1966 (7) TMI 15 - HC - Income Tax

Where it is extremely doubtful whether there were assets available with the person succeeded, who transferred his business to the successor, it cannot be said that proceedings against the successor under the proviso u/s 26(2) would be without justification

Summary

Issues:
Interpretation of Section 26(2) of the Income-tax Act, 1922 regarding assessment on a person succeeding another in business.

Analysis:
The case involved a reference by the Income-tax Appellate Tribunal under section 66(1) of the Indian Income-tax Act, 1922, regarding the justification of an order passed under section 26(2) for the assessment year 1957-58. Section 26(2) allows for assessment on a person succeeding another in business under certain conditions. The key issue was whether the tax could not be recovered from the person succeeded, which is a crucial condition for applying the proviso against the successor. The Tribunal found that the tax liability of the predecessor could not be recovered despite efforts, as he had transferred valuable assets to a private limited company. The Income-tax Officer confirmed the inability to recover the tax from the predecessor and held the successor liable. The Tribunal's decision was challenged on the grounds that the proviso requires the availability of assets from which tax can be collected, not just the existence of assets. However, the court upheld the Tribunal's decision based on the facts presented, indicating that the predecessor had taken steps to thwart recovery, making it doubtful if sufficient assets were available for tax collection.

The court emphasized that the proviso under Section 26(2) requires the availability of assets from which tax can be collected, not just the existence of assets. Despite the predecessor's transfer of assets and attempts to avoid tax payment, the court found that the conditions for applying the proviso against the successor were satisfied in this case. The court noted the predecessor's actions of transferring business and gifting properties to avoid tax payment, which supported the conclusion that the tax could not be recovered from him. The court highlighted the Income-tax Officer's findings that the tax amount could not be recovered from the predecessor, leading to the successor being held liable for the tax liability. Ultimately, the court answered the question in the affirmative, against the assessee, and in favor of the department, indicating that the proviso was rightly applied in this case based on the available facts and circumstances.

In conclusion, the court's decision reaffirmed the importance of the proviso under Section 26(2) of the Income-tax Act, 1922, requiring the availability of assets for tax collection to hold a successor liable for the tax liability of the predecessor. The court upheld the Tribunal's decision based on the evidence presented, indicating that the predecessor's actions to avoid tax payment justified the application of the proviso against the successor. The judgment clarified that the proviso focuses on the ability to recover tax from available assets, not just the mere existence of assets, in determining the successor's liability for tax assessment.