By TIOL News Service

NEW DELHI, FEB 25, 2016: THE issue is - Whether assessee would be resident company within the meaning of Section 6(3) where the management and control of the Assessee was wholly in New Delhi office. YES is the answer.

Facts of the case

The Assessees are companies carrying on the business of commercial agents in cardamom and other agricultural products. Sikkim became part of India in April 1975. The Constitution (Thirty sixth Amendment) Act, 1975 inserted Article 371-F in the Constitution of India, in terms of which not all the laws of India were extended to the new State of Sikkim. Income tax was to be charged and collected under the Sikkim State Income-tax Manual 1948 (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. By a Notification No. S.O. 1028 E 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. 1st of April, 1989 was appointed 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 AY 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 AY commencing from 1st April 1990.

The case of the Assessees is 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. The stand of the Assessees is that the income earned by them till that date was income earned in Sikkim from the business conducted done in Sikkim.

A search was conducted at the premises of M/s R & Co. CA at 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 Mr. R, Mr. RS (a former partner of M/s R & Co.) and a few other partners, both current and former, were recorded. Following the search conducted, notices were issued by the ACIT(Investigation) to each of the Assessees under Section 148 in respect of AYs 1987-88, 1988-89 and 1989-90. An order was passed in respect of the M/s R & Co. under Section 132 (5). Mr. R informed the Assessees that the aforementioned notice under Section 148 of the Act had been issued to each of them at the address of M/s. R & Co. at Daryaganj and had been affixed at the said premises of M/s. R & Co. Meanwhile, each of the Assessees filed returns of income in terms of the Sikkim Manual, 1948 for the three AYs in question. A demand notice was issued to each of them in respect thereof.

The Assessees filed writ petitions in the High Court of Sikkim, challenging the notices issued under Section 148. Sikkim High Court dismissed all the writ petitions holding that it had no jurisdiction to entertain the said petitions since no part of the cause of action had arisen in the State of Sikkim. It was stated that inasmuch as the notices were issued by the ACIT, (Investigation) and served on the Assessees in New Delhi, it had no jurisdiction over the actions of that authority. On the basis of the returns filed by the Assessees in Sikkim, the Income & Sales Tax Department of Government of Sikkim raised a revised demand cancelling the earlier demand. Assessee’s filed writ petitions in this Court. High Court passed interim order directing the AO to frame the assessment subject to outcome of the writ petition. The High Court directed that the Department may conclude the proceedings and pass orders thereon, but the orders would not be given effect to unless permitted by the Court.

Notices were issued to the Assessee companies under Section 143 by the ACIT requiring the Assessee to appear in the office of the ACIT. Separate assessment orders were passed by the ACIT for each of the AYs 1987-88, 1988-89, 1989-90, in which it was concluded that each of the Assessees were intentionally trying to take advantage of the prevailing laws at Sikkim by routing money through Sikkim and ploughing back in India. The objections raised by the Assessees as to jurisdiction were rejected. The additions were made on account of income from commission, unsecured loan from Dengzong Charitable Trust (DCT), interest accrued/paid on the unsecured loans and provision for income tax (which was disallowed). Separate penalty proceedings were initiated under Section 271(1)(a), 271(1)(c), 273/274 and 271-B.

Assessees then filed appeals before the CIT(A). Subsequently, the writ petitions filed by the Assessee were dismissed by the High Court. The additions made by the AO were confirmed by the CIT(A). CIT(A) also affirmed disallowance of the sums paid by the Assessees on account of the State income tax.

ITAT held that the burden was on the Revenue to prove that the control and management of the Assessee companies was situated wholly in India in the three AYs in question. At the time the AO proposed to issue notice under Section 148, there was no cogent material to enable him have reason to believe that the control and management of the affairs of the Assessee was wholly situated in India. Mere availability of the books of accounts with Mr. R in no manner establishes that the said place was the business premises of the assessee company from where it was carrying on any business. It was held that the Revenue failed to show the existence of any source of income from which the monies could be available to the Assessees in India and which, the Assessees could transfer to Sikkim. It was held that notices under Section 148 were not validly served on the Assessees. ITAT deleted the additions made by AO.

