TaxTMI 
TaxTMI 
2023 (4) TMI 419
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....enue and has quashed and set aside the common order dated 08th January, 2002 passed by the Income Tax Appellate Tribunal, New Delhi (for short, 'ITAT') for Assessment Years 1987-88, 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. Facts: 2. The facts leading to the present appeals in nutshell are as under: The respective assessees, namely, Mansarovar Commercial Private Limited, Sovereign Commercial Private Limited, Swastik Commercial Private Limited, Trishul Commercial Private Limited and Pasupati Nath Commercial Private Limited were incorporated under the Registration of Companies (Sikkim) Act, 1961. Each of the assessee companies claim to be carrying on the business of commercial agents in cardamon and other agricultural products. 2.1 Sikkim became part of India in April, 1975. The Constitution (Thirty Sixth Amendment) Act, 1975 inserted Article 371-F into 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 ....
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....e premises of M/s Rattan Gupta & Co., Chartered Accountant at Daryaganj, New Delhi and during the course of the search, books of account, cheque books, signed blank cheques, vouchers and other income documents of the assessees were found. The statements of the partners, former and current, of M/s Rattan Gupta & Co., CA were recorded. 2.5 On 10th July, 1990, following the search conducted on 15th 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). An order was passed on 12th July, 1990 by ACIT (Investigation), Circle 13(1), New Delhi in respect of M/s Rattan Gupta & Co. under section 132(5) of the Act. It appears that the said Rattan Gupta informed the assessees about notices under section 148 of the Act issued to each of them at the address of M/s Rattan Gupta & Co. at Daryaganj, New Delhi and affixed at the said premises of M/s Rattan Gupta & Co. 2.6 Meanwhile, each of t....
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....IT, Company Circle 2(2), New Delhi for each of the Assessment Years in question. The Assessing Officer 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 Assessing Officer also rejected the objections raised by the assessees as to the jurisdiction. 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). Separate penalty proceedings were initiated under sections 271(1)(a). 271(1)(c), 273/274 and 271-B of the Act. 2.12 The assessees then preferred appeals before the CIT(A). Subsequently on 08th December, 2000, the writ petitions filed by the assessees came to be dismissed by the High Court as the respective assessees moved the Appellate Authority prescribed under the statute. The appeals preferred by the assessees before the CIT(A) came to be dismissed vide order(s)....
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....alt with and considered the following main issues and both the parties were heard on the said issues. 1. Objection to the jurisdiction by the ACIT, Circle 7(1), New Delhi who issued notices to the assessees under Section 148 of the Act; 2. Control and management in New Delhi; 3. No income accrued or was earned in Sikkim; 4. Service of notice; 5. Limitation for issuance of notice under section 147 of the Act; 6. Merits of the reopening of the assessments; and 7. 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. If any income accrued to them or was earned by them in India prior to 1st April 1990, then such income is taxable under the Act. (ii) The Revenue is justified in contending that the Assessees not having raised such objection at the first available opportunity should not be permitted to urge the ground of lack of jurisdiction of the Delhi officers to issue notices to them under Sections 147/148 of the Act. (iii) Mr. Ra....
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....and against the assessees. The impugned common judgment and order passed by the High Court is the subject matter of present appeals. Submissions : 3. Shri Arvind P Datar and Shri G. Umapathy, learned senior counsel have appeared on behalf of the respective assessee companies and Shri N. Venkataraman, learned Additional Solicitor General of India has appeared on behalf of the Revenue. 3.1 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. It is submitted that the further issue is, whether jurisdiction on the authorities in Delhi can be conferred solely based on the alleged effective place of control and management of the assessee companies for the purpose of applicability of Income Tax Act, 1961. 3.2 Challenging the impugned judgment and order ....
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....1948. Reliance is placed on certain observations made in paragraphs 13 to 15 of the said decision. 3.7 It is next submitted that the assessee companies filed income tax returns before the appropriate authority as per Sikkim Manual, 1948 and a demand was raised by the said authority, which was paid. 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. Therefore, the allegation that the assessee companies have no real business in Sikkim is absolutely baseless, unfounded and untenable. 3.8 Making above submissions, it is urged that the Income Tax Act, 1961 shall not be made applicable so far as the assessee companies are concerned for the relevant assessment years. 3.9 It is further submitted that as such the ACIT, Delhi had no territorial jurisdiction to assess the assessee companies and therefore clearly exceeded in his jurisdiction in issuing notices under section 148 of the Act on the assumption that the assessee companies were carrying on business in India, on the basis....
