39. Kumar Rajaram vs. ITO(IT) [2020] 423 ITR 185 (Mad.) Date of order: 5th August, 2019 A.Y.: 2012-13
Revision – Section 263 of ITA, 1961 –
Diversion of income by overriding title – Interpretation of Will – Testator’s
direction to executor of Will to sell property and pay balance to assessee
after payment to trusts and expenses – Expenses and payments to trusts stood
diverted before they reached assessee – Order of A.O. after due inquiry
accepting assessee’s offer to tax amount of sale consideration – Revision
erroneous; A.Y. 2012-13
The assessee was a non-resident. During the
A.Y. 2012-13 he derived income from capital gains and interest income assessed
under the head ‘Other sources’. The assessee’s father bequeathed land and
residential property to him under a Will and testament with directions to the
executor of the Will. The executor was to give effect to the terms and
conditions of the Will and dispose of his properties as stated by him in the
Will. The executor was entitled to professional fees and all expenses for the
due execution of the Will from and out of the estate of the deceased testator.
The executor was to arrange to sell the property after a period of one year
from the date of his demise so as to accommodate his wife for her stay and
distribute the sale proceeds in favour of four charitable institutions
specifying the amount to be paid to each of them after incurring the necessary
expenses towards stamp duty, fees to the executor, etc. The balance sale
consideration was to be paid to the assessee who was to repatriate, according
to the Reserve Bank of India Rules, the amount so received for the education of
his children.
Accordingly, the assessee received a sum of
Rs. 8,19,50,000. The A.O. issued notices under sections 143(2) and 142(1) along
with a questionnaire. In response to the notice u/s 142(1), the assessee
submitted the details including the last Will and testament executed by his
father, a copy of the sale deed, the legal opinion obtained from his counsel
regarding the eligibility for exclusion of the payments to the charitable
institutions and remuneration to the executor in computing the long-term
capital gains on sale of the property. The A.O. accepted the claim of the
assessee in respect of the expenses and passed an order u/s 143(3) and accepted
the sale consideration as mentioned by the assessee in his return of income.
However, the plea raised by the assessee with regard to the indexation of the
cost was not accepted and the A.O. allowed indexation only from the financial
year 2011-12 in accordance with Explanation (iii) in section 48.
The Commissioner issued a notice u/s 263
proposing to disallow the exclusion of the sum of Rs. 68,02,500 being the
payment made to the charitable institutions and the sum of Rs. 8,02,500 being
the professional fees of the executor of the Will and the other expenditure
incurred in connection with the sale of the property. The Commissioner
disallowed the exclusion of Rs. 68,02,500 and directed the A.O. to re-compute
the total income and the tax thereon.
The Tribunal affirmed the order of the
Commissioner that the exclusion of the payments made by the assessee by
applying the diversion of income by overriding the title could not be allowed
and that there was no evidence for professional fee, commission paid, etc.
The Madras High Court allowed the appeal
filed by the assessee and held as under:
‘i) The Commissioner could not have invoked
the power u/s 263. While issuing the show cause notice u/s 263 he did not rely
upon any independent material or on any interpretation of law but on perusal of
the records and was of the view that the expenditure could not be allowed as
deduction u/s 48(i). The Commissioner had conducted a roving inquiry and
substituted his view for that of the view taken by the A.O. who had done so
after conducting an inquiry into the matter and after calling for all documents
from the assessee, one of which was the last Will and testament executed by the
assessee’s father.
ii) The A.O. after perusal of the copy of
the last Will and testament of the assessee’s father, the sale deed of the
property and the legal opinion given by the counsel for the assessee, had taken
a stand and passed the order. Therefore, it could not be stated that the A.O.
did not apply his mind to the issue. It was not the case of the Commissioner
that there was a lack of inquiry or inadequate inquiry.
iii) The testator bequeathed only a portion
of the sale consideration left over after effecting payments directed to be
made by him. The use of the expression “absolutely” occurring in the Will was
to disinherit the testator’s third wife from being entitled to any portion of
the funds and all that the testator stated was not to sell the property for one
year till his wife vacated the house. The sale deed recorded that the
stepmother of the assessee had in unequivocal terms agreed to the sale and had
vacated the property and granted no objection for transfer of the property.
There was a specific direction to the executor to pay specific sums of money to
the charitable institutions, clear the property tax arrears, claim his
professional fee, meet the stamp duty expenses and pay the remaining amount to
the assessee. The order passed by the Commissioner was erroneously confirmed by
the Tribunal.
iv) The Tribunal erred in holding that the
exclusion of payment to charities by applying the principle of diversion of
income by overriding title could not be allowed. The assessee at no point of
time was entitled to receive the entire sale consideration. The sale was to be
executed by the executor of the Will who was directed to distribute the money
to the respective organisations, defray the expenses, pay the property tax,
deduct his professional fee and pay the remaining amount to the assessee.
Therefore, to interpret the Will in any other fashion would be doing injustice
to the intention of the testator and the interpretation given by the
Commissioner was wholly erroneous. The intention of the testator was very clear
that the assessee was not entitled to the entire sale consideration. The
testator did not bequeath the property but part of the sale consideration which
was left behind after meeting the commitments mentioned in the Will to be truly
and faithfully performed by the executor of the Will. The major portion of the
sale consideration on being received from the purchaser of the property stood
diverted before it reached the assessee and under the Will there was no
obligation cast upon the assessee to receive the sale consideration and
distribute it as desired by the testator.
v) The
assessee had produced the copies of the receipts signed by the respective
parties before the A.O. who was satisfied with them in the absence of any fraud
being alleged with regard to the authenticity of those documents. The order of
the Tribunal in not allowing the sum of Rs. 8,02,500 being expenditure incurred
in connection with the sale alleging that there was no evidence when the
evidence in support was on record, was not justified and the expenditure was
allowable u/s 48(i). The Commissioner could not have revised the assessment by
invoking section 263.’
