$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 7th January, 2016
Date of Decision: 22nd February, 2016
+ ITA 162/2002
COMMR.OF INCOME TAX-DELHI ..... Appellant
Through: Mr. Kamal Sawhney, Senior Standing
Counsel, Mr. Raghvendra Singh, Junior
Standing Counsel and Mr. Shikhar Garg &
Mr. Sharad Agarwal, Advocates.
versus
MANSAROVAR COMMERCIAL P LTD ..... Respondent
Through: Mr. C.S. Aggarwal, Senior Advocate with
Mr. Prakash Kumar and Mr. Suhail Malik,
Advocates.
With
+ ITA 164/2002
COMMR.OF INCOME TAX-DELHI ..... Appellant
Through: Mr. P. Roy Choudhary, Senior Standing
Counsel.
versus
SOVEREIGN COMMERCIAL P LTD ..... Respondent
Through: Mr.C.S.Aggarwal, Senior Advocate with
Mr. Prakash Kumar and Mr. Suhail Malik,
Advocates.
With
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 1 of 51
+ ITA 165/2002
COMMR.OF INCOME TAX-DELHI ..... Appellant
Through: Mr.Kamal Sawhney, Senior Standing
Counsel, Mr. Raghvendra Singh, Junior
Standing Counsel and Mr. Shikhar Garg &
Mr. Sharad Agarwal, Advocates.
versus
SWASTIK COMMERCIAL P LTD ..... Respondent
Through: Mr. C.S. Aggarwal, Senior Advocate with
Mr. Prakash Kumar and Mr. Suhail Malik,
Advocates.
With
+ ITA 167/2002
COMMR.OF INCOME TAX-DELHI ..... Appellant
Through: Mr. Rohit Madan, Senior Standing
Counsel with Mr. Zoheb Hossain, Advocate.
versus
TRISHUL COMMERCIAL P LTD ..... Respondent
Through: Mr. C.S. Aggarwal, Senior Advocate with
Mr. Prakash Kumar and Mr. Suhail Malik,
Advocates.
And
+ ITA 168/2002
COMMR.OF INCOME TAX-DELHI ..... Appellant
Through: Mr. Kamal Sawhney, Senior Standing
Counsel, Mr. Raghvendra Singh, Junior
Standing Counsel and Mr. Shikhar Garg &
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 2 of 51
Mr. Sharad Agarwal, Advocates.
versus
PASUPATI NATH COMMERCIAL P LTD ..... Respondent
Through: Mr. C.S. Aggarwal, Senior Advocate with
Mr. Prakash Kumar and Mr. Suhail Malik,
Advocates.
CORAM:
JUSTICE S. MURALIDHAR
JUSTICE VIBHU BAKHRU
JUDGMENT
% 22.02.2016
Dr. S. Muralidhar, J.:
1. These five appeals under Section 260A of the Income Tax Act, 1961 (`the
Act') by the Revenue are against a common order dated 8th January, 2002,
passed by the Income Tax Appellate Tribunal (`ITAT') for Assessment
Years (`AYs') 1987-88, 1988-89 and 1989-90.
Introduction
2. The Assessees - Mansarover Commercial Private Limited (MCPL) (the
Respondent in ITA No. 162 of 2002), Sovereign Commercial Private
Limited (SCPL) (the Respondent in ITA No. 164 of 2002), Swastik
Commercial Private Limited (SWCPL) (the Respondent in ITA No. 165 of
2002), Trishul Commercial Private Limited (TCPL) (the Respondent in ITA
No. 167 of 2002) and Pasupati Nath Commercial Private Limited (PNCPL)
((the Respondent ITA No. 168 of 2002) are companies incorporated under
the Registration of Companies (Sikkim) Act, 1961. Each of the Assessee
companies claims to be carrying on the business of commercial agents in
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 3 of 51
cardamom and other agricultural products and having bank accounts with
UCO Bank, Gangtok and State Bank of India (SBI), Gangtok and Kasturba
Gandhi Marg, New Delhi.
3. 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. 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 Act was not made straightaway 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 (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.
