This is a reference by the Income-tax Appellate Tribunal, Madras Bench, under section 66(1) of the Indian Income-tax Act, 1922. The question referred to us is in these terms :
'Whether, on the facts and in the circumstances of the case, the order passed under section 26(2) of the Income-tax Act, 1922, for the assessment year 1957-58 is justified in law ?'
Section 26(2) of the Income-tax Act, 1922, provides in certain cases for an assessment being made on the person succeeding another who has been carrying on a business. This is contained in the proviso to sub-section (2) of section 26, which runs thus :
'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.'
It is admitted before us that all the conditions necessary except the one which speaks of 'cannot be recovered from him' have been satisfied in this case. As far as this condition, which is a condition precedent in order that the proviso may be applied against the successor, is concerned there is keen controversy and it is urged by counsel on behalf of the assessee that the Tribunal has erred in applying the proviso for the simple reason that it has not been established that the tax cannot be recovered from the person from whom the complainants before us succeeded to the business. Dealing with this matter, the Tribunal observed as follows :
'The total tax liability of Damodaran as on 23rd may, 1960, amounted to Rs. 4,05,422. The Income-tax Officer made various attempts to realise the arrears of tax without success. While efforts are being made to realise the arrears, Damodaran transferred a very substantial business with very valuable assets like buses, lorries and timber stock to a private limited company of himself, wife and brother-in-law. What all is left is some assets of the provision and cloth stores and of the debtors of Burmah Shell Oil agency business. The assessee might have declared a net wealth of Rs. 3,73,903 but the point to be seen is whether the tax could be recovered from Damodaran. It is not the existence of assets but the hard fact whether the department could recover the tax dues from this person. If every effort made by the department fails and if an assessee goes on denuding himself of all valuable assets, it can truly be said that taxes could not be recovered from the assessee.'
Counsel on behalf of the assessee has contended that there is a clear misapprehension in the mind of the Tribunal when it states that the existence of the assets is not material. If the case rested purely on the observation which we have extracted and which gave rise to the argument before us, we venture to think that there may be a case for the assessee. When the proviso speaks of 'cannot be recovered from him', we do not think it postulates the difficulties that may be experienced in collection or the time that may elapse or the impediments that may be put forward in the way of collection of taxes but of the availability of sufficient assets from which the tax can be collected. If, therefore, there was no material before the Tribunal and no reasoning on the basis of which it is possible to find that the conclusion has been reached not merely on this observation but on the materials available before it as to the availability or otherwise of the assets, we would have answered the question in favour of the assessee. We do not think we can do so on the facts as they are seen from the papers before us. We may as well refer to what the Income-tax Officer in his order said :
'He has been one of the worst defaulters in the matter of payment of tax and has been consciously taking steps to thwart recovery. The first such step was the transfer of his timber and transport business to a private limited company with himself, his wife and brother-in-law as directors. The second step was to gift almost all his immovable properties to his minor sons. He had little value for his assurance in the matter of payment of tax',
'Since for the reasons mentioned in para. 5, I find that the tax amounting to Rs. 1,98,467 referred to in the preceding para. cannot be recovered from Sri Damodaran under the proviso to section 26(2). This tax shall be payable by R. K. V. Motors and Timbers (P.) Ltd., the person who succeeded to the business of Sri Damodaran in timber and transport.'
In the statement of facts of this case, in paragraph 4, these facts are mentioned.
These indicate that it is extremely doubtful whether there were assets available with the said Damodaran who transferred his business to the company which is now being proceeded against for the tax. In these circumstances, we do not think that the proviso has been pressed into service without justification. The result is that the question referred to us has to be answered in the affirmative, i.e., against the assessee, and in favour of the department. We do so. We make no order as to costs.
Question answered in the affirmative.