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2016 (2) TMI 671
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....espondent in ITA No. 164 of 2002), Swastik Commercial Private Limited (SWCPL) (the Respondent in ITA No. 165 of 2002), Trishul Commercial Private Limited (TCPL) (the Respondent in ITA No. 167 of 2002) and Pasupati Nath Commercial Private Limited (PNCPL) ((the Respondent ITA No. 168 of 2002) are companies incorporated under the Registration of Companies (Sikkim) Act, 1961. Each of the Assessee companies claims to be carrying on the business of commercial agents in cardamom and other agricultural products and having bank accounts with UCO Bank, Gangtok and State Bank of India (SBI), Gangtok and Kasturba Gandhi Marg, New Delhi. 3. Sikkim became part of India in April 1975. The Constitution (Thirty sixth Amendment) Act, 1975 inserted Article 371-F in the Constitution of India, in terms of which not all the laws of India were extended to the new State of Sikkim. Under Article 371-F (k) all laws in force immediately before the appointed day, i.e., 26th April, 1975, in the territories comprising the State of Sikkim or any part thereof were to continue to be in force therein until amended or repealed by a competent legislature or other competent authority. The Act was not made straighta....
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...., both current and former, were recorded. 8. On 10th July 1990, following the search conducted, notices were issued by the Assistant Commissioner of Income Tax ('ACIT') (Investigation) Circle 7 (1), New Delhi to each of the Assessees under Section 148 of the Act, in respect of AYs 1987-88, 1988-89 and 1989-90. An order was passed on 12th July 1990 by ACIT (Investigation), Circle 13(1) in respect of the M/s Rattan Gupta & Co. under Section 132 (5) of the Act. Mr. Rattan Gupta informed the Assessees that the aforementioned notice under Section 148 of the Act had been issued to each of them at the address of M/s. Rattan Gupta & Co. at Daryaganj and had been affixed at the said premises of M/s. Rattan Gupta & Co. 9. Meanwhile, each of the Assessees filed returns of income in terms of the Sikkim Manual, 1948 for the three AYs in question on 27th April 1990. A demand notice was issued to each of them in respect thereof on 23rd July 1990. Writ petitions in the Sikkim High Court 10. The Assessees filed writ petitions in the High Court of Sikkim, challenging the notices issued under Section 148 of the Act. An interim order was passed by the Sikkim High Court in the said writ pet....
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....pear in the office of the ACIT on 7th September 1998. This was in respect of the AY 1987-88. Similar notices were issued in respect of each of the other two AYs i.e. 1988-89 and 1989-90. 15. On 9th October 1998, separate assessment orders were passed by the ACIT, Company Circle 2 (2), New Delhi for each of the AYs 1987-88, 1988-89, 1989-90, in which it was concluded that each of the Assessees were "intentionally trying to take advantage of the prevailing laws at Sikkim by routing money through Sikkim and ploughing back in India." The objections raised by the Assessees as to jurisdiction were rejected. The additions made to the income of the Assessees for the three AYs in question were on the following heads of income: (i) income from commission (ii) unsecured loan from Dengzong Charitable Trust (DCT) (iii) interest accrued/paid on the unsecured loans and (iv) provision for income tax (which was disallowed). Separate penalty proceedings were initiated under Section 271(1)(a), 271(1)(c), 273/274 and 271-B of the Act. 16. The Assessees then filed appeals before the Commissioner of Income Tax (Appeals) [CIT (A)]. Subsequently on 8th December 2000, the writ petitions filed by the ....
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....at he had only rendered some professional services through M/s Rattan Gupta & Co. in October/November 1998. (h) Mr. U.P. Karma, one of the working Directors of the five companies stated during his examination on 8th October 1998 that he had no idea about the business in which the five Assessees' companies were involved. He claimed that he never gone to Sikkim and yet asserted that books of the companies were present at the Gangtok registered office. His evidence did not inspire confidence. (i) It appeared that the amount alleged to be earned in Sikkim had factually "surfaced in India and invested in closely held companies of Dalmia Group in India". The Assessee did not produce any evidence to substantiate its case that the commission income had accrued in Sikkim and had neither accrued nor arisen in India. Therefore, the commission income had accrued in India and not in Sikkim. 18. The additions made by the AO were confirmed by the CIT (A). As regards the interest under Sections 234 A and 234 B of the Act, the CIT(A) held that the interest under Section 139(8) and 215/217 of the Act have been correctly charged for the three AYs in question. While confirming the above addit....
