Introduction:

In a significant judgment, the High Court of Delhi in Rajkumar Devraj & Ors. v. Jai Mahal Hotels Pvt. Ltd. & Ors (Co. A (SB) No. 25/2011, dated 12.12.2012) provided a definition of "legal heir" as a person entitled to the estate of the deceased. This ruling has implications for the liability of legal heirs and legal representatives under the Central Goods and Services Tax Act, 2017 (CGST Act), as well as the tax treatment in case of the death of a taxable person.

Liability of Legal Heirs under the CGST Act:

Section 93 of the CGST Act outlines the liability of legal heirs and legal representatives to pay tax arrears in the event of the taxable person's death. According to this provision, if the business is continued by the legal heirs, they become liable for paying taxes, interest, or penalties. If the business is discontinued before or after the taxable person's death, the legal heir must settle the outstanding taxes, interest, and penalty from the deceased's estate.

Determining Factors for Legal Heirs' Liability:

The liability of legal heirs under the CGST Act depends on the following factors:]

1. Nature or Forms of the Taxable Person: The liability varies depending on whether the taxable person is a Sole Proprietor, a Partner in a Partnership Firm, or a Director of a Company.

2. Transfer of Business upon Death: The transfer of business as a result of the taxable person's death influences the liability of legal heirs. If the business is continued, the legal heirs assume responsibility for tax obligations.

3. Intention to Continue or Close the Business: The decision of the legal heirs or remaining partners of a partnership firm to continue operating the business or shut it down also affects their liability under the CGST Act.

Liability Limitation for Legal Heirs:



In Kamal Gupta v. Bank of India (AIR 2008 Delhi 51), the High Court of Delhi clarified that legal heirs are liable for the debts of their predecessor only to the extent of the property inherited from them. The legal heirs are not personally liable for the predecessor's liabilities, but their liability is limited to the value of the deceased's estate.

I. SOLE PROPRIETORSHIP

A Sole Proprietor is an individual who independently operates and manages a business. Since a Sole Proprietorship is not a separate legal entity, the business ceases to exist upon the proprietor's death. The assets of the deceased proprietor are then distributed according to the will.

In the case of M/S S.A. Enterprise v. The General Manager Eastern Railway (W.P No. 26493(W) of 2017, dated 07.11.2017), the High Court of Calcutta ruled that legal heirs cannot automatically succeed to the business due to the nature of a Sole Proprietorship.

In the event of the Sole Proprietor's death, two situations may arise:

1. Legal heirs continue the business: If the legal heirs choose to continue the business after the proprietor's death, it is considered a transfer of business. As per Section 22(3) of the CGST Act, the successor or transferee of the Sole Proprietorship must obtain a new registration for the business from the date of transfer. The registration form GST REG-01, filed electronically on the GST portal, should mention the reason for obtaining registration as "Death of the Proprietor."

The tax liability of the transferee is governed by Section 85 of the CGST Act. It states that the transferee, who acquires the business through sale, gift, lease, hire, or any other means, becomes liable for unpaid or undetermined taxes, interest, and penalties at the time of or prior to the transfer. Additionally, Section 93 of the CGST Act requires the legal heirs carrying on the Sole Proprietorship business to settle any outstanding tax, interest, or penalty from the time of transfer.

According to Circular No. 96/15/2019-GST dated 28.03.2019 issued by the Central Board of Indirect Taxes and Customs (CBIC), in case of a business transfer due to the death of the Sole Proprietor, including to a transferee or successor, any unutilized Input Tax Credit (ITC) in the Electronic Credit Ledger will be transferred to the transferee.

When the business is voluntarily closed down or discontinued by the legal heirs, the following provisions apply:

Cancellation of registration for a deceased Sole Proprietor: Under Section 29(5) of the CGST Act, along with Rule 20 of the CGST Rules, a taxpayer who wishes to cancel the registration of a deceased Sole Proprietor must make a payment equivalent to the Input Tax Credit (ITC) contained in the stock of inputs, semi-finished goods, finished goods, capital goods, plant and machinery, or the output tax payable on such goods, whichever amount is higher.

