Liability of Legal Heirs under GST and Income Tax: An Analysis

A taxpayer's death has numerous financial and legal ramifications, including the resolution of their tax obligations. The liability of legal heirs or representatives for the tax debts of a deceased person is covered by particular provisions in both the Indian Income Tax and Goods and Services Tax (GST) legislation. Together with pertinent court rulings, these provisions are examined in this analysis.

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Legal heirs' obligation is often capped with the amount of assets they acquired from the deceased, which is a key premise underlying both GST and income tax liabilities.

Liability under the Income Tax Act, 1961

The responsibility of a legal heir is primarily regulated by Section 159 of the Income Tax Act of 1961. In this section, the legal framework for handling a deceased person's income and tax responsibilities is established. When someone passes away, their legal representative—including a legal heir—becomes responsible for paying any debt that the dead would have had to pay had they not passed away, according to Section 159(1). Income tax, interest, and penalties are all included in this.

The legal representative of the deceased is considered an assessee for the purposes of the Income Tax Act. As a result, they are bound by the same laws as the original taxpayer. From the point at which they stood, the legal representative may be subject to any tax processes (such as an assessment, reassessment, or re-computation) that were started against the deceased before their passing. It is also possible to start fresh legal actions against the representation that may have been started against the deceased.

A lawful heir's liability is not unlimited. The value of the estate they inherited sets a cap on it. Usually, it is restricted to the amount that the deceased's estate can pay toward the tax obligation. This implies that, unless they have mishandled the deceased's assets, the legal heir is not held personally responsible for the taxes owed on their own holdings.

A legal heir becomes personally responsible for the tax if, while the tax due is still owed, they sell or place a charge on any of the deceased's assets that they own. However, this personal culpability is only as much as the value of the charged or sold of assets.

For the time between the beginning of the fiscal year and the date of the deceased's passing, the legal heir is in charge of filing the deceased's income tax return. The legal heir, acting as a representative assessee, is responsible for paying taxes on the deceased's income generated up until the date of their death. To file the return on behalf of the deceased, the legal heir must register as a "legal heir" or "representative assessee" on the Income Tax Department's e-filing platform.

The legal heir is responsible for paying taxes on any income received from the inherited assets after the date of death. The lawful heir's personal income tax return, not the deceased's, should include this revenue.

A lawful heir will be subject to capital gains tax if they sell an inherited capital asset. Instead of using the date of inheritance, the "cost of acquisition" and the "period of holding" used to determine the capital gain are based on the original owner (the deceased). This makes it possible to carry over advantages like indexation.

Liability under the Goods and Services Tax (GST) Law

Under the Goods and Services Tax (GST) law, a legal heir's responsibility remains distinct and mainly controlled by Section 93 of the Central Goods and Services Tax (CGST) Act, 2017. The approach of the GST law is linked to the business's continuation, in contrast to the Income Tax Act, which imposes a wider duty.

Whether or not a legal heir carries on the deceased person's business determines their responsibility under GST. Any unpaid taxes, interest, or penalties owed by the deceased must be paid in full by the registered person's lawful heir or another individual if they carry on the business after their death. The legal heir in this situation is liable for all debts and is not just liable for the amount of the inherited property. For GST reasons, the individual carrying on the business assumes the role of the dead proprietor.

The legal heir's responsibility is capped at the amount of assets inherited from the deceased if the business is shut down on or after the registered person's death. This is comparable to the income tax rule, which states that an heir is not held personally responsible for debts exceeding the value of the estate they inherit.

The GST account of the deceased cannot be accessed directly by a legal heir. To be added as an authorized signatory, they must first submit a written request to the jurisdictional GST officer. A death certificate and evidence of lawful heirship must be submitted for this. All outstanding GST returns (such as GSTR-1 and GSTR-3B) for the dead up until the date of death must be filed by the legal heir.

The legal successor must use Form GST REG-16 to request the cancellation of the dead person's GST registration in the event that the business is shut down. A copy of the death certificate and the other necessary paperwork must be sent with this application. In order to prevent future compliance problems, the cancellation must be completed as soon as possible.

The legal heir is required to submit a final return using Form GSTR-10 following the approval of the registration cancellation. The closing stock and any other obligations are detailed in this form. GST must be paid on any stock or capital goods that remain after a business is shut down. GST on the value of these assets must be paid by the rightful heir.

A legal heir may move the unused Input Tax Credit (ITC) from the deceased's electronic credit ledger to their own if they choose to carry on the firm. It is crucial to remember that a deceased person's name cannot be used to submit a GST notice or recovery order. The legal representative must receive it. Legally, any notice given to a deceased individual is deemed void.