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....5) (a) of the Act. The AO did not serve an notice of his intention of treating Mr. Rattan Gupta as the principal officer for the purposes of Section 2(35)(b). The AO also did not proceed under Section 163 (b) of the Act or in the manner provided in Section 51 of the Companies Act 1956. Hence those provisions could not be relied on for proving effective service. (v) The substituted service under Rule 20 (1) of Order V CPC was also legally ineffective, because of refusal of the notice by Mr. Rattan Gupta, who was not authorized to accept service of the notice on behalf of the Assessee companies. The address simply stated 'C/o Ratan Gupta', and C/o merely meant that the addressee "in the present case, the appellant, was to be found at the said address." Therefore, if Mr. Rattan Gupta refused to receive such a notice, he was justified in doing so and his refusal did not authorize the AO to resort to substituted service within the meaning of Rule 20 of the Order V of CPC. (vi) On the question of whether the income could be deemed to accrue or arise in India, it was held that from the perusal of the reasons recorded and noted, there was no such material available with the AO to reo....
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....is taxable in India?" 21. At the instance of the Assessees, an additional question was also framed as under by the same order: "4. 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" Are the Assessees resident Indian companies? 22. The first question that Court proposes to answer is whether the Assessee is a resident of India within the meaning of Section 6(3) (ii) of the Act, since this would be crucial for determining some of the other issues that arise in the case. 23. In terms of Section 6(3)(ii), a company is said to be a resident in India if, during any previous year, "the control and management of its affairs is situated wholly in India". In the present case, inasmuch as each of the Assessees was incorporated under the Registration of Companies Act, Sikk....
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....be whether for the purposes of Section 6 (3) (ii) of the Act, it can be said, as contended by the Revenue, that the control and management of the affairs of the Assessees' companies was "situated wholly in India". This, therefore, is essentially a question of fact and not so much a question of law. 26. On this question of fact, the concurrent findings of the AO and the CIT (A) have been upset by the ITAT. Therefore, the Court is called upon to determine whether the decision of the ITAT on this aspect can be said to be perverse and therefore unsustainable in law. The case concerning Alankar Commercial Pvt. Ltd. 27. There was another company, Alankar Commercial Pvt. Ltd. ('ACPL'), in respect of which proceedings under Section 148 were initiated by the Revenue and which company was also incorporated in Sikkim. In the case of ACPL also, the notices were served at the address of Rattan Gupta & Co. and refused, on the ground that no office of ACPL was running from the said address i.e. 4556/4, Ansari Road, Daryaganj. Challenging the said notice, ACPL filed a writ petition in the High Court of Sikkim. In Alankar Commercial Pvt. Ltd. v. Assistant Commissioner of Income Tax (2000) ....
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....d income outside Sikkim but within India, the same would be liable to tax under the Act. 29. The third question that was addressed by the Sikkim High Court in Alankar Commercial Pvt. Ltd. v. Assistant Commissioner of Income Tax (supra) was whether it was open to the High Court to exercise jurisdiction under Article 226 of the Constitution of India to determine whether the ACIT had rightly formed "reason to believe for the purposes of Section 148 of the Act that the Assessee's (ACPL) income had escaped assessment." Here, the Sikkim High Court was of the view that from the document seized as a result of search and seizure operations in terms of 15th March 1990, the AO had reason to believe that the income shown in the notice under Section 148 was chargeable to tax and had escaped assessment. This was because the AO entertained the plea that although the ACPL was registered in Sikkim "income had accrued and arisen in Delhi and the head and brain of the company was situated in Delhi". It was also found that no office existed in fact at Sikkim. There was only a signboard at the address and the office remained mostly locked. Consequently the notice issued under Section 148 of the Act ....