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....refore wholly untenable and consequently to draw such presumption is legally unsustainable. 3.14 It is further submitted that there was no cogent material at the time of issuance of notices under section 148 of the Act to form a belief that income was chargeable under the Income Tax Act, 1961 and that the burden to prove that the control and management of assessee companies was situated wholly in India lie with the Department. That the law is well settled that the onus was on the Revenue, which has not been discharged. That on the contrary the High Court has erred in shifting the onus on the assessee companies to prove that they had legitimate business interest and income arising from the State of Sikkim. 3.15 It is contended that the impugned order is based solely on an erroneous supposition that Mr. Rattan Gupta was in control of the management of the assessee companies. That as such until the Assessment Years 1988-89, the audit and accounts of the assessee companies were being handled by one Ravinder Singh & Co. That the High Court has committed an error in treating the said Ravinder Singh to be the partner of M/s Rattan Gupta & Co. It is submitted that therefore, the impu....
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....d, (2001) 247 ITR 209 taking the view that levy of interest was under Section 234A, B & C of the Act, without a direction by the AO in the assessment order is not legally sustainable. 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. Anjum M.H. Ghaswala, (2002) 1 SCC 633 and Commissioner of Income Tax, Delhi v. Bhagat Construction Company Private Limited, (2016) 15 SCC 738. 3.19 Shri Datar, learned senior counsel appearing on behalf of the assessee companies contended that as such there was no notice served upon the proper person and the notice served upon Rattan Gupta cannot be said to be a valid service of notice. That under section 2(35)(b) of the Act, the Assessing Officer is required to serve a notice only on persons who are connected with the management or administration of the assessee company to treat them as Principal Officer. That Rattan Gupta was never connected with the management or administration of the assessee companies so as to treat him as a Principal Officer. That Rattan Gupta was not the S....
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....mises of the practising Chartered Accountant 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. The failure of same would set a very bad precedent and have far reaching consequences on the rights of Chartered Accountants to carry on their profession. 3.24 Making above submissions and relying upon the aforesaid decisions, it is prayed that the present appeals be allowed. 4. The present appeals are vehemently opposed by Shri N. Venkataraman, learned Additional Solicitor General of India appearing on behalf of the Revenue. He has taken us through the findings recorded by the Assessing Officer in the Assessment Order, findings of the CIT(A) vide order dated 30th March, 2001, findings recorded by the ITAT vide order dated 8th January, 2002 and the findings recorded by the High Court including the findings recorded regarding the is....
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....directions governing the commercial venture are given from elsewhere. b) Domicile or registration of the company is not relevant. The making, maintaining, managing and working is insufficient. c) Directors authorised to manage the work and employees rendering service again are insufficient. d) The determinative test is where the sole right to manage and control every department of its affairs lies. Managers and directors whose services are merely remunerated is not a relevant criterion. The profits although received by the employees as remuneration, do not belong to them and are not in their disposal. Incurring of debts or payment to agents are of no consequence. e) The test is, where the head and seat and directing power of the affairs of the company is, which works with some degree of permanence while the expression 'wholly' would seem to recognize the possibility of the seat of such power being divided between two distinct and separate places. f) The question to be asked is from where the person or group of persons control or direct the business. g) Mere activity by the company does not create residence. h) In case o....
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....nment with the global needs and business practices. 4.6 Taking us to the findings recorded by the AO, CIT(A) and the High Court which are on appreciation of evidence/material on record, it is vehemently submitted by Shri N. 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. It is submitted that the control and management of the companies was being done by Rattan Gupta from his Delhi office. Therefore, the assessees can be said to be residence in India and therefore liable to pay tax under the Income Tax Act, 1961. 4.7 Insofar as the submission on behalf of the appellants that in the absence of any original assessment, there shall not be any re-assessment under sections 147/148 of the Act, Shri N. Venkataraman, learned ASG has heavily relied upon the decision of this Court in the case of Commissioner of Income Tax v. Sun Engineering Works P. Ltd. (1992) 4 SCC 363 (paragraph 14). It is submitted that in the said decision, it is observed and held by thi....