The legal heir of the departed director or partner is often exempt from liability in the case of a private company or partnership firm. The remaining partners in a partnership bear joint and several liability for the GST obligations of the business. The directors of a private corporation who were in office when the tax was due may be held accountable on a joint and several liability basis.

Case Laws

The crucial role of deceased people's legal representatives has been affirmed by numerous rulings from the High Courts and Income Tax Appellate Tribunals (ITAT). In the case of CIT v. Jai Prakash Singh, the Supreme Court ruled that the legal representatives could be evaluated in the same way as the deceased. Nonetheless, only the deceased's estate is liable for paying taxes.

Numerous rulings address the appropriate process for starting and pursuing legal heirs, stressing the importance of adequate notice and a hearing chance.

In Amjad Ahmed Shaikh vs Income Tax Officer ruling, the Bombay High Court held that tax proceedings initiated in the name of a deceased person are invalid and must be directed against legal heirs under Section 159 of the Income Tax Act. The court quashed assessment orders and demand notices issued by the Income Tax Department against the late Ahmed Gulamnabi Shaikh, despite prior intimation of his demise but clarified that the department remains free to initiate fresh proceedings against the legal representative in accordance with the law. The writ petition was allowed.

In USHA GUPTA vs COMMISSIONER OF CGST , the Delhi High Court has invalidated a Show Cause Notice ( SCN ) issued to a deceased taxpayer under the Central Goods and Services Tax ( CGST ) Act, 2017. The court ruled that the SCN, addressed to the late Mr. Surender Kumar Gupta, a sole proprietor, was legally untenable because it was not served on the legal representative or the person continuing the business after his death, as mandated by Section 93 of the CGST Act. The judgment highlighted the legal requirement that tax authorities must follow the proper procedure when issuing notices in cases involving deceased or non-existent taxpayers. It stressed the importance of serving notices on legal heirs or successors, ensuring compliance with the provisions of Section 93 of the CGST Act.

In Late Shri Badri Lal Agarwal vs ITO the Jaipur Bench of the Income Tax Appellate Tribunal ( ITAT ) recently set aside an assessment order and directed the Assessing Officer to conduct fresh assessment proceedings after providing reasonable opportunity to the appellant, who claimed to be the sole legal representative of the deceased assessee. The Bench referred to the fact that the appeal was initially presented by the assessee himself on 24.1.2018, before his demise on 25.3.2021, and observed that the matter required remand to the Assessing Officer for fresh assessment proceedings. Upholding the rights of the legal heir, ITAT set aside the order of CIT(A) and remitted the matter to the Assessing Officer for fresh assessment proceedings.

In Sampath Kumar Srikala vs The Commissioner of Income Tax , the Madras High Court directed the tax authorities to reconsider an order issued in the name of a deceased individual despite a condonation of delay application submitted by the legal heir for filing a late income tax return. Justice Krishnan Ramasamy observed that conducting assessments against a deceased person was not valid. The court observed that the petitioner’s delay condonation application had not been addressed violating procedural fairness and natural justice. The court quashed the notice and impugned order dated 30.03.2024 and directed the respondents to consider and dispose of the petitioner’s application within four weeks after giving her a personal hearing. The writ petitions were disposed of with no costs.

In Sikha Borgohain Vs Union of India And Ors , the Gauhati High Court has quashed a GST (Goods and Services Tax) demand order issued in the name of a deceased assessee, holding that proceedings against a dead person are a nullity in law. At the same time, the Court permitted the tax authorities to initiate fresh proceedings against the legal heir in terms of Section 93 of the Central Goods and Services Tax Act, 2017.

In M/s Agarwal Khilona Bazar vs State of U.P. , the Allahabad High Court has ruled that no GST (Goods and Services Tax) notice must be issued to the legal representative before determining the tax liability post-death of the proprietor as it is established that demand against a deceased in void ab initio. The representative must be informed before determining the demand.

The Allahabad High Court in M/S Atishay Traders vs State of U.P. has held that GST ( Goods and Services TAx ) proceedings cannot be initiated or continued against a deceased person under the Goods and Services Tax Act, 2017. Chief Justice Arun Bansali and Justice Kshitij Shailendra quashed a GST demand raised against the late Harish Chandra Jain, proprietor of M/s Atishay Traders, observing that Section 93 of the Act does not authorize the determination of tax liability in the name of a deceased individual without issuing a proper show cause notice to the legal heir.

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