4. 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. In terms of
para 2 of the said Notification, the Central Government appointed, by
Notification S.O. 148 E 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 AY commencing on the 1 st day
of April, 1989. However, subsequently by virtue of Section 26 of the
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 4 of 51
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,
thereby extending the date of applicability of the Act by one year from the
date specified in the notification dated 23rd February, 1989.
5. 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 31 st 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.
6. The case of the Revenue, on the other hand, is that the control and
management of each of the Assessee companies was wholly with their
auditor, M/s. Rattan Gupta & Company, Chartered Accountants (CAs), 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.
Search
7. A search was conducted on 15th March 1990 at the premises of M/s Rattan
Gupta & Co. Chartered Accountant (`CA') at Daryaganj, New Delhi and
during the course of the search books of account, check books, signed blank
cheques, vouchers and other income documents of the Assessees, were
found. The statements of Mr. Rattan Gupta, Mr. Ravinder Singh (a former
partner of M/s Rattan Gupta & Co.) and a few other partners, both current
and former, were recorded.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 5 of 51
8. On 10th July 1990, following the search conducted, notices were issued by
the Assistant Commissioner of Income Tax (`ACIT') (Investigation) Circle
7 (1), New Delhi to each of the Assessees under Section 148 of the Act, in
respect of AYs 1987-88, 1988-89 and 1989-90. An order was passed on 12th
July 1990 by ACIT (Investigation), Circle 13(1) in respect of the M/s Rattan
Gupta & Co. under Section 132 (5) of the Act. Mr. Rattan Gupta 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. Rattan Gupta & Co.
at Daryaganj and had been affixed at the said premises of M/s. Rattan Gupta
& Co.
9. Meanwhile, each of the Assessees filed returns of income in terms of the
Sikkim Manual, 1948 for the three AYs in question on 27th April 1990. A
demand notice was issued to each of them in respect thereof on 23rd July
1990.
Writ petitions in the Sikkim High Court
10. The Assessees filed writ petitions in the High Court of Sikkim,
challenging the notices issued under Section 148 of the Act. An interim
order was passed by the Sikkim High Court in the said writ petitions staying
further proceedings. The said interim order was modified on 26th February
1991, 9th April 1991 and on 30th November 1991 in terms of which the
Income Tax Department ('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 file returns and produce the books of
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 6 of 51
accounts before the Assessing Officer (`AO'), New Delhi in compliance of
the notices under Section 148 of the Act.
11. Ultimately, on 20th July 1993, by the decision in Mansarover
Commercial Pvt. Ltd. (1994) 209 ITR 716 (Sikkim), the 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) Circle 7(10), New Delhi, and served on the Assessees
in New Delhi, it had no jurisdiction over the actions of that authority. The
Sikkim High Court declined to examine if such notices were validly issued.
The Sikkim High Court observed that "mere fact that the companies have
registered offices in Sikkim does not confer jurisdiction on this Court".
12. In the meanwhile, 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 on 30th November 1990, cancelling the earlier
demand raised on 30th July 1990.
Writ petitions in this Court
13. Consequent upon the dismissal of their writ petitions by the Sikkim High
Court on 20th July 1993, the Assessees filed writ petitions being W.P. (C)
Nos. 5565 to 5569 of 1993 in this Court. In the said writ petitions an interim
order was passed by the High Court staying the proceedings. On 13th August
1998 an order was passed by the High Court 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,
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 7 of 51
but the orders would not be given effect to unless permitted by the Court.
Assessment orders
14. Following this, on 24th August 1998, notices were issued to the Assessee
companies under Section 143 of the Act by the ACIT, Company Circle 2
(2), requiring the Assessee to appear in the office of the ACIT on 7 th
September 1998. This was in respect of the AY 1987-88. Similar notices
were issued in respect of each of the other two AYs i.e. 1988-89 and 1989-
90.
15. On 9th October 1998, separate assessment orders were passed by the
ACIT, Company Circle 2 (2), New Delhi 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 made to the income of the Assessees for the three AYs in question
were on the following heads of income: (i) income from commission (ii)
unsecured loan from Dengzong Charitable Trust (DCT) (iii) interest
accrued/paid on the unsecured loans and (iv) 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 of the Act.
