162/2002, 164/2002, 165/2002, 167/2002 & 168/2002, by which the High Court has allowed the said appeals preferred by the Revenue and has quashed and set aside the common order dated 08 January, 2002 passed by the Income Tax Appellate Tribunal, New Delhi (for short, ‘ITAT’) for Assessment 1987 Years-88, 1988-89 and 1989-90 and restored the orders passed by the Assessing Officer, upheld by the Commissioner of Income Tax (Appeals) (for short, ‘CIT(A)), the respective assessees have preferred the present appeals. Till such extension of the Act to Sikkim by a notification issued under Article 371-F(n), income tax was to be charged and collected under the Sikkim State Income-tax Manual, 1948 (for short, ‘Sikkim Manual, 1948’). However subsequently, by virtue of Section 26 of the Finance Act, 1989 the Act was made applicable to the State of Sikkim from the previous year relevant to the Assessment Year commencing from 1st April, 1990, thereby extending the date of applicability of the Act by one year from the date specified in the notification dated 23 February, 1989. On the other hand, the case of the Revenue was that the control and management of each of the assessee companies was wholly with their auditor, M/s Rattan Gupta & Co., Chartered Accountants, who had their offices in Karol Bagh, New Delhi and therefore, were companies’ resident in India in terms of Section 6(3) of the Act. 5 On 10 July, 1990, following the search conducted on 15 March, 1990 at the premises of M/s Rattan Gupta & Co., CA at Daryaganj, New Delhi, notices were issued by the Assistant Commissioner of Income Tax (for short, ‘ACIT’) (Investigation), Circle 7(1), New Delhi to each of the assessees under Section 148 of the Act, in respect of Assessment Years 1987-88, 1988-89 and 1989-90 (Assessment Years under consideration). 7 The respective assessees filed writ petitions in the High Court of Sikkim, challenging the notices issued under section 148 of the Act.
Also Read: https://newslaw.in/case-type/civil/c-a-no-001144-001146-2011/
After the dismissal of the writ petitions by the Sikkim High Court on 20 July, 1993, the assessees filed writ petitions before the Delhi High Court being Writ Petition Nos.
The Assessing Officer made additions to the income of the assessees for the aforesaid three Assessment Years in question under different heads of income, namely, (i) income from commission (ii) unsecured loan from Dengzong Charitable Trust (iii) interest accrued/paid on the unsecured loans and (iv) provision for income tax (which was disallowed).
Rattan Gupta cannot be said to be a “Principal Officer” of the assessees within the meaning of section 2(35)(a) of the Act and the AO did not serve any notices of his intention of treating Mr. Whether the income of the assessee is taxable in India?” At the instance of the Assessees, an additional question was also framed as under by the same order: Whether the ITAT was right in law in holding that the assessee is not a resident of India within the meaning of Section 6(3)(ii) of the Income Tax Act, 1961 and whether the said finding of the ITAT is not also vitiated and perverse as it ignores relevant admissible evidence and materials and relies upon incorrect facts and has not given due consideration to several important materials and evidence relevant for determination of residence of the assessee.”
Interest By the impugned common judgment and order, the High Court has summarised the conclusion in paragraph 91 as under: (i) The Assessees, incorporated under the company law of Sikkim, are resident Indian companies. The exhaustive evidence gathered by the Revenue, without being countered by the Assessees despite opportunity being afforded, serves to substantiate the case of the Revenue that the management and the control of the five Assessee companies was in fact located in Delhi. (vi) The plea of the Assessees that the proceedings under Section 148 of the Act gets vitiated in the absence of a specific order vesting the ACIT with the powers under Section 127 of the Act to issue notice under Section 148 of the Act is rejected.
