Commissioner of Income Tax vs Ettumanoor Motors (P.) Ltd.

T. Kochu Thommen, J.—The following questions have been, at the instance of the Revenue, referred to us by the Income Tax Appellate Tribunal, Cochin Bench :

"(1) Whether, on the facts and in the circumstances of the case, the order of the Income Tax Officer is without jurisdiction ?

(2) Whether, on the facts and in the circumstances of the case, the interpretation of Section 297(2)(j) of the Income Tax Act, 1961, by the Tribunal is correct ?

(3) Whether, on the facts and in the circumstances of the case and on an interpretation of Section 26(2) of the Indian Income Tax Act, 1922, should the Income Tax Officer record a finding that the tax could not be recovered from the predecessor and the order vitiated for lack of such finding ?"

These questions cannot be specifically answered for the reason that none of the documents relating to the assessment, in respect of which the questions have been referred, or the order u/s 26(2) of the Indian Income Tax Act, 1922 (Act 11 of 1922), has been placed before us. It would, however, appear from the submissions at the Bar that an assessment had been made on the predecessor of the respondent to this reference application at a time when Act 11 of 1922 was in force. It would further appear that in respect of that assessment, recovery proceedings were sought to be initiated against the respondent by recourse to Section 26(2) of Act 11 of 1922. That sub-section reads :

"(2) Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of Sub-section (4) of Section 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year :

Provided that, when the person succeeded in the business, profession or vocation cannot be found, the assessment of the profits of the year in which the succession took place up to the date of succession, and for the year preceding that year shall be made on the person succeeding him in like manner and to the same amount as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him, it shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid."

This sub-section shows that by recourse to the proviso, recovery can be had for the year in which succession took place up to the date of succession and for the year preceding that year from the person who succeeded if the tax payable cannot be recovered from the predecessor.

When Act 11 of 1922 was repealed by Section 297 of the present Act, provision was inserted in Clause (j) of Sub-section (2) thereof for recovery in respect of assessment made under the repealed Act. That clause reads :

"(j) any sum payable by way of Income Tax, super-tax, interest, penalty or otherwise under the repealed Act may be recovered under this Act, but without prejudice to any action already taken for the recovery of such sum under the repealed Act.'''' (emphasis* supplied)

This shows that, notwithstanding the provisions of the General Clauses Act, 1897, recovery in respect of assessment already completed under the repealed Act shall be had under the repealing enactment. Such recovery is without prejudice to any action for recovery already taken under the repealed Act.

Section 170(3) of the present Act says :

"(3) When any sum payable under this section in respect of the income of such business or profession for the previous year in which the succession took place up to the date of succession or for the previous year preceding that year, assessed on the predecessor, cannot be recovered from him, the Income Tax Officer shall record a finding to that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from the successor, and the successor shall be entitled to recover from the predecessor any sum so paid." (emphasis* supplied)

This sub-section is, except in one respect, in pari materia with the corresponding portion of Section 26(2) of the old Act. The crucial difference is that, unlike under the old Act, it is specifically stated under the new Act that the Income Tax Officer should record a finding to the effect that recovery cannot be had from the predecessor before steps are initiated to recover from the successor.

The Tribunal found that, in principle, recovery in respect of assessments made under the old Act could be had u/s 297(2)(j) read with Section 170(3) of the new Act. But the Tribunal further stated that such recovery was possible only where : (1) action had been taken for recovery under the old Act, and (2) where the successor had been heard by the recovering authority before recording a finding in terms of Section 170 to the effect that recovery could not be had from the predecessor. These two conditions prescribed by the Tribunal are, in our view, totally unwarranted by the new Act.

What apparently prompted the Tribunal to say that action should have been taken under the old Act were the words "without prejudice to any action already taken for the recovery of such sum under the repealed Act" appearing in Clause (j) of Section 297(2). The Tribunal wrongly, in our view, thought that the words "without prejudice, etc." indicated that action ought to have been taken under the old Act. Those words are only intended to protect recovery proceedings already taken under the repealed Act and not to make such a proceeding a condition precedent to invoke the power under the new Act. Recovery under the new Act will be without prejudice to whatever action in that behalf had already been taken under the old Act. Any other construction would lead to absurdity, for it would then mean that there would be no statute under which recovery is possible even though an assessment has been validly made under the repealed Act.

The Tribunal again wrongly assumed that Section 170(3) required that the successor should be heard before the officer recorded a finding that the amount could not be recovered from the predecessor. The successor, in our view, has no such right of hearing. All that the successor is entitled to say is that he should have notice before he is proceeded against. No notice is required to be issued to him to record a finding that recovery cannot be had against the predecessor. Once that fact is recorded, it is open to the Revenue to proceed against the successor after giving him a reasonable opportunity of being heard. That in the present case such a finding has been already recorded seems to be clear from what the Tribunal says :

"...Since the tax is sought to be recovered from the successor, it is necessary that such a finding should be recorded after hearing the objections of the successor thereto, the fact that it had been mentioned in the notice issued to the assessee-company that tax could not be recovered from the vendor-company is not sufficient. The Income Tax Officer should have recorded a finding after hearing the assessee in respect of that matter. Such, a finding is not found in the impugned order. Nor did the departmental representative bring to our notice that such a finding had been recorded by the Income Tax Officer, after hearing the assessee, in any other place. For this reason also, we hold that the impugned order is not valid."

This observation implies that the fact was recorded, but not preceded by notice to the assessee. Such notice was unnecessary.

The Tribunal has thus erred in law in these two crucial aspects.

However, as stated earlier, in the absence of relevant papers, including the assessment order (annexure A is admittedly not the relevant order), we decline to answer the questions referred to us.

We direct the parties to bear their respective costs in this tax referred case.

A copy of this judgment under the seal of the High Court and the signature of the. Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.