ITAT Rules: Salary Arrears of Deceased Cannot Be Taxed on Legal Heir’s Personal Income
Tribunal clarifies Section 159 of Income Tax Act: Heirs are only representatives, not taxpayers for arrears
NFAC’s approach rejected; ruling protects families from wrongful tax burden on dues of deceased employees
By Our Legal Reporter
New Delhi: December 03, 2025:
In a landmark decision, the Income Tax Appellate Tribunal (ITAT) has ruled that salary arrears belonging to a deceased employee cannot be taxed in the personal capacity of the legal heir. Instead, such arrears must be assessed under Section 159 of the Income Tax Act, 1961, which makes the heir a representative assessee rather than a direct taxpayer. The ruling came after the National Faceless Assessment Centre (NFAC) attempted to treat arrears received by a widow as her personal income, ignoring the statutory provisions.
This judgment is expected to have wide implications for families who receive pending dues after the death of a loved one, including salary arrears, pensions, and other employment-related benefits.
Background of the Case
The dispute arose when the NFAC issued an assessment order taxing salary arrears received by the legal heir of a deceased employee. The NFAC treated the arrears as the heir’s own income, thereby increasing her tax liability. The heir challenged this order before the ITAT, arguing that the arrears were earned by the deceased during his lifetime and should be taxed in his name, not hers.
The ITAT agreed, holding that income accrued to the deceased before death remains taxable in the deceased’s name, even if received later by heirs. The tribunal emphasized that heirs cannot be treated as earning that income personally.
Section 159 Explained
Section 159 of the Income Tax Act deals with the liability of legal representatives. It states:
- Any income earned by a deceased person up to the date of death is taxable in the deceased’s name.
- The legal heir is responsible only as a representative assessee.
- The liability of the heir is limited to the estate inherited, not beyond.
This provision ensures that heirs are not unfairly burdened with taxes on income they did not earn.
Tribunal’s Observations
The ITAT noted that the NFAC had ignored Section 159 and wrongly taxed the arrears in the heir’s personal capacity. The tribunal clarified:
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- Salary arrears are part of the deceased’s income.
- The heir’s role is only to represent the deceased for tax purposes.
- Tax authorities must assess such income in the name of the deceased, with the heir acting as representative.
Related Judgments
This ruling aligns with several earlier decisions:
- Delhi High Court (2025): Held that Section 159 applies only if reassessment notices were issued before the taxpayer’s death.
- ITAT Mumbai (2023): Quashed an assessment order issued in the name of a deceased taxpayer, declaring it non-existent.
Together, these cases reinforce the principle that tax proceedings against deceased persons must follow proper legal procedures and cannot be arbitrarily shifted to heirs.
Implications for Taxpayers
The ITAT’s ruling provides clarity and relief for families dealing with posthumous financial matters:
- For Legal Heirs: Salary arrears, pensions, or other dues must be filed under the deceased’s PAN, not the heir’s personal return.
- For Tax Authorities: NFAC and other bodies must strictly apply Section 159 and avoid wrongful assessments.
- For Employers: Organizations disbursing arrears should issue tax documents in the name of the deceased, with heirs as representatives.
Expert Opinions
Tax experts welcomed the ruling, noting that it prevents unnecessary hardship for grieving families. “The ITAT has reaffirmed a basic principle of tax law—that income belongs to the person who earned it. Legal heirs cannot be treated as taxpayers for arrears,” said a senior chartered accountant.
Practical Guidance for Families
Families receiving arrears after the death of an employee should:
- File returns under the deceased’s PAN as representative assessee.
- Keep documentation of death certificates, employer letters, and arrear statements.
- Consult tax professionals to ensure compliance with Section 159.
Conclusion
The ITAT’s ruling is a significant step in protecting the rights of legal heirs. By rejecting NFAC’s approach, the tribunal has ensured that families are not unfairly taxed on income they did not earn. This decision strengthens the application of Section 159 and provides a clear roadmap for handling posthumous income tax matters.
As India moves towards faceless and digital tax administration, such rulings remind authorities to balance efficiency with fairness and compassion.
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