Salary arrears of Deceased cannot be Taxed on Individual Capacity of Legal Heir : ITAT says NFAC Ignores S. 159 [Read Order]

The Income Tax Appellate Tribunal ( ITAT ), Agra Bench, has held that salary arrears belonging to a deceased person cannot be taxed in the personal/individual capacity of the legal heir. Instead, such income must be assessed in the status of “legal representative” as per Section 159 of theIncome Tax Act, 1961.

The income tax appeal was filed by Sheela Devi, who received salary arrears of ₹27,19,935 belonging to her late husband, Digambar Singh, an employee with the Agricultural Extension Department, Banda, who passed away on 11 April 2016.

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During Assessment Year 2019-20, the Income Tax Department issued a notice under Section 148 in her individual capacity and subsequently completed reassessment under Section 147 read with Section 144B, taxing the whole arrears in her personal hands. Both the Assessing Officer and the NFAC held that because the payment was made to her, the arrears must be taxed in her personal capacity.

However, the Tribunal rejected this approach. It held that Section 159 of the income tax law mandates that any income that “accrued” to the deceased must be assessed in the hands of the legal heir only as a legal representative, not as an individual taxpayer.

The Bench of M. Balaganesh observed that the NFAC had “completely ignored” Section 159 and had therefore upheld an assessment order contrary to the statutory scheme. Accordingly, the ITAT directed deletion of the addition made in her individual capacity.

The Tribunal clarified that the legal heir merely got into the place of the deceased for tax purposes, and this representative capacity cannot be converted into a personal liability. Since the relief was granted on this important legal issue discussed in the appeal, all other grounds raised in the appeal were left open as academic.

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