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....in view of the subsequent decisions in the cases of Anjum M.H. Ghaswala (supra) and Bhagat Construction Company Private Limited (supra). 4.11 Insofar as the submission regarding non-framing of the substantial question of law on levy of interest is concerned, heavy reliance is placed on the decision of this Court in the case of State Bank of India v. S.N. Goyal, (2008) 8 SCC 92 (paragraph 13). It is submitted that as observed and held by this Court in the aforesaid decision, when a question of law arises incidentally or collaterally, having no bearing on the final outcome, it will not be a substantial question of law. It is submitted that in the present case, the Constitution Bench in Anjum M.H. Ghaswala (supra) has held that the interest is both mandatory and automatic and the decision of this Court and various High Courts had concluded that it does not require a separate notice, hearing and an independent order. 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 annexe....
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....gh Court in great detail. At the outset, it is required to be noted that the AO held against the respective assessees on all points including Rattan Gupta being the main person in management and control of the respective companies situated in Delhi as well as the jurisdiction of the AO in Delhi. The findings shall be referred to hereinbelow. The findings recorded by the AO have been upheld by the CIT(A), which are also against the respective assessees. However, the ITAT reversed the order passed by the CIT(A), which order has been reversed by the High Court by holding that the decision of the ITAT is perverse both, on facts and in law. 6. 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. Ajay Agarwal was pr....
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....d by these persons except signing papers; x) Mr. Rajiv Jain in his statement dated 15th March, 1990 confirmed that cheque books and pass books were found at the office of Mr. Rattan Gupta and so is the case with rubber stamps and blank printed letter heads; xi) 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) This was done till 31st March, 1989 and the moment Income Tax Act was extended in 1990 the whole apparatus erased and no commission was shown by any of the companies. Findings recorded by the CIT(A) : 1) That the appellate authority u....
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....nclusion that since all the 5 companies had been registered in Sikkim, Sikkim will get the jurisdiction to tax. Thereafter, the ITAT concluded that the revenue could not discharge its burden and, therefore, control and management was only in Sikkim and the income had accrued only in Sikkim. 6.1 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. 6.2 On the levy of interest, the ITAT concluded that the interest could not have been levied since the AO had not applied his mind before levying interest following the decision of the Patna High court in the case of Ranchi Club Limited (supra). Findings recorded by the High Court: 1. That a company, though incorporated in Sikkim, if it had earned any income outside Sikkim and within India, I....
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....produce some evidence to counter the picture and, the court found that its extremely unusual that the seals and the signed blank cheques would be lying with the Chartered Accountant. e) The High Court in paragraph 70 held that the revenue is right as there can be no presumption in law that control and management is at the registered office. f) In paragraph 71, the High Court held that "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 assessee despite opportunity being afforded, serves to substantiate the case of the revenue that the management and control of the 5 assessee companies was in fact located in Delhi. 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 evi....
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....ompson (Inspector of Taxes), 1925 AC 495 : 9 TC 373 (HL)] , which is one of the leading cases on the subject, are: (1) That the conception of residence in the case of a fictitious "person", such as a company, is as artificial as the company itself, and the locality of the residence can only be determined by analogy, by asking where is the head and seat and directing power of the affairs of the company. What these words mean have been explained by M. Patanjali Sastri, J. with very great clarity in the following passage where he deals with the meaning of Section 4-A(b) of the Income Tax Act: "4-A. (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." As a general rule, the 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 grou....
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....hen the section refers to the control and management being situated wholly without the taxable territories it implies that the control and management can be situated in more places than one. Where the control and management are situated wholly outside India the initial presumption arising under the section is effectively rebutted. 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. Theoretically, if the partners reside in India they would naturally have the legal right to control the affairs of the firm which carries on its operations outside India. 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. It must be shown by evidence that control and management in the affairs of the firm is exercised, may be to a small extent, in India before it can be held th....
