Assessment of arrears of pay of deceased employee
Q: My husband, an army officer retired in January, 1992 and died in 1997. I received arrears of his pay in 1999 after the commencement of Fifth Pay Commission. Am I entitled for tax exemption on the arrears I received?
A: An amount earned by a person during his lifetime is taxable in the hands of the legal representative under Sec. 159 of the Act. In the reader's case, the reader is a legal representative, who is obliged to pay tax, because she is "deemed to be an assessee" under Sec. 159(3) of the Act, in respect of the income assessable in the hands of her husband in like manner and to the same extent as the deceased. Normally, this provision applies to a case, where the amount was due to deceased during his life time but received after his life and not to amount, to which he could not have laid a claim during his life time.
The income in the reader's case has accrued after death on sanction of arrears after refixation of pay after his life time, so that liability to tax arises only in the year in which the arrears are sanctioned/received. On the date on which the amount had become due, the assessee was not alive. In this context, Sec. 159 would have no application. In the hands of the reader, she receives it no doubt as successor, but accrual of income is after death, so that it cannot be treated as arising out of employment, because there is no employer-employee relationship between the employer and the deceased or as between the employer and the reader on the date of accrual. It can have only the character of a capital receipt in her hands, as it had become due after his death. In other words, since the amount had accrued after the lifetime of the employee, it is not assessable as income of the estate of the deceased. On the other hand, if it is treated as salary relating to service during his life time quantified after death, liability as salary can be inferred.
The Board had taken the view that amount accruing after death is not taxable in respect of leave encashment in Circular No. 309 dated July 3, 1981 (1981) 132 ITR (St.) 321. In the case of gratuity payment, a decision was rendered by the Tribunal that it would not be taxable, where it is payable to the widow on the death of her husband in Smt. L.K.Thangammal v Third ITO (1982) 1 ITD 762 (Mad).
It may, therefore, be possible to take the view that the amount cannot be taxed as legal representative of the deceased. Where the employee had retired in 1992 and died in 1997, while the arrears became due in 1999 after announcement of Fifth Pay Commission, if at all, it is assessable as income of the legal heirs in their own hands, but in the hands of the legal heirs, it can have only character of a capital receipt. It is presumed that tax has not been deducted at source from the payment. If it is so deducted, a return may be filed in the name of the person in whose name TDS certificate is issued and file return claiming refund on the ground that the receipt is non-taxable. Even if tax has not been deducted, it is advisable that the reader files a return and stakes a claim for exemption along with facts of the case, so as to avoid any hassles in the future.
S. Rajaratnam
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