Penalty Liability on Legal Heirs: ITAT Upholds Liability u/s 159 and Restores Matter to AO to Verify Inherited Estate [Read Order]

The Jaipur Bench of Income Tax Appellate Tribunal ( ITAT ) restored the matter to the Assessing Officer (AO ) to verify the extent of the estate inherited by the legal heir while upholding the penalty liability under Section 159 of Income Tax Act,1961.

The legal heirs of Late Jagdish, appellant-assessee, filed an appeal against the order dated 30.09.2024 passed by the Commissioner of Income Tax (Appeals) [CIT(A)],for the assessment year 2007-08. The facts are that during the assessment proceedings, the AO made two additions, ₹3,80,000 for unexplained cash deposits and ₹14,62,758 for Long Term Capital Gains (LTCG). Based on these additions, a penalty order under Section 271(1)(c) was passed on 01.03.2017 imposing a penalty of ₹3,96,929.

When the matter was taken before the CIT(A), the penalty was deleted on the addition relating to LTCG of ₹14,62,758 but sustained on the addition of ₹3,80,000 for unexplained cash deposits. The CIT(A) observed that the assessee failed to substantiate the source of the cash deposits, holding that it amounted to concealment of income.

Get a Handbook on TDS Including TCS as Amended up to Finance Act 2024, Click Here

Regarding the LTCG addition, the CIT(A) noted that it arose from a debatable issue under Section 50C and therefore did not warrant a penalty. Aggrieved by the order sustaining the penalty on ₹3,80,000, the legal heirs of the assessee filed an appeal before the tribunal.

The assessee counsel submitted that the AO had made additions of ₹3,80,000 for unexplained cash deposits and ₹14,62,758 for LTCG, and based on this, imposed a penalty of ₹3,96,929 under Section 271(1)(c) on 01.03.2017. Late Shri Jagdish passed away on 08.02.2018, and his legal heir, Shri Chhaju Ram, continued the appeal. The CIT(A) deleted the penalty on the LTCG addition but upheld it on the unexplained cash deposits.

It was stated that the deposits were properly explained as money received and returned through an intermediary and from cash available from land sales. The counsel argued that the penalty should not continue after the assessee’s death as it was personal in nature and could not be recovered from legal heirs. Reliance was placed on an ITAT Nagpur ruling supporting this view.

The counsel also argued that confirming an addition did not automatically mean penalty should be imposed. It was further pointed out that the AO did not specify the reason for the penalty in the notice under Section 274, showing non-application of mind. Citing various High Court and Supreme Court rulings, the counsel requested that the penalty under Section 271(1)(c) be quashed.

The assessee counsel argued that since the assessee had passed away, no penalty could be imposed, and the legal heirs could not be held responsible. He referred to Section 159 of the Act and relied on the ITAT Nagpur decision in Beantkaur Avtarsingh Juneja (ITA No. 18/Nag/2023).

The Departmental Representative supported the orders of the lower authorities, stating that under Section 159(3), legal heirs were deemed assessees, and since the addition was already upheld, the penalty was valid.

In reply, the assessee counsel again referred to the Nagpur Bench decision and argued that Section 159(3) should be read together with Section 159(4).

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The two member bench comprising Narinder Kumar (Judicial Member) and Rathod Kamlesh Jayantbhai (Accountant Member) heard both parties and reviewed the records. It observed that the appeal was filed against the levy of a penalty of ₹81,842. The assessee’s counsel argued that under Section 159 of the Income Tax Act, the legal representatives of a deceased person should not be held liable for the penalty.

The tribunal noted that Section 159(1) uses the term “any sum,” which includes not only tax but also penalty and interest. It held that legal representatives are liable to pay such amounts on behalf of the deceased. Relying on the rulings of the Allahabad High Court in Kalawati Devi v. ITO and the Kolkata High Court in Smt. Tapati Pal v. CIT, the tribunal stated that penalty proceedings for defaults committed by a deceased person could be initiated or continued against legal representatives.

Since the precedent cited by the assessee had already been overruled, the tribunal found no merit in the argument and upheld the penalty. However, as the counsel could not confirm whether the legal representative had inherited any estate of the deceased and its extent, the tribunal restored the matter to the AO to determine the value of the estate, if any, available to meet the liability.

The appeal was accordingly disposed of with these directions.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates