1. This is a departmental appeal arising out of the order of the Commissioner (Appeals) cancelling an order of the ITO passed on 17-7-1979 purportedly under Section 170(3) of the Income-tax Act, 1961 holding National Textile Corporation Ltd. liable for an amount of Rs. 5,99,163, representing taxes, income-tax and surtax demanded from Tamilnadu Textile Corporation Ltd. for the assessment year 1974-75.
2. National Textile Corporation (Tamilnadu & Pondicherry) Ltd. is subsidiary of National Textile Corporation Ltd. (an undertaking of Government of India) and had taken over the business of a sick mill owned by Cambodia Mills Ltd. with effect from 1-4-1976 by virtue of Section 5(1) of the Sick Textile Undertakings (Nationalisation) Act, 1974 (hereinafter referred to as "the Nationalisation Act"), after such business was first vested with the Central Government on that date on payment of compensation of Rs. 64.40 lakhs to the erstwhile owner, viz., Cambodia Mills Ltd. The amount to which the dispute relates is comprised of the following taxes : It was apparently the view of the ITO that there has been transfer within the meaning of Section 170 making National Textile Corporation (Tamilnadu & Pondicherry) Ltd. successor. Section 170 reads as under : (1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession,- (a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession, (b) the successor shall be assessed in respect of the income of the previous year after the date of succession.
(2) Notwithstanding anything contained in Sub-section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly.
(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.
(4) Where any business or profession carried on by a Hindu undivided family is succeeded to, and simultaneously with the succession or after the succession there has been a partition of the joint family property between the members or groups of members, the tax due in respect of the income of the business or profession succeeded to, up to date of succession, shall be assessed and recovered in the manner provided in Section 171, but without prejudice to the provisions of this section.
Explanation : For the purpose of this section 'income' includes any gain accruing from the transfer, in any manner whatsoever, of the business or profession as a result of the succession.
Section 170(2) provides for assessment for the year of succession and in immediately preceding year on the successor if the "predecessor cannot be found". Section 170(3) similarly makes the successor liable for recovery of tax assessed on the predecessor for these two assessments, where the tax "assessed on the predecessor, cannot be recovered from him" and after the ITO records a finding to that effect.
It is for this reason that the ITO recorded a "finding" in the impugned order that the amount of arrears could not be recovered from its predecessor, viz., Tamilnadu Textiles Corporation, because the assets had been handed over to successor, viz., National Textile Corporation Ltd. After giving this "finding" he directed National Textile Corporation (Tamilnadu & Pondicherry) Ltd., Coimbatore, to pay the above taxes and enclosed a demand notice demanding the sums specified above. He did so without issuing a formal show cause notice or otherwise hearing the affected party which filed an appeal before the Commissioner (Appeals), Coimbatore, on various grounds. The finding of the ITO was disputed on the following grounds : 1. There was no succession to Tamilnadu Textile Corporation Ltd., since this company was only an authorised controller of Cambodia Mills Ltd., which continued to exist both before 1-4-1974 and after.
2. National Textile Corporation (Tamilnadu & Pondicherry) Ltd. acquired ownership by transfer from Central Government vide Section 3(2) of the Nationalisation Act, and that power was vested in the Central Government under Section 3(1) of the Nationalisation Act by virtue of the statute and not by way of succession. Section 170, it was argued, had no application. Hence, it was claimed that National Textile Corporation (Tamilnadu & Pondicherry) Ltd. was not successor even to Cambodia Mills Ltd. 3. It was also alternatively argued that the transfer was by an order dated 15-2-1975 passed under Section 6(2) of the Nationalisation Act. Even if it is taken as succession, such succession took place only on 15-2-1975 and that the liability as a successor could lie only for the period 1-1-1975 to 15-2-1975 and an earlier year, i.e., calendar year 1974. No part of the demand relates to these years but to calendar year 1973.
4. Another alternative argument taken was that the prerequisite of the impossibility of recovery was not satisfied. Whether the predecessor is Tamilnadu Textiles Corporation Ltd. (a position not accepted in appeal) or Cambodia Mills Ltd., both were found and had assets (the latter having right to compensation). In fact, in respect of tax dues of the business before takeover, the Nationalisation Act specifically provides for payment on priority basis by following the requirement of the statute of registration of the claim before the Claims Commissioner. In fact, the Assistant Commissioner of Payments called for claims by a press release and the attention of the ITO was drawn by a letter dated 23-4-1977 addressed by Tamilnadu Textiles Corporation Ltd. to him, asking him to file the claim before 30-4-1977. This letter, though acknowledged on 26-4-1977, was not acted upon in time. Since non-priority debts had the benefit of an amount of Rs. 44.54 lakhs left over after meeting other priority debts, it was argued that if the amount has not been collected it is because of the omission or fault of the ITO. Under these circumstances it was claimed that a successor, even if it is a successor, cannot be made liable under Section 170(3).
5. In paragraph 5 of the grounds of appeal before the first appellate authority, it was specifically claimed "In any event before the impugned order was passed, the appellant was not heard, no notice was given to the appellant of any intention of proposal to pass such an order, and no opportunity was given to the appellant".
It was, therefore, contended that the order was in violation of principles of natural justice and, therefore, bad in law.
3. The first appellate authority cancelled the order merely following his orders in the appeals filed by Tamilnadu Textiles Corporation Ltd. in 161C & 162C/1979-80 [now subject-matter of orders of this Tribunal in IT Appeal Nos. 678 and 679 (Mad.) of 1980 and ST Appeal No. 8 (Mad.) of 1980 of even date] on the assumption that demands under Section 170(3) are the same as those cancelled by him in his orders. As pointed out in the departmental grounds of appeal the demand under Section 170(3) not only relates to the reassessment for the year 1974-75 and surtax assessment for the assessment year 1974-75, but also to the original assessment for the assessment year 1974-75 validly made on Cambodia Mills Ltd. on return filed by Tamilnadu Textiles Corporation Ltd. as its authorised controller. The learned Commissioner (Appeals) had overlooked this aspect of the case. If he had noticed that the demand raised in the original assessment for the year 1974-75 is undisputed, he would have to deal with other grounds canvassed by National Textile Corporation (Tamilnadu & Pondicherry) Ltd. We can, therefore, remit the matter back to the first appellate authority for a fresh disposal. Or, we could dispose of this matter on legal grounds taken by both sides [referred to briefly in our common order in IT Appeal No. 678 (Mad.) of 1980 and ST Appeal No. 8 (Mad.) of 1980 of even date] and further arguments as to whether National Textile Corporation (Tamilnadu & Pondicherry) Ltd. is a successor and whether alleged negligence on the part of ITO in not availing the procedure laid down by the Nationalisation Act defeats his rights or whether procedure laid down by the Income-tax Act is not whittled down by the procedure for recovery prescribed in the Nationalisation Act as contended by the learned standing counsel. Neither course commends itself to us. It is because of more reasons than one. Firstly, the argument as to opportunity taken up in grounds of appeal mentioned in sub-paragraph 5 of the preceding paragraph has to be met. Lack of opportunity violates the principle of natural justice and hits at the very legal foundation of the order. Though the statute does not prescribe any specific opportunity, we have no doubt that the Corporation is entitled to such an opportunity before a demand of such magnitude is foisted on it. Secondly, there has been an inference that the moneys "cannot be recovered from predecessor". It is an inference on which it is possible for the successor to have some say. It may have pointed out ways of recovery as was probably done. It might even dispute the amount of tax allegedly non-recoverable. Hence, an opportunity is ordinarily called for. Thirdly, there are legal objections which have not been considered in any detail. The ITO had no occasion to consider them as he gave no notice of his intention to make the Corporation liable for the dues of Cambodia Mills Ltd. Apparently, a tentative legal opinion to the effect that special procedure prescribed in the Income-tax Act will override the provisions of the Nationalisation Act was considered as enough authority for the course adopted by the ITO. The Corporation should have been heard so as to enable a proper legal opinion on all relevant facts and law.
4. We, therefore, find that the order under Section 170(3) suffers from a basic flaw as it was passed without the affected party having an opportunity to meet the ITO's inference which made the Corporation liable for such a large demand. Such an order which offends the principles of natural justice is invalid and illegal. We have, therefore, to uphold the order of the first appellate authority cancelling such an order, though for reasons which are different from the one which prompted him to cancel it. In the view we have taken, it is not necessary to consider the various other grounds taken by both sides. We have no doubt that the ITO will probably like to consider them before the issue of notice of his intention to make the Corporation liable and if he chooses to issue such a notice, he will give a reasonable opportunity to the Corporation and consider its objections. We have also no doubt that he would expeditiously take parallel steps to see the legitimate tax demand is sought to be realised from the beneficial owner of the business so that the necessity of making a third party liable may possibly not arise.