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.... 33. It is not disputed that the Assessees, incorporated under the company law of Sikkim, are resident Indian companies. If any income has accrued to them or earned by them in India prior to 1st April 1990, then such income is taxable under the Act. Objections as to jurisdiction 34. In the present case, the question whether the Assessee companies could be said to be a resident for the purposes of Section 6 (3) (ii) of the Act arose in the light of the categorical finding of the AO in the assessment orders dated 9th October 1998 for all three AYs 1987-88, 1988-89 and 1989-90 that although the Assessees had been registered in Sikkim and had been subject to tax in Sikkim "but most of factors so emanated later proved that the total management and control lies in India is liable to be taxed in India under Section 6 (3) (ii) of the Act". 35. This finding was relevant for determining the validity of the exercise of jurisdiction by the ACIT, Circle 7 (1), New Delhi, who issued the notices to the Assessees under Section 148 of the Act. In other words, unless it was found as a matter of fact that the management and control of the Assessees was wholly situated in New Delhi, the ACIT ....
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...., New Delhi and also of ACIT, Central Circle - 4, New Delhi. 38. An objection is raised by learned counsel for the Revenue to the Court permitting the Assessees to urge the above pleas on the ground that Section 124 (3) of the Act constituted a bar inasmuch as such objection was not raised at the first available opportunity in the assessment proceedings. It is submitted that the principal place of business of the Assessees was located in Delhi. It is submitted that by not raising the plea of jurisdiction at the earliest opportunity, the Assessees waived their right to raise such challenge by virtue of Section 124 (4) and by virtue of the fact that they urged that plea for the first time before the ITAT. Further it is pointed out that the objection raised was generally to the applicability of the Act. It is stated that the Assessees also had a right of appeal under Section 246 of the Act which he failed to exercise. On this aspect it is further submitted that this was only an irregularity at the highest and the ITAT ought to have remanded the matter and not set aside the assessments. Reliance is placed on the decisions in CIT v. SS Ahluwalia [2014] 46 Taxmann.com 169 (Delhi); Kan....
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.... 132 (4) of the Act. He stated that he had gone to Sikkim only once during last two years, where he got to meet one Mr. Bansal. In regard to the books and documents of the Assessees which were found in the premises, Mr. Gupta sought to explain as under: "We are rendering professional services to these companies. These records were in our office premises in connection with the professional services. The professional services which we render are finalization of accounts, reconciliation of bank accounts, reconciliation with various parties accounts, company law formalities etc.". 43. Mr. Rattan Gupta stated that the professional work for the Assessees was taken up by Rattan Gupta & Co. somewhere during the year 1987-88 from Mr. Ravinder Singh, CA. When asked with whom he was corresponding on behalf of the companies, Mr. Rattan Gupta stated: "The persons to be contacted in Dalmia Resorts International Pvt. Ltd. and Gujarat Heavy Chemicals Ltd. were from Accounts Department and I never noted or remember the names". 44. Specific to five Assessee companies, when asked with whom he had been in touch, Mr. Rattan Gupta stated: "There was one person Sh. H.L. Verma who ....
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....ed: "I was taking decision in my professional capacity only. Sometime I have taken advise from Dalmia Bros. Pvt. Ltd. I am talking about National, Norbu, Sikkim Ispat and Sikkim Produce. Q. 22. Why did you take the advice of Dalmia Bros(P) Ltd.? Was the first step taken by you or take took the initiative.? Ans 22. There was no obligation on me to take the advice of Dalmia Bros Pvt. Ltd. The funds in the Sikkim companies were to be invested for which decision was to be taken by me in professional capacity. The advise become important for safety of funds". 48. On appointment of brokers for sale of shares of the Sikkim company, Mr Rattan Gupta stated: "The Directors of the company after discussing with me appointed the brokers for the sale of shares". When asked whether there was any employer or director based in Sikkim in respect of the other four Sikkim companies, i.e., Nova Investment Pvt. Ltd., Lovely Investment Pvt. Ltd., Altar Investment Pvt. Ltd and Illac Investment Pvt. Ltd. (which were also part of the Dalmia Group of Companies), Mr. Gupta stated: "There is no employer/director based in Sikkim". He was again asked why Dalmia Bros. (P) Ltd., shoul....
