Income Tax Act, 1961 – whether the company formed in Sikkim having control and management in New Delhi will be subject to Sikkim Law or Indian Income Tax Act before 1st April, 1990 - by virtue of Section 26 of the Finance Act, 1989 the Act was made applicable to the State of Sikkim from the previous year relevant to the Assessment Year commencing from 1st April, 1990, thereby extending the date of applicability of the Act by one year from the date specified in the notification dated 23rd February, 1989 - The case of the assessees was that each of them was a resident of Sikkim, carrying on business in Sikkim and not elsewhere and that till 31st March, 1990, each of them were governed by the Sikkim Manual, 1948 and not the Income Tax Act - Assessing Officer rejected the objections raised by the assessees as to the jurisdiction and made additions to the income of the assessees under different heads of income – High Court upheld the revenue stand – The impugned judgment passed by the High Court is the subject matter of appeals – HELD - as per the findings recorded by the AO, CIT(A), confirmed by the High Court, it cannot be said that the High Court has committed any error in upsetting the findings recorded by the ITAT – the court is in complete agreement with the view taken by the AO, CIT(A) and the High Court on all issues including the issue of control and management of the affairs of the assessee companies by Rattan Gupta from Delhi; jurisdiction of the AO at New Delhi; applicability of the Income Tax Act, 1961; the assessees did not prove that the income was earned by way of commission in Sikkim and therefore the tax was not liable to be paid under the Income Tax Act, 1961 and was liable to be paid under the Sikkim Manual, 1948 the court is also in agreement with the view taken by the High Court on levy of interest in view of the binding decision of the Constitution Bench - the present appeals fail and the same is dismissed

 

2023-VIL-10-SC-DT

 

IN THE SUPREME COURT OF INDIA

 

CIVIL APPEAL NO. 5769 OF 2022

WITH

CIVIL APPEAL NO. 5773 OF 2022

CIVIL APPEAL NO. 5772 OF 2022

CIVIL APPEAL NO. 5771 OF 2022

CIVIL APPEAL NO. 5770 OF 2022

 

DATE: 10.04.2023

 

MANSAROVAR COMMERCIAL PVT. LTD

 

Vs

 

COMMISSIONER OF INCOME TAX, DELHI

 

CORAM

M.R. SHAH & B.V. NAGARATHNA, JJ.

 

JUDGMENT

 

M.R. SHAH, J.

 

1. Feeling aggrieved and dissatisfied with the impugned common judgment and order dated 22.02.2016 passed by the High Court of Delhi at New Delhi in Income Tax Appeal Nos. 162/2002, 164/2002, 165/2002, 167/2002 & 168/2002, by which the High Court has allowed the said appeals preferred by the Revenue and has quashed and set aside the common order dated 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., 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 Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) was not made straightway applicable to the State of Sikkim. Till such extension of the Act to Sikkim by a notification issued under Article 371-F(n), income tax was to be charged and collected under the Sikkim State Income-tax Manual, 1948 (for short, ‘Sikkim Manual, 1948’). The recovery of tax was under the scheme of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987.

 

2.2 By a notification No. S.O. 1028E dated 7th November, 1988 issued under Article 371-F(n) of the Constitution, the Act, the Wealth Tax Act, 1957 and the Gift Tax Act, 1958 were extended to the State of Sikkim. In terms of para 2 of the said notification, the Central Government appointed, by Notification S.O. 148E dated 23rd February, 1989, the 1st of April, 1989 as the date on which the Act would come into force in the State of Sikkim in relation to the previous year relevant to the Assessment Year commencing on the 1st day of April, 1989. However subsequently, by virtue of Section 26 of the Finance Act, 1989 the Act was made applicable to the State of Sikkim from the previous year relevant to the Assessment Year commencing from 1st April, 1990, thereby extending the date of applicability of the Act by one year from the date specified in the notification dated 23rd February, 1989.