16. The Assessees then filed appeals before the Commissioner of Income
Tax (Appeals) [CIT (A)]. Subsequently on 8th December 2000, the writ
petitions filed by the Assessee were dismissed by the High Court by the
following order:
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 8 of 51
"Heard counsel for the parties. Petitioner claims to have moved
Appellate authority prescribed under the statute. An apprehension is
raised that question whether income Tax Act 1961 is applicable to a
company registered in Sikkim may not be within the domain of the
appellate authority to decide. Learned counsel for the Revenue states
that this apprehension is misconceived because the Appellate
Authority has jurisdiction to decide all the aspects of fact and question
of law. It shall be open to the Petitioner to raise additional grounds, if
any, before the Appellate Authority. In view of the above position we
dispose of the writ petition. Interim order stand vacated. Dasti."
Order of the CIT (A)
17. The conclusions of the CIT (A) in the orders dated 30th March 2001
dismissing the Assessees' appeals were as under:
(a) The Assessees failed to furnish information to substantiate that the
persons who claimed to have given huge amounts of commissions were
"genuine parties or that the basis of earning commission is genuine or that
the assessee has rendered any work alleged by it in Sikkim to earn the
commission income in Sikkim."
(b) Although the commission income was more than a crore of rupees, none
of the Assessees had incurred any worthwhile expenses and that the whole
payment of the commission itself is highly improbable.
(c) No record of the Assessee maintained in terms of the applicable
company law was produced despite specific requests of the AO.
(d) The summons sent to different persons who had been paying commission
had not been responded to by any of them. The Assessees also did not
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 9 of 51
produce any worthwhile evidence to prove the genuineness of the
commission received.
(e) The complete books of accounts of each of the Assessee companies was
found in the office of their CA at New Delhi. It was admitted, in the
statements recorded, that the head and brain of each the companies was in
India.
(f) The Assessees were unable to produce the present Directors or furnish
the name and address of all the Directors from the days of incorporation
despite being asked to do so by the AO.
(g) Mr. Rattan Gupta, CA, in his statement recorded on 5th October 1998,
claimed not to know anything about the business operations at Sikkim or
Delhi of the Assessee. He maintained that he had only rendered some
professional services through M/s Rattan Gupta & Co. in October/November
1998.
(h) Mr. U.P. Karma, one of the working Directors of the five companies
stated during his examination on 8th October 1998 that he had no idea about
the business in which the five Assessees' companies were involved. He
claimed that he never gone to Sikkim and yet asserted that books of the
companies were present at the Gangtok registered office. His evidence did
not inspire confidence.
(i) It appeared that the amount alleged to be earned in Sikkim had factually
"surfaced in India and invested in closely held companies of Dalmia Group
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 10 of 51
in India". The Assessee did not produce any evidence to substantiate its case
that the commission income had accrued in Sikkim and had neither accrued
nor arisen in India. Therefore, the commission income had accrued in India
and not in Sikkim.
18. The additions made by the AO were confirmed by the CIT (A). As
regards the interest under Sections 234 A and 234 B of the Act, the CIT(A)
held that the interest under Section 139(8) and 215/217 of the Act have been
correctly charged for the three AYs in question. While confirming the above
additions, the CIT(A) also affirmed disallowance of the sums paid by the
Assessees on account of the State income tax.
Impugned order of the ITAT
19. The Appeals by the Assessees against the orders of the CIT(A) were
dismissed by the ITAT which came to the following conclusion in the
impugned order:
(i) 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 of the Act, 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.
(ii) Mr. Rattan Gupta came to be associated with the Assessee companies in
1988. Although he stated that he was handling their investments in India,
there was nothing to show that he was the brain behind the working and the
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 11 of 51
control and management of the Assessees as a whole. Mere availability of
the books of accounts with him, in no manner establishes that the said place
was the business premises of the assessee company from where it was
carrying on any business. Further, apart from the statement of Mr. Ratan
Gupta, the other statements and certain other documents relied on were not
confronted to the Assessee for rebuttal and hence could not be considered.
(iii) The CIT (A) erred in proceeding on the basis that the Assessees could
not challenge the notices under Section 148 of the Act on the ground of non-
existence of reasons to believe since the two High Courts had dismissed the
Assessee's writ petitions. The orders of the two High Courts did not
determine the pleas raised by the Assessees on merits. Further, the Delhi
High Court had specifically permitted the Assessees to raise all pleas before
the CIT (A). The AO drew inferences without actually referring to the
material before him.
(iv) The service of notice under Section 148 of the Act was a jurisdictional
issue. The said notice could not be served on any person readily available
without being satisfied that such person had the legal authority to accept the
notice. Neither the statement of Mr. Rattan Gupta, nor the fact that the books
of accounts and papers pertaining to the Assessees were found at his office
established that he was a `principal officer' of the Assessees within the
meaning of Section 2 (35) (a) of the Act. The AO did not serve an notice of
his intention of treating Mr. Rattan Gupta as the principal officer for the
purposes of Section 2(35)(b). The AO also did not proceed under Section
163 (b) of the Act or in the manner provided in Section 51 of the Companies
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 12 of 51
Act 1956. Hence those provisions could not be relied on for proving
effective service.
(v) The substituted service under Rule 20 (1) of Order V CPC was also
legally ineffective, because of refusal of the notice by Mr. Rattan Gupta,
who was not authorized to accept service of the notice on behalf of the
Assessee companies. The address simply stated `C/o Ratan Gupta', and C/o
merely meant that the addressee "in the present case, the appellant, was to be
found at the said address." Therefore, if Mr. Rattan Gupta refused to receive
such a notice, he was justified in doing so and his refusal did not authorize
the AO to resort to substituted service within the meaning of Rule 20 of the
Order V of CPC.
(vi) On the question of whether the income could be deemed to accrue or
arise in India, it was held that from the perusal of the reasons recorded and
noted, there was no such material available with the AO to reopen the
assessment. The monies claimed to have been transferred to Gangtok were
not even claimed to belong to the Assessee companies and as observed by
the CIT (A) it had not been established, even till the final stages of
assessment, that the monies transferred to Sikkim in fact belonged to the
Assessees. 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.
(vii) On the existence of commission agents, in response to the Revenue's
contention that none responded to the AO's letters, the ITAT observed that
since no adverse material had been brought on record, the ACIT could not
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 13 of 51
have proceeded to draw adverse inference, as the burden was heavy on the
Revenue.
(viii) Therefore, the notices under Section 148 of the Act were not validly
served on the Assessees. The AO, therefore, did not acquire any jurisdiction
under Section 148 of the Act to proceed with the assessments.
(ix) With reference to the addition of the sum of Rs. 30,75,000/- in the
account of the assessee in the name of M/s. Dengzong Charitable Trust,
Gangtok which according to the assessee is a loan raised by it from the said
trust, it was held that the payment was admittedly received through account
payee cheque issued by the trust, confirmation letter from the lender was
also filed and the details of the bank account of the trust were also available
with the AO. There was thus prima facie proof of the loan and the existence
and capacity of the lender and the addition was liable to be deleted.
(x) On the question of the interest claimed in relation to the above
mentioned loan, as a consequence of the finding that the credit of loan from
the aforesaid trust was genuine, the disallowance could not be sustained and
was deleted.
Questions of law
20. On 21st September 2004, while admitting these appeals, the 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?
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 14 of 51
2. Whether the order made by the ITAT is perverse based on
conjectures and surmise and ignorance of evidence and material and
has relied upon incorrect facts?
3. Whether the income of the assessee is taxable in India?"
21. 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"
Are the Assessees resident Indian companies?
22. The first question that Court proposes to answer is whether the Assessee
is a resident of India within the meaning of Section 6(3) (ii) of the Act, since
this would be crucial for determining some of the other issues that arise in
the case.