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....r the signed cheque book to Mr. H.L. Verma for utilization". 51. An analysis of the statement of Mr. Rattan Gupta indicates that he could not have acted merely as an Auditor, giving professional advice to the five Assessees. Clearly his own employees were appointed as Directors of the companies. The four names, he subsequently mentioned are Mr. S.P. Sethi, Mr. Vijay Goswami, Mr. Rajesh Goswami and Mr. Vedant Mehta. The explanation for the signed cheque books, the rubber seals of the companies and their letter-heads being available in his office is also not convincing. He seeks to shift the entire responsibility for the handing of the cheques to Mr. Verma but then Mr. Verma was never produced by the Assessees. 52. The burden shifted to the Assessees to show that the control and management did not only vests with Mr. Rattan Gupta but that it was Mr. H.L. Verma who was handling the affairs of the companies. Even otherwise with Mr. H.L. Verma himself not being Director of any of the Assessees' companies, the answer given by Mr. Rattan Gupta raised more questions which required an explanation. In other words, in view of the fact that the books of accounts, the signed blank cheques....
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....gh explained: "Sir, the drafts were sent from Sikkim by Shri Hira Lal Verma, the person who were conducting the business on behalf of our companies in Sikkim. These drafts were always send by hand by that gentleman. Generally, these drafts were coming through the employees of Shri Uma Shankar Sitani who would either cause the drafts to be deposited in our bank on his own or ask me to collect these drafts from his office at Nehru Place or from his resident at Sainik Farms. In his absence, I used to get phone calls from his brother Rajan Sitani or his nephew Shammi". 56. In response to two other questions, Mr. Ravinder Singh stated as under: "Q 22. As, I understand, all the decision in respect of investment of the money of the 5 companies registered in Sikkim when you were the Managing Director, were taken by Shri Anurag Dalmia and introduce by you. On the basis of the answers given by you, is this a facts? Ans. There was no managing director in the companies. I was only a director responsible to the shareholders. It is a fact that from May 86 onwards all decisions regarding investment were taken by Shri Anurag Dalmia and also communicated to me. ....
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....39;s business was the sale of the diamonds from its mines to a syndicate of diamond merchants of London. The contracts of sale, which were annual contracts dealing with a year's output, were executed in London. The control of the company was vested in three life governors and sixteen ordinary directors, of whom four had to reside in England. The majority of the directors was always in London. The chairman and six ordinary directors resided in the Cape Colony. Meetings of the directors were held weekly in Kimberley and London with an interchange of minutes between the two places. Company by laws provided that directors in London were to be consulted on matters of exceptional importance. Further, certain decisions were only taken in London. However, general meetings of shareholders were always held at Kimberley. In the above factual background, the 'place of incorporation' test for determining residence of the company was rejected. Since the Commissioners recorded a finding of fact that "the head and seat and directing power of the affairs of the Appellant Company were at the office in London from whence the chief operations of the Company, both the UK and elsewhere, were in fact, co....
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....he control and management of a business remains in the hand of a person or a group of persons, and the question to be asked is wherefrom the person or group of persons controls or directs the business. (2) Mere activity by the company in a place does not create residence, with the result that a company may be "residing" in one place and doing a great deal of business in another. (3) The central management and control of 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. (4) In case of dual residence, it is necessary to show that the company performs some of the vital organic functions incidental to its existence as such in both the places, so that in fact there are two centres of management." 64. To the same effect is the decision in Narottam and Pereira Ltd. v. CIT [1953] 23 ITR 454 (Bom) where the Assessee was carrying on the business of stevedoring in Ceylon. It was registered in Bombay and its registered office was also in Bombay. The meetings of the board of directors are held in Bombay and also the meetings of the shareholders. The question before the Court was wh....
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.... Income-tax Act, 1922, it was observed that what would constitute 'control and management' was a mixed question of fact and law. It was observed: "The control and management must no doubt be shown to have been actually exercised; and the exercise of the control and management should not be illusory or merely notional. Once it is shown that control and management in the affairs of the firm was exercised by the partners residing in India, it would not be relevant to enquire whether the control and management thus exercised amounted to a substantial part of the control and management of the affairs of the firm." 67. In CIT v. Bank of China [1985] 154 ITR 617 (Cal) it was held: "The question depends on the fact of the management and not on the physical situation of the thing that is managed. A company is managed by the board of directors and if the meetings of the board of directors are held within India, it may be said that the central control and management is situated here. The direction, management and control "the head and seat and directing power" of a company's affairs is, therefore, situate at the place where the directors' meetings are held....