 

2.3 The case of the assessees was that each of them was a resident of Sikkim, carrying on business in Sikkim and not elsewhere and that till 31st March, 1990, each of them were governed by the Sikkim Manual, 1948 and not the Act. Therefore, the stand of the assessees was that the income earned by them till that date was income earned in Sikkim from the business conducted/done in Sikkim. On the other hand, the case of the Revenue was that the control and management of each of the assessee companies was wholly with their auditor, M/s Rattan Gupta & Co., Chartered Accountants, who had their offices in Karol Bagh, New Delhi and therefore, were companies’ resident in India in terms of Section 6(3) of the Act.

 

2.4 A search was conducted on 15th March, 1990 at the 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 the assessees filed return of income in terms of the Sikkim Manual, 1948 for the Assessment Years in question on 27th April, 1990. A demand notice was issued to each of them in respect thereof on 23rd July, 1990.

 

2.7 The respective assessees filed writ petitions in the High Court of Sikkim, challenging the notices issued under section 148 of the Act. The Sikkim High Court initially passed an interim order staying further proceedings. The said interim order was modified in terms of which the Department was permitted to continue with its enquiry and seek facts and information from the Directors of the assessee companies. The assessee companies were required to furnish the necessary information and also to file returns and produce the books of accounts before the Assessing Officer, New Delhi in compliance of the notices under section 148 of the Act. Thereafter, the Sikkim High Court dismissed the writ petitions holding that it had no jurisdiction to entertain the said writ petitions since no part of the cause of action had arisen in the State of Sikkim. It was observed that as the notices were issued by the ACIT (Investigation), Circle 7(1), New Delhi and served on the assessees in New Delhi, it had no jurisdiction over the actions of that authority. It appears that the Sikkim High Court also observed that “mere fact that the companies have registered offices in Sikkim does not confer jurisdiction on this Court.”

 

2.8 It appears that in the meanwhile, on the basis of the returns filed by the assessees in Sikkim, the Income and Sales Tax Department of Government of Sikkim raised a revised demand on 30th November, 1990, cancelling the earlier demand raised on 30th July, 1990.

 

2.9 After the dismissal of the writ petitions by the Sikkim High Court on 20th July, 1993, the assessees filed writ petitions before the Delhi High Court being Writ Petition Nos. 5565 to 5569 of 1993. Initially, the Delhi High Court passed an interim order staying the proceedings. However thereafter on 13th August, 1998, an order was passed by the Delhi High Court directing the AO to frame the assessment subject to outcome of the writ petitions.

 

2.10 That thereafter on 24th August, 1998, notices were issued to the assessee companies under section 148 of the ACT by ACIT, Company Circle 2, New Delhi.

 

2.11 That on 09th October, 1998, separate assessment orders were passed by the ACIT, 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) dated 30th March, 2001.

 

2.13 Feeling aggrieved by the order(s) passed by the CIT(A) dismissing the appeals, the respective assessees preferred appeals before the ITAT. The ITAT observed and held that notices under Section 148 of the Act could not have been served on Mr. Rattan Gupta as the said Mr. Rattan Gupta cannot be said to be a “Principal Officer” of the assessees within the meaning of section 2(35)(a) of the Act and the AO did not serve any notices of his intention of treating Mr. Rattan Gupta as the “Principal Officer” for the purposes of section 2(35)(b) of the Act. On the refusal of Mr. Rattan Gupta to receive notices, ITAT observed and opined that if Mr. Rattan Gupta refused to receive such notices, he was justified in doing so and his refusal did not authorise the AO to resort to substituted service within the meaning of Rule 20 of Order V of CPC. The order(s) passed by the ITAT allowing the appeals preferred by the assessees was/were the subject matter of appeals before the High Court at the instance of the Revenue.

 

2.14 The High Court framed the following questions of law:

 

“1. Whether the Tribunal was right in holding that the ACIT exceeded his jurisdiction in issuing notices under section 148 of the Act and the notices were not served in accordance with law?

 

2. Whether the order made by the ITAT is perverse based on conjectures and surmises and ignorance of evidence and material and has relied upon incorrect facts?