23. In terms of Section 6(3)(ii), a company is said to be a resident in India if,
during any previous year, "the control and management of its affairs is
situated wholly in India". In the present case, inasmuch as each of the
Assessees was incorporated under the Registration of Companies Act,
Sikkim 1961, none of them was an Indian company and therefore the
applicability of Section 6 (3) (i) of the Act did not arise. It is in this context,
the question arises whether their management and control was wholly
situated in India.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 15 of 51
24. In the decision in the Assessees' petitions the Sikkim High Court
analysed Article 371 F (k) and (n) of the Constitution of India and concluded
that:
"The combined effect of both these clauses on the present
controversy is that so long as the Act of 1961 was not extended to
Sikkim, the Sikkim law of income-tax continued to be in force in
respect of all incomes earned in Sikkim, notwithstanding the other
provisions of the Constitution, and the provisions of the Indian
Income-tax Act would not apply to such incomes irrespective of the
length of stay in that part of India where the Indian Income-tax
Act was in force. That is the natural consequence of the State law
being inapplicable in a part of India to which part the Central law did
not apply. But the Sikkim law being a State law cannot have extra-
territorial operation so as to apply to incomes earned outside Sikkim.
So, the only effect of the special provisions contained in Article
371F is that so long as the Indian Income-tax Act did not become
applicable to Sikkim, the 1961 Act could not apply to incomes earned
in Sikkim, but in respect of the incomes earned in other parts of India
where the 1961 Act was in force, the Sikkim law could not operate
and the 1961 Act would apply. As such, there cannot be any occasion
for double taxation of the same income both under the Sikkim State
Income-tax Manual and under the Act".
25. The determination of the issue to the above extent by the High Court of
Sikkim has become final as far as the Assessees are concerned, since that
decision was not challenged further. It is for this reason that the question of
the Act being extended to the State of Sikkim by the notifications issued on
7th November 1988 and 28th February 1989, and later by Section 26 of the
Finance Act 1989 make it applicable with effect from AY 1990-91 may
notbe relevant as far as the present case is concerned. Here, we are
concerned with three AYs i.e., 1987-88, 1988-89 and 1989-90 during which
period the Act did not apply to income earned and accrued in Sikkim.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 16 of 51
Therefore, as far as AYs 1987-88, 1988-89 and 1989-90 are concerned, the
relevant question would be whether for the purposes of Section 6 (3) (ii) of
the Act, it can be said, as contended by the Revenue, that the control and
management of the affairs of the Assessees' companies was "situated wholly
in India". This, therefore, is essentially a question of fact and not so much a
question of law.
26. On this question of fact, the concurrent findings of the AO and the CIT
(A) have been upset by the ITAT. Therefore, the Court is called upon to
determine whether the decision of the ITAT on this aspect can be said to be
perverse and therefore unsustainable in law.
The case concerning Alankar Commercial Pvt. Ltd.
27. There was another company, Alankar Commercial Pvt. Ltd. (`ACPL'),
in respect of which proceedings under Section 148 were initiated by the
Revenue and which company was also incorporated in Sikkim. In the case of
ACPL also, the notices were served at the address of Rattan Gupta & Co.
and refused, on the ground that no office of ACPL was running from the
said address i.e. 4556/4, Ansari Road, Daryaganj. Challenging the said
notice, ACPL filed a writ petition in the High Court of Sikkim. In Alankar
Commercial Pvt. Ltd. v. Assistant Commissioner of Income Tax (2000)
243 ITR 626 (Sikkim), the Division Bench of the High Court of Sikkim held
that it had territorial jurisdiction to entertain the petition since a part of cause
of action did arise therein. It was found that notices were served both at
theaddress of Rattan Gupta & Co. in New Delhi (which notice was refused
to be accepted) as well as at the address of ACPL at Gangtok. The High
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 17 of 51
Court of Sikkim made a reference to a letter dated 7th April 1994 addressed
on behalf of the ACPL by its Advocate Mr. T.P. Thapa to the ACIT, New
Delhi in which inter alia it was stated that notice under Section 142(1) of the
Act had been received by ACPL through Rattan Gupta &Co. The High
Court of Sikkim declined to draw an inference from the above letter that
Rattan Gupta was authorized to receive notice on behalf of the ACPL. It was
factually determined that: "There is no other document on record to prove
that Rattan Gupta and Company was the principal officer or the authorised
agent of the petitioner-company". It was in the above context held that
notice under Section 148 was served at Gangtok and that the service of
notice at the address of Rattan Gupta & Co. by refusal of registered posts
"did not amount to service of notices on the company". It was held that
"under Section 282(2)(b) of the Income-tax Act notice is required to be
served in the case of a company on its principal officer". Since the notice
was served only in Gangtok it was held that the part of cause of action did
arise within the territorial jurisdiction of the Sikkim High Court and it had
jurisdiction to entertain the petition.