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.... to ordinary matters connected with the business of the firm that the same has to be decided by majority of partners under sub-section (c) of the said section. It has not been suggested or shown that there was any difference between the partners in regard to the matters covered by the individual partner's letters of instruction to the superintendent. Indeed the course of conduct evidenced by these letters shows that Andiappa Pillai who holds the maximum number of individual shares has purported to act for the partnership and usually gave instructions in regard to the conduct and management of the firm's affairs. On the record we see no trace of any protest against, or disagreement with, this conduct of Andiappa Pillai. Besides, it was never suggested during the course of the enquiry before the Income Tax Officers that the directions given by Andiappa Pillai were not valid or effective and had not been agreed upon by the remaining partners. That is why we think this technical point raised by Mr Kolah must fail." iii) That thereafter the Bombay High Court in the case of Narottam and Pareira Ltd. (supra) through Justice M.C. Chagla, as His Lordship then was, observed and he....
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....ts and agents, but it is not the servants and agents that constitute the seat of power or the controlling and directing power. It is that authority to which the servants, employees and agents are subject, it is that authority which controls and manages them, which is the central authority, and it is at the place where the central authority functions that the company resides. It' may be in some cases that like an individual a company may have residence in more than one place. It may exercise control and management not only from one fixed abode, but it may have different places. That would again be a question dependent upon the circumstances of each case. But the contention which Mr. Kolah has most strongly pressed before us is entirely unacceptable that a company controls or manages at a particular place because its affairs are carried on at a particular place and they are carried on by people living there appointed by the company with large powers of management. 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 manageme....
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....e decision in the case of B.R. Naik v. Commissioner of Income Tax, Bombay, (1945) 13 ITR 124 has observed and held that the expression "control and management" means where the central control and management actually abides. 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. While holding so, in paragraphs 7 to 9, it is observed and held as under: "7. Under s. 6(3), a non-Indian company is said to be resident in India in any previous year if during that year the control and management of its affairs is situated wholly in India. The determination as to at what place or places the control and management of a particular company is situated is essentially a question of fact to be determined on the facts and circumstances of the particular case. 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. The expression "control and management" signifies the controlling and directiv....
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....ends 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 and, consequently, a non-Indian company would be a resident in this country if the meetings of the directors who manage and control the business are held here. The word "affairs" means affairs which are relevant for the purpose of the I.T. Act and which have some relation to the income sought to be assessed. It is not the bare possession of powers by the directors, but their taking part in or controlling the affairs relating to the trading, that is of importance in determining the question of the place where the control is exercised. They must exercise their power of control in relation to business or activity wherefrom the profit is derived. (See Egyptian Hotels Ltd. v. Mitchell, [1915] 6 TC 542 (HL))." v) In the c....
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....allegedly paid amounts as commission, however, those persons had not responded. Therefore, the AO as such has rightly drawn an adverse inference. At this stage, it is required to be noted that as such the assessees did not produce any worthwhile evidence to prove the genuineness of the commission received. Despite the above, the ITAT reversed the findings of fact recorded by the AO and the CIT(A) by observing that the AO did not proceed further (after issuing the summons/notices) and that since no adverse material has been brought on record the AO could not have proceeded to draw an adverse inference as the burden was heavy on the revenue. Once, the AO issued summons to those who had allegedly paid the commission to the assessees and the summons were issued under Section 131 which were not complied with and it was the assertion on behalf of the respective assessees that they earned the income of commission within Sikkim, the burden to prove the same was upon the assessees. Under the circumstances, the ITAT wrongly and erroneously shifted the burden upon the AO to prove the contrary. Therefore, in absence of any material on record that the commission was earned only in Gangtok, the ....
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....ce of any specific order passed in the assessment order to levy interest, the interest could not have been levied, is concerned, the said issue as such is concluded against the assessees in view of the Constitution Bench decision of this Court in the case of Anjum M.H. Ghaswala (supra) as well as the subsequent decision in the case of Karanvir Singh Gossal (supra). The ITAT relied upon the decision of the Patna High Court in the case of Ranchi Club Ltd. (supra), however, the decision of the Patna High Court in the case of Ranchi Club Ltd. (supra) is held to be not good law, in view of the Constitution Bench decision of this Court in the case of Anjum M.H. Ghaswala (supra). 12.1 In the case of Anjum M.H. Ghaswala (supra), while dealing with the interest under the provisions of Sections 234A, 234B and 234C of the Income Tax Act, 1961, it is observed and held that the interest contemplated under the said provisions is mandatory in nature and the power of waiver or reduction has not been expressly conferred on the Commission. The same indicates that insofar as the payment of statutory interest is concerned, the same is outside the purview of the settlement contemplated in Chapter XI....