 

3. Whether the income of the assessee is taxable in India?”

 

At the instance of the Assessees, an additional question was also framed as under by the same order:

 

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.”

 

2.15 By the impugned common judgment and order, the High Court has answered all the questions in favour of the Revenue and against the assessees and consequently has allowed the appeals preferred by the Revenue. The High Court in the impugned judgment and order has dealt 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 1 st 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 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 for the Department to have gone in for substituted service and the refusal by Rattan Gupta & Co. to receive the notice was sufficient to consider it as a deemed service of notice.

 

(vi) The plea of the Assessees that the proceedings under Section 148 of the Act gets vitiated in the absence of a specific order vesting the ACIT with the powers under Section 127 of the Act to issue notice under Section 148 of the Act is rejected.

 

(vii) The plea of the Assessees that the notices under Section 142(1) and 143(2) of the Act were issued for the first time in 1998 and were time barred is rejected.

 

(viii) On merits there were sufficient grounds for exercising the power under Section 148 of the Act.

 

(ix) The ITAT's conclusion that the interest under Sections 234 A and 234 B of the Act could not be charged since a specific notice in that behalf was not issued by the AO is unsustainable in law and is overruled.”

 

Concluding as above, the High Court has accordingly answered the questions framed in favour of the Revenue 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 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 effective control of the companies vested with one Mr. Rattan Gupta, a resident of Delhi, who was rendering accounting and auditing services.

 

3.3 It is submitted that the impugned judgment has erroneously allowed the Department to levy interest on the assessee companies without framing the issue as a specific question of law as mandated by Section 260A of the Act.

 

3.4 In support of his submission that the Income Tax Act, 1961 shall not be applicable for the period during the relevant assessment years, it is vehemently submitted by Shri Datar, learned senior counsel appearing on behalf of the assessee companies that the Income Tax Act, 1961 came to be extended to the State of Sikkim only on and after 1st April, 1990. That therefore, the AO exceeded his jurisdiction.

 

3.5 It is contended that the assessee companies having been assessed to tax under the Sikkim Manual, 1948 and having paid and discharged income tax under the said law cannot be subjected to tax once over again by applying the “head and brain” rule in the absence of an express provision under the Income Tax Act, 1961, more so in view of the well settled law that “a taxing statute should not be interpreted in such a manner that its effect will be to cast a burden twice over for the payment of tax on the taxpayers unless the language of the statute is so compelling that the Court has no alternative than to accept it.” That in a case of reasonable doubt, the construction most beneficial to the taxpayer is to be adopted.

 

3.6 It is further contended that as such the present case is squarely covered by the decision of this Court in the case of Mahaveer Kumar Jain v. CIT, Jaipur, reported in (2018) 6 SCC 527, wherein this Court considered a question whether the appellant, who was a resident of Rajasthan and had won a lottery from Sikkim during the Assessment Year 1986-87 was liable to be taxed in India where Income Tax Act, 1961 was in force, notwithstanding that the said income had accrued or arisen to him at a place where Income Tax Act, 1961 was not in force, i.e., Sikkim, more particularly when the said income had already been taxed in the State of Sikkim under the Sikkim Manual, 1948. 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 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 law, besides being perverse.

 

3.10 It is further submitted that as observed and held by this Court in the cases of Ajay Kumar v. State of Uttarakhand, 2021 SCC OnLine SC 48 and Kiran Singh v. Chaman Paswan, AIR 1954 SC 340, an order passed by the authority without jurisdiction is a nullity.

 

3.11 It is contended that the exercise of territorial jurisdiction by CIT, Delhi is also wholly untenable in law in view of section 6(3) of the Act as it was at the relevant point of time. That Mr. Rattan Gupta was a practising Chartered Accountant and providing accounting and auditing services to several corporates and individuals and could have never been the “head and brain” behind the assessee companies.

