénouement

In this article, some of the direct tax implications of a Will are covered. The series of articles which is proposed to be written on the law governing Wills is aimed to cover, aspects such as Intestate succession, Will of Non-residents, implications of the law of evidence and other relevant aspects.

  1. CIT v. Amarchand N. Shroff [1963] 48 ITR 59 (SC)
  2. Rudra Gouda v. Asstt. CIT [2018] 93 taxmann.com 333 (Kar)(HC)
  3. First Addl. ITO v. Mrs. Suseela Sadanandan [1965] 57 ITR 168 (SC)
  4. CIT v. Dalumal Shyanumal [2005] 276 ITR 62 (MP) (HC)
  5. Tapati Pal v. CIT [2002] 124 Taxman 123(Cal)(HC)
  6. M. Abdul Khalick & Co. v. ITO [1975] 101 ITR 43 (Mad) (HC)
  7. Estate of Late Rangalal Jajodia v. CIT [1971] 79 ITR 505 (SC)
  8. CIT/CWT v.P. Manonmani [2000] 245 ITR 48 (Mad) (FB)
  9. CIT v. Navnitlal Sakarlal [1980] 125 ITR 67 (Guj)(HC)
  10. CIT v. P. Manonmani [2000] 245 ITR 48 (Mad)(FB)
  11. Navnit Lal Sakarlal v. CIT [1992] 193 ITR 16 (SC)
  12. CIT v. P. Manonmani [2001] 245 ITR 48 (Mad)(HC)(FB)
  13. B. D. Gupta & Sons v. ITO [2015] 60 taxmann.com 38 (Delhi – Trib.)
  14. Raghunathdas Kakani v. Addl. CIT [1980] 122 ITR 952 (MP) (HC)
  15. CIT v. Mrs. Usha D. Shah [1981] 127 ITR 850 (Bom)(HC)
  16. CIT v. Bharani Pictures [1981] 129 ITR 244 (Mad)(HC)
  17. C.V. Ramanathan v. CIT [1980] 4 Taxman 432 / 125 ITR 191 (Mad)(HC)
  18. Late Mir Gulam Ali Khan v. CIT [1986] 28 Taxman 572 / [1987] 165 ITR 228 (AP)(HC)
  19. Sumit Balkrishna Gupta v. ACIT [2019] 414 ITR 292 (Bom)(HC)
  20. CIT v. Dalumal Shyanumal [2005] 276 ITR 62 (MP) (HC)
  21. Savita Kapila, legal heir of late Shri Mohinder Paul Kapila v. ACIT [2020](273 Taxman 148 (Del) (HC)
  22. DCIT v. Barclays Global Service Centre Private Ltd ITA 46/Pun/2021 dated January 02, 2023 (Pun) (Trib)
  23. UOI v. Mrs. Sarojini Rajah [1974] 97 ITR 37 (Mad)(HC)
  24. Purvez A. Poonawalla v. ITO ITA No. 6476/Mum/2009 (Mum)(Trib)
  25. CIT v. Manjula J Shah [2013] 355 ITR 474 (Bom)(HC) 
  26. Arun Shungloo Trust v. CIT [2012] 18 taxmann.com 261 / 205 Taxman 456 (Del)(HC)

 

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