The first sentence is correct. music is the implied subject of the second part of the compound sentence, making it "... and [the music] could be heard from a long way away." Applying this to the second sentence, it would read "... and [the music] could hear from a long way away." Obviously the music can be heard, but the music cannot hear.

Simply - the first is correct, the second is not. The first one uses the passive voice 'the music could be heard'. The second one is incorrect, because music cannot hear. Using the passive voice means that you don't need a subject. To use 'hear' you would need to add a subject - something like 'The music was very loud and we could hear it from a long way away'

It's be heard. The only way the second sentence could be correct is it you said; the music was very loud and you could hear it from a long ways away.