The Income Tax Act Of 1961 Would Apply To A Company, Even Though It Was Incorporated In Sikkim, If It Had Earned Any Income Outside Of Sikkim And Within India

Case title:

Mansarovar Commercial Pvt. Ltd. Vs Commissioner of Income Tax, Delhi

Date of Order:

APRIL 10, 2023.

Bench:

Hon’ble Justice M.R. SHAH, Hon’ble Justice C.T. Ravikumar

Parties:

Appellant: Mansarovar Commercial Pvt. Ltd. 

Respondent: Commissioner of Income Tax, Delhi

SUBJECT:

Feeling aggrieved and unhappy with the contested common judgment and order issued by the High Court of Delhi in New Delhi in Income Tax Appeal Nos. 162/2002, 164/2002, 165/2002, 167/2002, and 168/2002, by which the High Court has allowed the aforementioned appeals filed by the Revenue and has quashed and set aside the common order issued by the Income Tax Appellate Tribunal, New Delhi, on January 8, 2002, 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) , the respective assessees have preferred the present appeals.

IMPORTANT PROVISIONS:

The Income Tax Act, 1961

As per Section 148 of the Income Tax Act, an Assessing Officer can issue a notice to taxpayers if their income escapes from the computation. They need to offer the following documents:

1. Income tax returns of an assessee

2. An individual's income tax return besides the assessee 

Remember, an assessee must furnish income tax returns within 30 days or a date specified in a notice.

OVERVIEW:

• The present appeals involve five companies, Mansarovar Commercial Private Limited, Sovereign Commercial Private Limited, Swastik Commercial Private Limited, Trishul Commercial Private Limited, and Pasupati Nath Commercial Private Limited, which claim to be carrying on the business of commercial agents in cardamon and other agricultural products. 
• These companies were incorporated under the Registration of Companies (Sikkim) Act, 1961. Sikkim became a part of India in April 1975, and under Article 371-F of the Indian Constitution, the Income Tax Act, 1961 was not immediately made applicable to the new state. 
• Until its extension to Sikkim, income tax was charged and collected under the Sikkim State Income-tax Manual, 1948. The Act was ultimately extended to Sikkim in 1988. The issue in the present case is whether the assessees were governed by the Sikkim Manual or the Act till 31st March 1990, and whether their control and management were with their auditor in New Delhi, making them resident in India under Section 6(3) of the Act. 
• A search was conducted in March 1990 at the premises of the auditor in New Delhi, during which documents of the assessees were found. Notices were issued to the assessees under Section 148 of the Act in July 1990 in respect of Assessment Years 1987-88, 1988-89, and 1989-90.
• The assessees filed returns of income in accordance with the Sikkim Manual for the Assessment Years and were issued demand notices by the Income Tax Department of the Government of Sikkim. The assessees filed writ petitions challenging the notices issued under section 148 of the Act in the High Court of Sikkim, which initially passed an interim order staying further proceedings. 
• The writ petitions were dismissed by the Sikkim High Court on the grounds that no part of the cause of action had arisen in Sikkim. The Delhi High Court directed the Assessing Officer to frame the assessment subject to the outcome of the writ petitions filed by the assessees. 
• The Assessing Officer passed separate assessment orders and initiated separate penalty proceedings under different heads of income. The CIT(A) dismissed the appeals preferred by the assessees, and the assessees then preferred appeals before the ITAT. 
• The ITAT allowed the appeals and held that notices under Section 148 of the Act could not have been served on Mr. Rattan Gupta, as he was not 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. Rattan Gupta as the "Principal Officer" for the purposes of section 2(35)(b) of the Act.

The High Court summarized its conclusion in favor of the Revenue and against the assessees. stated:

• Indian resident companies incorporated in Sikkim are taxable under the Indian Income Tax Act if income accrued to them in India prior to April 1, 1990; 
• Objections to the jurisdiction of Delhi officers to issue notices under Sections 147/148 of the Act cannot be raised if not raised at the first available opportunity; 
• Evidence shows that the management and control of the five Assessee companies was actually situated in Delhi; 
• The Assesses failed to prove that commission payments were earned exclusively in Sikkim; 
• Notice was properly served on the Assessees through Rattan Gupta & Co.; 
• Proceedings under Section 148 of the Act are not vitiated in the absence of a specific order vesting the ACIT with the powers under Section 127 of the Act; 
• Notices under Sections 142(1) and 143(2) of the Act were not time-barred; 
• There were sufficient grounds for exercising the power under Section 148 of the Act; and

Interest under Sections 234A and 234B of the Act can be charged without a specific notice

ISSUES RAISED:

• Whether the provisions of the Income Tax Act, 1961 shall apply to the assessee companies that are registered under the Sikkim Companies Act.
• Whether the income earned by the assessees as commission on sale of cardamom in Sikkim is liable to be taxed under the Income Tax Act, 1961 or not
• Whether Control and management of the affairs of the assessee companies by Rattan Gupta is from Delhi
• Whether it is Jurisdiction of the AO at New Delhi or Sikkim

ARGUMENTS ADVANCED BY THE APPELLANT:

• The issue in the current appeals, according to learned senior counsel appearing on behalf of the assessee companies, is whether the provisions of the Income Tax Act, 1961 shall apply to the assessee companies that are registered under the Sikkim Companies Act and subject to the Sikkim Tax Manual, 1948 in respect of three Assessment Years, namely 1987–1988, 1988–1989, and 1989–1990, when the Income Tax Act, 1961 was not extended to the State of Sikkim. 
• According to the argument, the next question is whether Delhi's authorities can be given jurisdiction merely based on the purported location of the assessee firms' management and control for the purposes of applying the Income Tax Act of 1961.
• The senior counsel representing the assessee companies has argued that the judgment against them is based on an incorrect assumption about the control of the companies and that interest was levied without following proper procedures. 
• The counsel has also argued that the Income Tax Act, 1961 should not be applicable to the relevant assessment years as it was only extended to the State of Sikkim from April 1, 1990, and that the AO exceeded his jurisdiction.
• Additionally, it is argued that the companies should not be subjected to double taxation without an express provision in the Income Tax Act, 1961, and that in case of doubt, the construction most beneficial to the taxpayer should be adopted
• The case concerns whether the Income Tax Act, 1961 applies to the assessee companies for the relevant assessment years, given that they filed tax returns as per the Sikkim Manual, 1948, and had paid the tax demand raised by the appropriate authority under that manual. The appellant cites the decision in Mahaveer Kumar Jain v. CIT, Jaipur to argue that the Income Tax Act should not be applied in this case. 
• The appellant further argues that the ACIT, Delhi exceeded its jurisdiction in issuing notices under section 148 of the Act and that the exercise of territorial jurisdiction by CIT, Delhi is also wholly untenable in law. The reassessment was also impermissible in the absence of any original orders passed under section 143(3) of the Act. 
• The appellant contends that there was no material to substantiate that the assessee companies’ control and management was situated wholly in India, and the High Court's finding that the control over management vested with Rattan Gupta was legally unsustainable
• The argument is that the ITAT did not direct the AO to levy interest, and therefore, the High Court was wrong in relying on previous cases to justify the imposition of interest. It is contended that the imposition of interest without a specific direction from the AO is not legally sustainable. The High Court's reliance on previous cases was also criticized
• Next, it is argued that the assumption of jurisdiction based on the seizure of books of accounts from the office space of a practicing chartered accountant, Mr. Rattan Gupta, in New Delhi and treating him as the principal officer or "head and brain" of the companies incorporated under the Sikkim Companies Registration Act, 1961, is unjustifiable because the chartered accountant had categorically stated under oath that he was providing professional accounting and reconciliation services. Failure to do so would create a very poor precedent and have far-reaching effects for Chartered Accountants' rights to practice their profession. 

ARGUMENTS ADVANCED BY THE RESPONDENT:

• The Additional Solicitor General of India is opposing the present appeals and has presented findings from the Assessment Order, CIT(A) order, ITAT order, and High Court findings, including issues related to notice service and interest levies. 
• The argument on the control and management of companies' affairs is based on section 6 of the Income Tax Act, which defines residence in India. The ASG contends that this principle existed even under the Income Tax Act, 1922, and has explained the relevant provisions under the old and new Acts.
• The appellants argue that re-assessment cannot be done under sections 147/148 of the Income Tax Act in the absence of an original assessment. However, the respondent contends that under section 147, the assessing officer (AO) can assess or reassess the escaped income of an assessee, including both non-assessment and under-assessment.
• The appellants argue that the notice sent to Delhi is sufficient as it is the principal place of business and the seat of control. The respondent relies on the High Court's findings and the Calcutta High Court's decision in India Glycols Ltd. v. Commissioner of Income Tax, 2004 SCC OnLine Cal. 736, to argue that notices served at Delhi are valid.
• The respondent argues that interest levied under Section 234A of the Act is mandatory and there is no discretion with the AO, and therefore there is no question of non-compliance with principles of natural justice. The appellants argue that while the penalty leviable under section 271 is discretionary, interest is mandatory, and there is no requirement of following principles of natural justice. 
• The respondent cites the Constitution Bench decision in Anjum M.H. Ghaswala and subsequent decisions in Karanvir Singh Gossal v. Commissioner of Income Tax and Bhagat Construction Company Private Limited to support their argument.
• The respondent argues that the decision of this Court in Ranchi Club Ltd. has been subsequently overruled and/or held not to be good law in view of the subsequent decisions in Anjum M.H. Ghaswala and Bhagat Construction Company Private Limited.
• The respondent argues that 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. In the present case, the interest is both mandatory and automatic, and it does not require a separate notice, hearing, and an independent order. Therefore, interest is incidental or collateral, and it does not give rise to a substantial question of law.
• The respondent argues 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. The appellants had not disputed the imposition of interest at the first instance, and therefore the moment the tax liability gets upheld, if the AO had imposed interest at the first instance, it would be valid

JUDGEMENT ANALYSIS:

Findings recorded by the High Court:

• Income Tax Act, 1961 would apply to a company incorporated in Sikkim, if it earned any income outside Sikkim and within India.
• Rattan Gupta was not merely an auditor giving professional advice, but in de facto control of the five entities.
• Control and management of the affairs of the assessee companies was wholly in India.
• 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 Rattan Gupta as being in de facto control of the five entities appears to be correct.
• The revenue is right as there can be no presumption in law that control and management are at the registered office.
• None of the five 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 assesses.
• The control and management of the assessee companies was with Rattan Gupta, Chartered Accountant in Delhi.
• The High Court has rightly held that the notices served on Rattan Gupta were valid and that the AO at New Delhi had jurisdiction to issue notice under the Income Tax Act, 1961.
• The income earned by the assessees was liable to be taxed under the Income Tax Act, 1961, as no income by way of commission had been established or proved by the assessees.
• The ITAT wrongly shifted the burden of proof upon the AO to prove the commission was not earned in Gangtok.
• The assessees attempted to evade the payment of tax under the Income Tax Act, 1961, with a false claim that they earned the income within Sikkim.
• The submission that there could not have been a re-assessment under sections 147/148 of the Act, 1961, due to the absence of an original assessment has no substance, as per the binding decision of the Sun Engineering Works P. Ltd. Case.
• After citing the ruling in the case of B.R. Naik v. Commissioner of Income Tax, Bombay, (1945) 13 ITR 124, Judge Kania, at the time, observed and held that the phrase "control and management" refers to the area where the actual central control and management abides.
• In the matter of Bank of China (supra), the Calcutta High Court clearly stated that although a firm may have multiple residences at once, control and management are located where the head and brain are.
• Court has ruled in the case of Nandlal Gandalal that the phrase "control and management" in Section 4A(b) of the Income Tax Act, 1922, refers to actual control and management rather than merely the right or power to do so.
• The case is about whether the income earned by the assessees as commission on sale of cardamom in Sikkim is liable to be taxed under the Income Tax Act, 1961 or not.
• The AO and the CIT(A) found that no income by way of commission has been established and proved by the assessees, despite issuing notices/summons to different persons who had allegedly paid amounts as commission.
• The ITAT reversed the findings of the AO and the CIT(A), but wrongly and erroneously shifted the burden of proof upon the AO to prove the contrary.
• Since the assessees did not produce any worthwhile evidence to prove the genuineness of the commission received, they cannot be permitted to say that they were liable to pay tax under the Sikkim Manual, 1948 and not under the Income Tax Act, 1961.
• It appears that the assessees tried to evade the payment of tax under the Income Tax Act, 1961 by claiming that they earned the income within Sikkim, which has not been established and proved.
• The submission made on behalf of the assessees regarding the levy of interest has been concluded against them.
• The Constitution Bench decision in the case of Anjum M.H. Ghaswala and subsequent decision in the case of Karanvir Singh Gossal have held that the interest under Sections 234A, 234B, and 234C of the Income Tax Act, 1961 is mandatory in nature and the power of waiver or reduction has not been conferred on the Commission.
• The decision of the Patna High Court in the case of Ranchi Club Ltd. is not good law in view of the Constitution Bench decision in the case of Anjum M.H. Ghaswala.
• The levy of interest under Section 234A for default in furnishing the return of income is mandatory and automatic.
• The interest is statutory interest leviable and payable.
• When the interest is levied as per the workings mentioned in ITNS 150, which is part of the assessment order, it is sufficient and good enough for charging interest

CONCLUSION

• The control and management of the various assessees' affairs were with Rattan Gupta, a Chartered Accountant in Delhi, according to the conclusions of the AO and the CIT(A) when the aforementioned legal principles were applied to the facts of the matter at hand. The AO's conclusions of fact—confirmed by the CIT(A)—that Rattan Gupta was in charge of managing and controlling the affairs of the assessee entities were based on the entirety of the documentation.
• The High Court correctly observed and held that notices served on Rattan Gupta treating him as the principal officer and/or as a principal officer for and on behalf of the assessee companies were valid notices in light of the aforementioned findings. Additionally, the High Court correctly determined that the AO in New Delhi had the authority to issue notices under the Income Tax Act.
• Given the foregoing, the aforementioned reasons, and the conclusions recorded by the AO, CIT(A), which were upheld by the High Court, it cannot be contended that the High Court erred in overturning the findings recorded by the ITAT. We completely concur with Rattan Gupta's supervision of the assessee companies' activities from Delhi; the AO's jurisdiction in New Delhi; the applicability of the Income Tax Act of 1961; 
• And all other positions adopted by the AO, CIT(A), and the High Court that the assessees failed to establish that the income was obtained in Sikkim through the payment of commissions; as a result, the tax was not due under the Income Tax Act of 1961 but rather under the Sikkim Manual of 1948. We concur with the High Court's stance on the imposition of interest in light of the Constitution Bench's conclusive ruling in the matter of Anjum M.H. Ghaswala (above), which was later applied to Karanvir Singh Gossal (supra).
• The current appeals fail for the reasons outlined above, and as a result, they deserve to be dismissed and are done so. There shall be no order regarding expenses given the facts and circumstances of the case, nonetheless.