1
Also Read: https://newslaw.in/case-type/civil/acquisition-of-land-and-deemed-lapse-under-the-act-2013/
Shri Arvind P Datar, learned senior counsel appearing on behalf of the assessee companies has submitted that the issue involved in the present appeals is, as to whether the provisions of Income Tax Act, 1961 shall be applicable to the assessee companies which are registered under the Sikkim Companies Act and amenable to Sikkim Tax Manual, 1948 in respect of three Assessment Years, i.e., 1987-88, 1988-89 and 1989-90 when Income Tax Act, 1961 was not extended to the State of Sikkim. 4
In support of his submission that the Income Tax Act, 1961 shall not be applicable for the period during the relevant assessment years, it is vehemently submitted by Shri Datar, learned senior counsel appearing on behalf of the assessee companies that the Income Tax Act, 1961 came to be extended to the State of Sikkim only on and after 1 April, 1990. CIT, Jaipur, reported in (2018) 6 SCC 527, wherein this Court considered a question whether the appellant, who was a resident of Rajasthan and had won a lottery from Sikkim during the Assessment Year 1986-87 was liable to be taxed in India where Income Tax Act, 1961 was in force, notwithstanding that the said income had accrued or arisen to him at a place where Income Tax Act, 1961 was not in force, i.e., Sikkim, more particularly when the said income had already been taxed in the State of Sikkim under the Sikkim Manual, 1948. That the fact that the appropriate Income Tax Authority under the Sikkim Manual, 1948 accepted the income tax returns filed by the assessee companies and raised demand based on such returns establish the bona fides of the assessee companies beyond reproach. 11 It is contended that the exercise of territorial jurisdiction by CIT, Delhi is also wholly untenable in law in view of section 6(3) of the Act as it was at the relevant point of time. It is submitted that no evidence was produced to the effect that he ever appointed any person as the Director of the assessee companies or dictated the manner in which such Directors were to discharge duties towards assessee companies.
That the finding of the High Court that the control over management vested with Rattan Gupta and therefore the assessee companies were situated in India, is therefore wholly untenable and consequently to draw such presumption is legally unsustainable. Shri Datar further submitted that in the absence of framing of any substantial question of law under Section 260A of the Act on levy of interest, the liability of interest could not have been fastened upon the assessee companies. Therefore, the ITAT rightly held that the ACIT Delhi who issued notices under section 148 of the Act had no territorial jurisdiction.
It is further submitted that the High Court, while upsetting the finding recorded by the ITAT on levy of interest, has erred in relying upon the decisions of this Court in the cases of Commissioner of Income Tax, Mumbai v. Therefore, the AO ought to have served a notice on Rattan Gupta informing him of his intention to treat him as the Principal Officer of the assessee companies on the ground that he was a person connected with the management or administration of the assessee companies under section 2(35)(b) of the Act. 20 It is submitted that there is adequate evidence on record to establish that: (a)the business was managed from Gangtok in Sikkim where the business was carried on by one Mr.
Rattan Gupta at New Delhi and treating him as the Principal Officer or “head and brain” of the companies incorporated under the Sikkim Companies Registration Act, 1961 when the said Chartered Accountant had categorically stated on oath that he was rendering professional accounting and reconciliation services to the companies in question, is without jurisdiction, perverse and deserves to be set aside. Venkataraman, learned Additional Solicitor General of India appearing on behalf of the Revenue. Section 6 of the Act deals with residence in India and the relevant provision would be Section 6(3) pre-amendment in 2017 and post- amendment 2017 w.e.f. He has taken us through the relevant provisions under the Income Tax Act, 1922 (Section 4A), Section 6(3) of the Act (existed prior to 01.04.2017) and Section 6(3) of the Act substituted by Finance Act w.e.f. CIT, Madras, 1963 49 ITR 39, (Madras High Court Judgment); vi) CIT v. Chitra Palayakat Co., 1985 156 ITR 730 (Madras High Court Judgment); vii) Commissioner of Income Tax v. c) Directors authorised to manage the work and employees rendering service again are insufficient.
i) Control and management which must be shown is not merely theoretical control and power, or de jure control and power but the de facto control and power actually exercised in the course of the conduct and management of the affairs of the firm. l)
The expression control and management of its affairs is much wider than the expression used in some treatises ‘Control and Management of the business.’ 4 It is further submitted that in light of the principles laid down in the aforesaid decisions, it is well settled that a question, as to where the control and management lies is to be decided in light of the actual or the factual exercise of control, inasmuch as the Courts consistently have taken the view that mere presence of a partner firm in India even when he happens to be the managing partner, is not conclusive of the issue. Venkataraman, learned ASG that it was rightly concluded that the control and management of the companies was in Delhi and that it was a clear design on the part of the respective assessees to treat the income as arising from Sikkim to avoid the payment of tax under the Act, 1961. That the term ‘escaped assessment’ includes both “non- assessment” as well as “under assessment.” 8 Insofar as the submission on behalf of the appellants on service of notice is concerned, it is submitted that the principal place of business is the seat of control and therefore notice sent to Delhi is sufficient.