Liability of legal heirs: According to Section 93 of the CGST Act, if the business is discontinued after the death of the Sole Proprietor, the legal representative of the deceased becomes liable to pay the outstanding tax, penalty, or interest from the estate of the deceased. This liability is limited to the extent that the estate is capable of meeting the charges. It includes any tax, interest, or penalty that was assessed prior to the death but remained unpaid, as well as any tax, interest, or penalty assessed after the death.

II. PARTNERSHIP

A Partnership refers to an arrangement where two or more individuals come together to share profits in a business. If any changes occur within the Partnership agreement, it may lead to the reconstitution of the Partnership firm.

The circumstances under which a Partnership firm can be dissolved, as per Section 42 of the Indian Partnership Act, 1932, include:

1. Expiry of the fixed term for which the Partnership was established.

2. Completion of the specific undertaking for which the Partnership was formed.

3. Death of a partner.

4. Adjudication of a partner as insolvent by a Court.

Hence, the death of a partner may result in the dissolution of the Partnership, subject to the terms agreed upon by the partners.

In the case of S.P. Misra & Ors. v. Mohd. Laiquddin Khan & Anr. (C.A. No. 3311 of 2015, dated 18.10.2019), the Supreme Court clarified that the death of a partner automatically leads to the dissolution of the Partnership firm under Section 42(c) of the Indian Partnership Act, 1932, as a matter of legal operation.

Consequently, upon the dissolution of the partnership firm, there cannot be a continuation of the partnership where the legal heirs would assume the place of the deceased partner.

In the case of Smt. S. Parvathammal v. CIT, 1987 163 ITR 161 Mad, the High Court of Madras established that a partnership typically dissolves upon the death of a partner, unless the original partnership deed specifies otherwise. Even if an agreement existed in a partnership with two partners, the partnership automatically ends when one of them dies. There is no provision for admitting a third party into the partnership after that. A partnership is not an inheritable position but a contractual arrangement.

Section 90 of the CGST Act addresses the liability of partners in a firm for paying GST. According to Section 90, the remaining partners in a firm are jointly and severally liable for the payment of tax, interest, or penalty under the CGST Act. As a result, the legal heirs of a deceased partner are not held liable for the payment of the partner's tax arrears. This aligns with judicial precedents as partnerships do not pass on to the legal heirs of a deceased partner.

III. COMPANY

In the context of a company, it is considered a separate legal entity governed by the Companies Act, 2013, and enjoys perpetual succession. The death of one or more members or directors of a company does not affect the company's perpetual succession, and the company continues its business operations.

Regarding the liability of directors in a private company, Section 89 of the CGST Act states that if a private company fails to pay taxes, the directors of the company are jointly and severally liable for the tax, interest, or penalty under the CGST Act.

Section 89 of the CGST Act contains a non-obstante clause, which means that it takes precedence over anything specified in the Companies Act, 2013. This implies that the separate legal entity status granted to a company under the Companies Act, 2013, is diluted when it comes to the recovery of the company's GST dues.

Upon careful reading of Section 89 of the CGST Act, it is evident that no personal liability is imposed on the legal heirs of a director for the payment of tax arrears of the company in the event of the director's death. However, the remaining directors of the company remain personally liable for the payment of such arrears if a director passes away.

REMARKS:

The government has the constitutional authority and responsibility to collect taxes, including tax arrears, from the legal heirs of a taxable person after their death. The introduction of the CGST Act has been beneficial for the economy by consolidating and unifying the indirect tax system. However, there exists a significant inconsistency in the liability of legal heirs based on the type of business entity involved, such as Sole Proprietorship, Partnership, or private company.

In a Sole Proprietorship, the legal heir is liable to pay the tax arrears of the deceased Proprietor. In a Partnership, the liability falls jointly and severally on the remaining partners, with no extension of liability to the legal heirs of the deceased partner. In the case of a private company, the death of a director does not affect the position of the legal heirs, as the remaining directors are held personally liable for unpaid tax arrears of the company.

This lack of uniformity in prescribing the liability of legal heirs for tax arrears may create challenges for the tax authorities in recovering the outstanding taxes from deceased individuals. It can also lead to confusion among the legal heirs regarding their responsibility to settle the tax arrears.

To address these issues, it is necessary for the government to provide clarifications or consider amending the CGST Act to clearly define the liability or non-liability of legal heirs in the case of a deceased partner in a partnership firm or a director in a company.