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TaxTMI 
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2023 (4) TMI 419
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....ommon 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 immediately before the appointed day, i.e., 26t....
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....ntant 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 the assessees filed return of income in terms of the Sikki....
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.... 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) dated 30th March, 2001. 2.13 Feeling aggrieved by the order(s) pass....
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..... 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. Rattan Gupta was not only doing the audit work of the five Assessee companies, but determining who should be the directors of the said companies. This coupled with the fa....
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....nior 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 passed by the High Court, Shri Arvind P Datar, learned senior counsel appearing on behalf of the assessee companies has vehemently submitted that the impugned judgment is based on an erroneous assumption that the....
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....kkim 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 of availability of books of accounts of the assessee companies at the premises of the Chartered Accountant of the assessee companies, i.e., M/s Rattan Gupta & Co. It is submitted that such an approach is wholly untenable in l....
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....ef 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 impugned order is based on a flawed presumption of a critical fact and therefore the impugned judgment deserves to be set aside by this Court. 3.16. Shri Datar further submitted that in the absence of framing of any substantial question of l....
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.... 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 Secretary, Treasurer, Manager or Agent of the assessee companies under section 2(35)(a) of the Act. 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 assesse....
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....d 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 issue pertaining to service of notice and levy of interest. 4.1 Insofar as the submission on behalf of the appellants on control and management of affairs of the companies is concerned, it is submitted that section 6 of the Act defines residence in India. That the relevant provis....
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....anage 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 of dual residence, it is necessary to show that the company performs some of the vital organic functions incidental to its existence in both the places so that there are in fact two centres of management. 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 ....
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.... 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 this Court that under section 147, the AO has been vested with the power to 'assess or reassess' the escaped income of an assessee. That the term 'escaped assessment' includes both "nonassessment" as well as "under assessment." 4.8 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 suff....
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....his 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 annexed the same with the assessment order, the same would constitute adequate compliance for sustaining the interest and upholding it. That the aforesaid judgment makes it evidently clear that when an issue is incidental or collateral then it does not give rise to a substantial question of law. Once the tax liability is upheld, interest become automatic, mandatory and collateral. 4.12 It is next submitted that the final outcome of the tax liabil....
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..... 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 projected as a resident of Gangtok, Sikkim, which could not be sustained as no proof or identity was shown; ii) The entire books of accounts were found and seized at New Delhi at the address of Mr. Rattan Gupta, Chartered Accountant, 4556/4, Ansari Road, Darya Ganj, New Delhi. Returns were filed without audit reports and auditors have not signed balance sheets and the auditors were also based out of Delhi. Though bank accounts were available both in Delhi and Sikk....
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.... 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 upheld the findings of the AO, more specifically regarding commission alleged to have been received by reiterating that the summons sent to different persons who had allegedly paid amounts as commission had not responded to him and that the assessees had also not produced any worthwhile evidence to prove the genuineness of commission received. 2) That even U.P. Karma was examined on 8th October, 1998 and he confirmed that he had joined in 1998 and had no idea of earlier annual general body meetings and could not produce any minutes. He also confirmed that he did not have any idea about the busi....
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....as 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, Income Tax Act, 1961 would apply to such income and the jurisdiction of the income tax authorities would not get excluded as long as what is sought to be brought to take is the income of the company incorporated in Sikkim, which income accrued to it and was earned in India. 2. While referring to the various statements made by the directors who are all stationed in Delhi, the High Court has given the following findings: i) Rattan Gupta had not acted merely as an auditor giving professional advice to the 5 entities; ii) His own employees are appointed as directors; iii) The explanation offered for signed cheque books, rubber seals and letter heads being availa....
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.... 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 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, nonexistence 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 in....
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....r 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 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 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. (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." ii) Thereafter, in the case of Erin Estate (supra), it is observed in paragraphs 6 & 9 as under: "6. There is no doubt that the question raised for our decision is a question of law....