 

3.12 It is further contended that even otherwise the re-assessment was impermissible in law in the absence of any original orders passed under section 143(3) of the Act. Reliance is placed on the decision of this Court in the case of trustees of H.E.H, the Nizam’s Supplemental Family Trust v. CIT, reported in (2000) 3 SCC 501 (paragraphs 10 & 11). It is submitted that the said decision was subsequently followed and affirmed by this Court in the case of Standard Chartered Finance Limited v. CIT, Bangalore, (2016) 14 SCC 634 (Civil Appeal No. 1101 of 2016 dated 9.2.2016).

 

3.13 It is further submitted by Shri Datar, learned senior counsel appearing on behalf of the assessee companies that as such there was no material to substantiate that the assessee companies’ control and management was situated wholly in India. That the High Court has proceeded on an erroneous presumption that the assessee companies were controlled by one Rattan Gupta, who was rendering accounting and auditing services, simply because books of accounts had been found in his office. It is submitted that no evidence was produced to the effect that he ever appointed any person as the Director of the assessee companies or dictated the manner in which such Directors were to discharge duties towards assessee companies. That the finding of the High Court that the control over management vested with Rattan Gupta and therefore the assessee companies were situated in India, is therefore wholly untenable and consequently to draw such presumption is legally unsustainable.

 

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 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 law under Section 260A of the Act on levy of interest, the liability of interest could not have been fastened upon the assessee companies. That section 260A of the Income Tax Act is analogous to Section 100 CPC which mandates framing of question of law before exercising its jurisdiction on the said issue. It is submitted that as such no issue of levy of interest was framed by the High Court. That therefore the High Court has committed a jurisdictional error in recording a finding that ITAT’s conclusion that interest under section 234 A & B of the Act could not be charged since a specific notice in that behalf was not issued by the Assessing Officer, is unsustainable in law.

 

3.17 In addition, it is submitted on the aspect on territorial jurisdiction of the authorities at Delhi that the assessee companies were having their registered offices in Sikkim. Therefore, the issuance of notices under Section 148 of the Act is beyond jurisdiction. That on the issue of territorial jurisdiction, the ITAT found that since the business premises of the assessees were in Sikkim, the territorial jurisdiction to assess vested with the ACIT, Gangtok. Therefore, the ITAT rightly held that the ACIT Delhi who issued notices under section 148 of the Act had no territorial jurisdiction. That the proper course for the Department was to have the matter entrusted to ACIT, Gangtok after complying with the mandate of section 127 of the Act for transferring jurisdiction of ACIT, Gangtok to New Delhi. It is submitted that though the Revenue in its appearance before the High Court raised a question of law on the finding recorded by the ITAT on territorial jurisdiction of the authorities at Delhi, while framing question(s) of law, the High Court did not frame an issue with regard to territorial jurisdiction. Thus, the finding with regard to lack of territorial jurisdiction by ITAT had attained finality.

 

3.18 Insofar as the levy of interest is concerned, it is submitted that the ITAT specifically observed that no direction was made by the AO for levy of interest. Therefore relying upon the decision of this Court in the case of CIT v. Ranchi Club Limited, (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 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 assessee companies on the ground that he was a person connected with the management or administration of the assessee companies under section 2(35)(b) of the Act. However, in the present case, the AO never served a notice on Rattan Gupta under section 2(35)(b) of the Act expressing his intention to treat him as the Principal Officer of the assessee companies. Therefore, this failure vitiates the entire proceedings.

 

3.20 It is submitted that there is adequate evidence on record to establish that:

 

(a) the business was managed from Gangtok in Sikkim where the business was carried on by one Mr. Ajay Kumar Agarwal, Local Director and Mr. H.L. Verma,

 

(b)the income was earned and assessed to income tax in Sikkim as per the Sikkim Manual, 1948, and

 

(c)income tax was paid in Sikkim under Sikkim Manual, 1948.

 

3.21 That further, seized vouchers and records clearly establish that commission payments were received into the bank accounts of these companies from identified traders of large cardamom and that department had no material in its possession to disbelieve that these traders had made the commission payments only on sale of cardamom.