Therefore, for imposing penalty, principles of natural justice are required to be complied with, however in case of interest, the same being mandatory in nature and automatic there is no requirement of following principles of natural justice and/or even if in the assessment order there is no specific order to levy the interest but the interest charged is indicated in the ITNS 150 accompanying the assessment order and the same would be sufficient compliance for demanding interest. Commissioner of Income Tax, (2012) 13 SCC 802 (2008) and the decision of this Court in the case of Bhagat Construction Company Private Limited (supra). It is submitted that this Court in the case of Bhagat Construction Company Private Limited (supra) had in no uncertain terms made the legal position clear by holding that should the assessing authority enclose an ITNS 150 form computing the interest liability and annexed the same with the assessment order, the same would constitute adequate compliance for sustaining the interest and upholding it. 12
Also Read: https://newslaw.in/case-type/civil/c-a-no-003481-003481-2022/
It is next submitted that the final outcome of the tax liability or the final outcome of the substantial questions raised and decided by the High Court, had been decided without any sense of dependence on the issue of interest. That therefore, failure to raise a question of taxability of capital gains in a particular case may tantamount to a failure in raising a substantial question of law in terms of Section 260A of the Act. While appreciating the correctness of the impugned judgment and order passed by the High Court and while appreciating the submissions made by the learned counsel appearing for the respective parties, the findings recorded by the AO, CIT(A), ITAT and the High Court in the impugned judgment and order are required to be referred to, which are as under: Findings record by the AO while passing the Assessment Order: i) The directors are all from outside Sikkim and had never been to Sikkim, and the lone director Mr. Though bank accounts were available both in Delhi and Sikkim, the authorized signatories, to operate both the accounts were located only in Delhi; iii) The statutory books, registers and the shareholders were all located in Delhi; iv) No evidence was ever produced for having conducted board meetings in Sikkim; v) When it came to earning of commission from various agents, the genuineness of the addresses given at Sikkim could not be proved. Rattan Gupta & Co., the following things were seized: 1) Books of accounts 2) Funds 3) Memorandum and Articles of Association 4) Blank cheque books of the bank accounts held both in New Delhi, Gangtok and Sikkim 5) Pass books of all the 5 companies both Delhi and Gangtok 6) Blank printed letter pads and rubber stamps ix) Mr. Ravinder Singh in his statement confirmed that he had been looking after the day-to-day affairs of these companies from Delhi till March, 1998, after which Rattan Gupta took over the position as the only director and the other directors were his nominees, and Rattan Gupta functioned and operated only from Delhi and no office expenses have been incurred in Sikkim; xii) The AO also entered a finding that there has been a fund transfer from Delhi into the bank accounts at Sikkim to claim exemption and these have been round tripping of money going from Delhi to Sikkim and getting remitted back into Delhi and claiming exemption in Sikkim; and xiii) He also confirmed that he did not have any idea about the business in which all the 5 companies were involved earlier.
In that view of the matter, thereafter it is not open for the assessees to make a grievance with respect to non-service of the notice; 2) On the aspect relating to the control and management of the affairs, the ITAT recorded the findings as under: i) It is important to highlight that the ITAT had neither reserved nor found the findings of the AO as upheld by the CIT(A), as not maintainable or factually erroneous or perverse. 1 While reversing the finding of the AO on whether the commission was not earned in Gangtok, though the AO found that the notices were sent to those who had allegedly paid the commission to the assessees and the summons under Section 131 had not been complied with, the ITAT gave a finding that the AO did not proceed further and thus, since no adverse material has been brought on record, the AO could not have proceeded to draw adverse inference as the burden was heavily on the revenue. Verma was never produced by the assessee; v) The burden of proof could not be discharged in the instant case and therefore, the High Court upheld the findings of the AO that the precise role of Mr. Rattan Gupta as being in de facto control of the 5 entities appears to be correct; vi) That two persons who had been identified to have handled the business and supervised it, namely, H.L. 3 Thereafter, the High Court concluded that the control and management of affairs was wholly in India for the following reasons: a) Rattan Gupta was not only doing audit work but determining who should be the directors of the said companies.