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.... was submitted during assessment proceedings where all were shown to be residents of Delhi. The Revenue is right in the contention that in the circumstances, there can be no presumption in law that control and management is at the registered office. 71. It appears to the Court that the ITAT has not upset the factual finding of the AO, which was confirmed by the CIT(A). The above 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. The finding by the ITAT in this regard is plainly perverse and unsustainable in law. Jurisdiction of the ACIT 72. Once it is held that the management and control of the Assessee companies was in Delhi in the office of Rattan Gupta & Co., the question that would next arise is the jurisdiction of the ACIT which issued the notice under Section 148 of the Act to these companies. The question arises in two contexts. One is regarding the authority of the ACIT to issue the notice and the second is whether Rattan Gupta & Co. could be said to be ....
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....he P&L account of the Assessees showed no expenditure corresponding to the carrying on of the business of trading in cardamom. The Assessees indeed failed to provide details and justification regarding the accrual of income exclusively at Sikkim. Further, the balance sheet showed that notwithstanding that the income was from commission, the assets were in the form of investments in the Dalmia group companies in India. 77. The further finding of the AO that the commission earned is more than the entire turnover of the sales of cardamom even from the accounts produced by the Assessees has again not been dislodged by the Assessees. The repeated assertion during the course of the arguments that no income was accrued to the Assessees or earned by them in India, cannot be accepted in the absence of any tangible material produced before the AO by the Assessees to substantiate such plea. The finding by the ITAT in this regard is contrary to the record and is based on surmises and unsustainable in law. Service of notice 78. This then brings up a question whether the notices were rightly served on the Assessees by tendering them at the address of Ratan Gupta & Co. at Ansari Road, Da....
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.... could not be raised in view of the judgment of the High Court of Sikkim, the Court is of the view that this judgment did not preclude the Assessees from raising this issue. However, the ITAT proceeded on the basis that Rattan Gupta could not have been served notices, because he was not authorized to receive notices. 82. The submission of the Revenue is that there was valid service of notice in terms of Section 282 since Mr. Rattan Gupta was the principal officer of the Assessees in terms of Section 282 (2) (c) read with Section 2 (35). The evidence brought on record bear out the submission of the Revenue that "As long as Rattan Gupta is the principal officer of the assessee, notice can be addressed and served upon him, without the need to establish authority to receive notice under Order V Rule 12 of the CPC." In any event the AR of the Assessees appeared before the AO and accepted that notice had been issued. 83. In the light of the finding of this Court that the management and control was with Mr. Rattan Gupta & Co., there was an implied authority of Mr. Rattan Gupta to receive such notices even in terms of Section 252(2) of the Act, read with Order V Rule 20 CPC. Conseque....
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....7th February 1992 whereas the notice under Section 143 (2) was issued only on 24th August 1998. It is further submitted that the Order sheet entries of the AO show that no such notice was issued other than the one dated 24th August 1998. It is submitted that there can be no acquiescence against validity of the assumption of jurisdiction. Reliance is paced on the decision in CIT vs. Hotel Blue Moon 321 ITR 362(SC). 88. The Court finds merit in the submission of the Revenue that the above plea was raised for the first time by the Assessees before the ITAT and ought not to have been permitted by it. This objection finds support in the decisions in CIT v Indovax (2014) 220 Taxman 164 (Delhi) and CIT v Sushil Modi (2003) 130 Taxman 286 (Delhi). Even otherwise, it is seen that the Assessees engaged in protracted litigation first before the High Court of Sikkim and thereafter this Court. There was an interim order staying the assessment proceedings from 10th July 1990 to 13th August 1998. Having benefited by that interim protection, the Assessees cannot be heard to submit that there was delay in the issue of notice under Section 143 (2). For that purpose, the time during which the proc....
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....he said companies. This coupled with the fact that the blank signed cheque books of all the five companies together with rubber seals, the letter heads, the blank signed cheques and other records were also found in the office of Rattan Gupta & Co., the factual determination by the AO that the management and the control of the five companies was actually wholly situated in Delhi gets fortified. 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. (iv) The findings of the AO that the Assessees failed to prove that the commission payments were earned by them exclusively in Sikkim has not been dislodged by the Assessees by producing any tangible material. (v) There was an implied authority of Mr. Rattan Gupta to receive such notices even in terms of Section 252(2) of the Act, read with Order V Rule 20 CPC. Consequently, the Court is unable sustain the finding of the ITAT that notice was not properly served on the Assessees through Rattan Gupta & Co. There was no need....