 

3.22 It is submitted that books of accounts, ledgers etc. which were found at the office premises of Mr. Rattan Gupta’s office at Daryaganj, Delhi were handed over to Mr. Rattan Gupta for providing professional accounting services as he was a practising Chartered Accountant.

 

He had clearly stated that the books of accounts, ledgers etc. were handed over to him for providing professional services and that the business operations were carried out from Gangtok in Sikkim by Mr. Ajay Kumar Agarwal, Local Director and Mr. H.L. Verma and that he had nothing to do with the business operations of the assessee companies. A mere allegation that he is in charge of the conduct of the company is not sufficient to hold that he is the Principal Officer. There should be credible material to how his active involvement in the conduct and management of the business.

 

3.23 It is next submitted that assumption of jurisdiction based on the seizure of books of accounts from the office premises 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 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 provision is section 6(3) of the Act. That this principle of control and management of its affairs is not something which had originated for the first time in the Income Tax Act, 1961. This expression had existed even under the Income Tax Act, 1922. It is submitted that under the erstwhile Income Tax Act, 1922, Section 4A defined residence in taxable territories. Section 6 of the Act deals with residence in India and the relevant provision would be Section 6(3) pre-amendment in 2017 and post-amendment 2017 w.e.f. 01.04.2017. He has taken us through the relevant provisions under the Income Tax Act, 1922 (Section 4A), Section 6(3) of the Act (existed prior to 01.04.2017) and Section 6(3) of the Act substituted by Finance Act w.e.f. 01.04.2017.

 

4.2 On the interpretation on the control and management of affairs, Shri N. Venkataraman, learned ASG has relied upon the following English, Supreme Court and High Court judgments both under the Act, 1922 and Act, 1961:

 

i) San Paulo v. Carter (1896) AC 31 Lord Halsbury;

 

ii) V.V.R.N.M. Subbayya Chettiar v. CIT, Madras, AIR 1951 SC 101;

 

iii) Erin Estate v. CIT, 1959 SCR 573;

 

iv) Narottan and Pereira Ltd. v. CIT, Bombay City, 1953 23 ITR 454 (paragraphs 3 & 4) (Bombay High Court Judgment);

 

v) Estate of A. Mohammed Rowther v. CIT, Madras, 1963 49 ITR 39, (Madras High Court Judgment);

 

vi) CIT v. Chitra Palayakat Co., 1985 156 ITR 730 (Madras High Court Judgment);

 

vii) Commissioner of Income Tax v. Nandlal Gandalal, 1960 40 ITR 1 (SC);

 

viii)A.M.M. Firm v. Reserve Bank of India, 1982 SCC OnLine Mad. 187 (Madras High Court Judgment);

 

ix) Commissioner of Income Tax v. Bank of China, 1985 SCC OnLine Cal. 24 (Calcutta High Court Judgment); and

 

x) Universal Cargo Carriers Inc. v. Commissioner of Income Tax, 1990 SCC OnLine Cal. 385 (Calcutta High Court Judgment)

 

4.3 Relying upon the aforesaid decisions, it is submitted as under:

 

a) Holding lands, receipt of payments and carrying on trade is of no consequence as long as the control of the commercial venture and 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 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 conduct and management of the affairs of the firm. Mere presence of directors or vesting of power in them is insufficient unless otherwise they had exercised the power elsewhere in the territory under question.

 

j) Even acting under a power of attorney is not sufficient as the same can be cancelled at any moment and as a power of attorney holder they must submit to the principal an explanation of what they have been doing and the principal has the right of keeping a vigilant eye over their work from the board room and the power exercised by the power of attorney holder is only de jure control and not de facto control and management.

 

k) The intrinsic test is where the central control and management actually abides. Mere presence of even the managing partner or mere delegation of power is insufficient.

 

l) The expression control and management of its affairs is much wider than the expression used in some treatises ‘Control and Management of the business.’

 

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