The finding by the ITAT in this regard is plainly perverse and unsustainable in law.” g) On commission and accrual of income, the High Court concluded as under: i) The findings by the AO that the assessee had failed to prove that the commission payments earned by them is exclusively in Sikkim had not been dislodged by the assessee by producing any tangible material; ii) The evidence produced by the assesses are only copies of bills and vouchers and receipt of money from such agents at Sikkim in its bank accounts and assessments have been made under the Sikkim Manual, 1948; iii) The High Court in para 76 held that “none of the 5 entities named by the assessees as having paid the commission to them appeared in the course of assessment proceedings to confirm the payments having been made to the assessees.” The High Court also recorded that the rate of commission paid was unrealistic and beyond human probabilities, non- existence of any employees in Sikkim, non-incurring of any expenditure in Sikkim as found in the P&L account and finally the balance sheet showing that notwithstanding that the income was from commission the assets were in the form of investments in Dalmia Group would stare at the face of the assessees and remains unrebutted. 1 On control and management of business, few decisions on interpretation of Section 4A of the erstwhile Income Tax Act, 1922 and interpretation of Section 6(3) of the Income Tax Act, 1961 are required to be referred to, which are as under: i) In the case of V.V.R.N.M. ( b ) ‘Control and management’ signifies, in the present context, the controlling and directive power, ‘the head and brain’ as it is sometimes called, and ‘situated’ implies the functioning of such power at a particular place with some degree of permanence, while ‘wholly’ would seem to recognise the possibility of the seat of such power being divided between two distinct and separated places.” (3) The central management and control of a company may be divided, and it may keep house and do business in more than one place, and, if so, it may have more than one residence. Section 4-A( b ) provides inter alia that “for the purpose of the Act, a firm is resident in the taxable territories unless the control and management of its affairs is situated wholly without the taxable territories”.
It is true that the control and management which must be shown to, be situated at least partially in India is not the merely theoretical control and power, not a de jure control and power but the de facto control and power actually exercised in the course of the conduct and management of the affairs of the firm. The presence of this theoretical de jure right to control and manage the affairs of the firm which inevitably vests in all the partners would not by itself show that the requisite control and management is situated in India. …( 2 ) Mere activity by the company in a place does not create residence, with the result that the company may be residing in one place and doing a great deal of business in another. Under Section 12 of the Partnership Act, it is only the majority of partners who could have given effective directions to the superintendent and since there is no evidence that the alleged control and management has been exercised by the majority of partners acting in concert it would not be possible to hold that any control and management of the firm’s affairs resided in India. It is also necessary that the control and management of the affairs of the company should be situated wholly in the taxable territories. Therefore; whereas in the case of a Hindu undivided family or firm or association of persons any measure of control and management within the taxable territories would make them resident, in the case of a company any measure of control and management of its affairs outside the taxable territories would make it non-resident. A company or for the matter of that a firm or an undivided Hindu family has got to work through servants and agents, but it is not the servants and agents that constitute the seat of power or the controlling and directing power. A company may have a dozen local branches at different places outside India, it may send out agents fully armed with authority to deal with and carry on business at these branches, and yet it may retain the central management and control in Bombay and manage and control all the affairs of these branches from Bombay and at Bombay.
…. It is perfectly true that these two managers do all the business of the company in Ceylon and in doing that business naturally a large amount of discretion is given to them and a considerable amount of authority. Kolah is right again when he puts emphasis upon the fact that what we have to consider in this case is not the power or the capacity to manage and control, but the actual control and management, or, in other words, not the dejure control and management but thede facto control and management, and in order to hold that the company is resident during the years of it must be established that the company de facto controlled and managed its affairs in Bombay. iv) The Calcutta High Court in the case of Bank of China (supra) has specifically held that a company may be simultaneously resident in more than one place, but the control and management is where the head and brain is situated.
A company can be simultaneously resident in more than one place but the question is whether the control and management is situated wholly in India during the relevant previous year.
Case Title: MANSAROVAR COMMERCIAL PVT. LTD. Vs. COMMISSIONER OF INCOME TAX DELHI (2023 INSC 330)
Case Number: C.A. No.-005769-005769 / 2022