Having heard the parties, the Court held that,

++ Even though a company may have been incorporated under the Companies Act of Sikkim, in the period prior to 1st April 1989, if it earned any income outside Sikkim but within India, the Income Tax Act 1961 would apply to such income. The jurisdiction of the Indian income tax authorities would not get excluded as long as what is sought to be brought to tax is the income of a company incorporated in Sikkim which income accrued to it and was earned in India. (para 32);

++ the Assessees, incorporated under the company law of Sikkim, are resident Indian companies. If any income has accrued to them or earned by them in India prior to 1st April 1990, then such income is taxable under the Act. (para 33);

++ the decision in Pannalal Binjraj v. Union of India holds that the principles of natural justice must be followed while transferring cases from one jurisdiction to another. However the objection as to place of assessment has to be raised at the earliest stage. Therefore, 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. (para 40);

++ Mr. R 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 R & 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. (para 68)

++ despite detailed information being sought under Sections 142(1) and 143(2), no information was provided and according to the Revenue, there was non-cooperation. Further the Assessees have been unable to deny that barring one, all the directors were residents of Delhi. A different list was submitted during assessment proceedings where all were shown to be residents of Delhi. The Revenue is right in the contention that in the circumstances, there can be no presumption in law that control and management is at the registered office. (para 70)

++ the management and the control of the five Assessee companies was in fact located in Delhi. The finding by the ITAT in this regard is plainly perverse and unsustainable in law. (para 71);

++ in the light of the findings of this Court that the management and control of the five Assessee companies was wholly in the office of R & Co. at his office in Ansari Road, New Delhi, the conclusion is that all the five Assessee companies answered the description of the resident Indian companies within the meaning of Section 6(3) (ii) and were operating from Delhi. (para 73);

++ in terms of Section 5(1), the income of such resident would include the income that accrues and arises to such resident anywhere in India. In this regard, 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. (para 74)

++ none of the five entities named by the Assessees as having paid the commission to them appeared in the course of the assessment proceedings to confirm the payments having been made to the Assessee. The findings in this regard by the AO and the CIT(A), based as they were on preponderance of probabilities, were not able to be explained away by the ITAT. The Revenue's contention that the rate of commission claimed to have been paid was unrealistic and beyond human probabilities. Further no employees existed in Sikkim. The P&L account of the Assessees showed no expenditure corresponding to the carrying on of the business of trading in cardamom. The Assessees indeed failed to provide details and justification regarding the accrual of income exclusively at Sikkim. Further, the balance sheet showed that notwithstanding that the income was from commission, the assets were in the form of investments in the Dalmia group companies in India. (para 76);

++ in the light of the finding of this Court that the management and control was with Mr. R & Co., there was an implied authority of Mr. R to receive such notices even in terms of Section 252(2), 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 R & Co. There was no need for the Department to have gone in for substituted service and the refusal by R & Co. to receive the notice was sufficient to consider it as a deemed service of notice. The finding by the ITAT in this regard is contrary to the evidence on record and is unsustainable in law. (para 83);

++ the search and seizure operation that took place in March 1990 revealed for the first time that the actual management and control of the five Assessees was in New Delhi and that none of these companies had in fact filed any returns under the Indian Income Tax Act despite earning income in India. There are sufficient grounds for exercising the power under Section 148. Admittedly, returns were filed only pursuant to the orders passed by this Court. In any event, even the returns under the Sikkim Income Tax Law were only after the search operations took place in March 1990. The bona fides of the Assessees for complying with the laws was certainly not established. Consequently, the Court is of the view that the ITAT was in error in holding that sufficient ground did not exist for exercise of the power under Section 148. (para 89)

++ ITAT's conclusion that the interest under Section 234A and 234B would not be charged since a specific notice in that behalf was not issued by the AO, was based on the decision in Ranchi Club v. CIT 2003-TIOL-293-HC-PATNA-IT. That view has since been overruled by the decisions in CIT v. Bhagat Constructions and CIT v Anjum 2002-TIOL-73-SC-IT-CB. The decision of the ITAT in this regard is therefore overruled. (para 90)

(See 2016-TIOL-362-HC-DEL-IT)