Section 87 of the Ordinance specifically addresses the taxation on the income of deceased individuals, outlining the responsibilities of their legal representatives.
In a bid to provide clarity on the taxation of income generated by deceased individuals, the Federal Board of Revenue (FBR) has incorporated amendments through the Finance Act, 2021, into the Income Tax Ordinance, 2001.
The text of Section 87 of the Income Tax Ordinance, 2001 is as follows:
“87. Deceased individuals.— (1) The legal representative of a deceased individual shall be liable for — (a) any tax that the individual would have become liable for if the individual had not died; and (b) any tax payable in respect of the income of the deceased’s estate.
(2) The liability of a legal representative under this section shall be limited to the extent to which the deceased’s estate is capable of meeting the liability. (2A) The liability under this Ordinance shall be the first charge on the deceased’s estate. (3) For the purpose of this Ordinance, — (a) any proceeding taken under this Ordinance against the deceased before his or her death shall be treated as taken against the legal representative and may be continued against the legal representative from the stage at which the proceeding stood on the date of the deceased’s death; and (b) any proceeding which could have been taken under this Ordinance against the deceased if the deceased had survived may be taken against the legal representative of the deceased.
(4) In this section, “legal representative” means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in representative character the person on whom the estate devolves on the death of the party so suing or sued.”
Section 87 establishes the legal obligations of the representative of a deceased individual regarding the deceased’s tax liabilities. The legal representative is held responsible for any tax the deceased would have become liable for had they not passed away. Additionally, the legal representative is accountable for any tax payable in relation to the income of the deceased’s estate.
Subsection (2) provides a crucial limitation on the liability of the legal representative, specifying that their responsibility is confined to the extent to which the deceased’s estate can cover the tax liability. Subsection (2A) emphasizes that the liability under the Ordinance is considered the first charge on the deceased’s estate, ensuring that tax obligations are prioritized during the settlement of the deceased’s affairs.
Subsection (3) delineates the procedural aspects, indicating that any ongoing proceeding against the deceased before their death shall be treated as taken against the legal representative. Furthermore, any proceeding that could have been initiated against the deceased had they survived can be instituted against the legal representative.
The definition provided in subsection (4) clarifies that a legal representative includes any person who, in law, represents the estate of a deceased individual. This encompasses individuals who actively manage or meddle with the deceased’s estate. Additionally, it includes cases where a party sues or is sued in a representative capacity, and the estate devolves upon the person on the death of the party involved in the legal action.
Tax experts commend the comprehensive nature of Section 87, as it not only outlines the legal representative’s responsibilities but also ensures that the tax liabilities are reasonably limited to the deceased’s estate’s capacity.
Section 87 of the Income Tax Ordinance, 2001 provides a robust framework for addressing tax obligations arising from the income of deceased individuals. By defining the legal representative’s responsibilities and limitations, the section contributes to a more transparent and equitable taxation system, aligning with the broader goals of financial responsibility and legal clarity.