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.... 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 that the control and management is not situated wholly without the taxable territories. (Vide B.R. Naik v. CIT [(1945) 13 ITR 124 : (1946) 14 ITR 334] ). The effect and scope of the provisions of Section 4-A(b) has been considered by this Court in V.V.R.N.M. Subbayya Chettiar v. CIT [1950 SCC 971 : (1950) SCR 961, 965] . After examining the relevant decisions on this point, Fazi Ali, J., who delivered the judgment of the Court, has observed "(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. ...(2) Mere activity by the company in a place does not create residence, with the result that the company may be residi....
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....iappa 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 held in paragraphs 3 and 4 as under: "3. It is also necessary that the control and management of the affairs of the company should be situated wholly in the taxable territories. Therefore, if any part of the control and management is outside the taxable territories then the company would not be resident. In this connection it is perhaps necessary to look at the converse definition for a Hindu undivided family, firm or other association of persons. In their case they are resident unless the control and management of its affairs is situated wholly without 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 tax....
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....nd 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 management and control in Bombay and manage and control all the affairs of these branches from Bombay and at Bombay. It would be impossible to contend that because there are authorised agents doing the business of the company at six different places outside India, therefore the company is resident not only in Bombay but at all these six different places. 4. ....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. But the mere doing of business does not constitute these managers the controlling and directing power. Their power-of-attorney can be cancelled at any moment, they must carry out any orders given to them from Bombay, they must submit to Bombay an explanation of what they have been doing, and througho....
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....he 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 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. The word "wholly" as used in s. 6(3) would indicate that the seat of such power may be divided between two distinct and separate places. The expression "control and management" means de facto control and management and not merely the right or power to control and manage. In order to hold that a non- Indian company is resident in India during any previous year, it must be established that such company de facto controls and manages its affairs in India. The principles are by now well settled. 8. Lord Loreburn L.C. in De Beers Consolidated Mines Ltd. v. Howe, [1906] 5 TC 198 (HL) at page 212, observed as follows: "Mr. Cohen propounded a test which had the merits of simplicity and certitude. He maintained that a ....
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.... 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 case of Nandlal Gandalal (supra), this Court has held that the expression "control and management" in Section 4A(b) of the Income Tax Act, 1922, means de facto control and management and not merely the right or power to control and manage. 8. The sum and substance of the above decisions of this Court as well as various High Courts would be that where the head and seat and directing power of the affairs of the company and the control and management is must be shown is not merely theoretical control and power, i.e., not de jure control and power, but de facto control and power actually exercised in the course of the conduct and management of the affairs of the firm; that the domicile or the registration of the company is not at all relevant and the determinate test is where the sole right to manage and control of the company lies. 9. Applying the above principles of law to the facts of the case a....
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....ssion 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 assessees cannot be permitted to say that they were liable to pay the tax under the Sikkim Manual, 1948 and not under the Income Tax Act, 1961. It appears that the assessees with mala fide intention and to evade the payment of tax under the Income Tax Act, 1961 came out with a case that they earned the income within Sikkim, which has not been established and proved. It was a clear attempt on the part of the respective assessees to wriggle out of the clutches of the Income Tax Act, 1961. 11. As regards the submission on behalf of the respective assessees that as there was no original assessment under the Income Tax Act, 1961, there could not have been the re-assessment under sections 147/148 of the Act, 1961 is concerned, the same has no substance in view of the binding decision of this Court in the case of Sun Engineering Works P. Ltd. (supra). In paragraph 14 of the said decision, it is observed and....
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....ns 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 XIX-A of the Act. In the present case also, the levy of interest under Section 234A for default in furnishing the return of income is mandatory and automatic. Section 234A of the Act provides that where the return of income for any assessment year is furnished after the due date or is not furnished, the assessee shall be liable to pay simple interest. Thus, interest under section 234A is statutory interest leviable and payable and therefore the decision of this Court in the case of Anjum M.H. Ghaswala (supra) shall be applicable with full force. Therefore, when the interest is levied as per the workings mentioned in ITNS 150 which is forming part of the assessment order, it is rightly held to be sufficient and good enough to charging interest. (See decision of this Court in the case of Bhagat Construction Company Private Limited (supra)). 13. As regards the submission on behalf of the assessees that no substantial....