28. In Alankar Commercial Pvt. Ltd. v. Assistant Commissioner of Income
Tax (supra) the High Court held that the jurisdiction of the ACIT, Delhi to
issue notice under Section 148 of the Act was not ousted by Article 371 F of
the Constitution of India . Consistent what was earlier held by it in the case
of Assessees herein, i.e., Mansarover Commercial Pvt. Ltd. (supra), the High
Court of Sikkim held that the said provision could not "stultify theoperation
of the central law of income-tax with respect to a company registered in
Sikkim concerning its income which accrued or was received outside
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 18 of 51
Sikkim. Further, law of income-tax is not a personal law which a person
may carry with him wherever he goes or functions." It was held that if
ACPL had carried on its business activities or had received income outside
Sikkim but within India, the same would be liable to tax under the Act.
29. The third question that was addressed by the Sikkim High Court in
Alankar Commercial Pvt. Ltd. v. Assistant Commissioner of Income Tax
(supra) was whether it was open to the High Court to exercise jurisdiction
under Article 226 of the Constitution of India to determine whether the
ACIT had rightly formed "reason to believe for the purposes of Section 148
of the Act that the Assessee's (ACPL) income had escaped assessment."
Here, the Sikkim High Court was of the view that from the document seized
as a result of search and seizure operations in terms of 15 th March 1990, the
AO had reason to believe that the income shown in the notice under Section
148 was chargeable to tax and had escaped assessment. This was because
the AO entertained the plea that although the ACPL was registered in
Sikkim "income had accrued and arisen in Delhi and the head and brain of
the company was situated in Delhi". It was also found that no office existed
in fact at Sikkim. There was only a signboard at the address and the office
remained mostly locked. Consequently the notice issued under Section 148
of the Act was not interfered with.
30. The above decision of the High Court of Sikkim was upheld by the
Supreme Court in Alankar Commercial Pvt. Ltd. v. ACIT (2000) 244 ITR
31(SC). In a short order, the Supreme Court held as under:
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 19 of 51
"It is contended that Sikkim was not a part of India and at that time
the Income-tax Act was not applicable in respect of the assessment
year for which notice was served at New Delhi. Learned counsel for
the petitioner relies upon the decision of this court in State of Sikkim
v. Surendra Prasad Sharma AIR 1994 SC 2342.
The aforesaid decision in Surendra Prasad Sharma's case related to
the employees employed in a company in Sikkim and the question
which arose there was whether the Indian law applied or not. The
question of applicability of the Income-tax Act did not arise in that
case, therefore, the said decision has no relevance. The Indian
Income-tax Act, inter alia, taxes income which accrues or arises in
India. It is immaterial whether the petitioner company has its head
office in Sikkim or may be carrying on business activities there. The
impugned notice under section 148 of the Income-tax Act has been
issued in relation to the income which is stated to have arisen in India
and this can be done even if the petitioner has a company registered in
Sikkim. The decision of the High Court calls for no interference.
The petition for special leave is dismissed."
31. On this aspect, a reference may also be made to the decision of the High
Court of Sikkim in Sikkim Manipal University v. State of Sikkim (2014)
369 ITR 57 (Sikkim). The High Court discussed the notifications dated 7th
November 1988 and 28th February 1989 and Section 26 of the Finance Act
1989 and held that by necessary implication the Sikkim State Manual 1948
stood repealed on 1st April 1990.
32. To summarize the legal position as far as the applicability of the Act
was concerned:
(i) 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
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 20 of 51
any income outside Sikkim but within India, the Income Tax Act 1961
would apply to such income
(ii) 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.
33. It is not disputed that 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.
Objections as to jurisdiction
34. In the present case, the question whether the Assessee companies could
be said to be a resident for the purposes of Section 6 (3) (ii) of the Act arose
in the light of the categorical finding of the AO in the assessment orders
dated 9th October 1998 for all three AYs 1987-88, 1988-89 and 1989-90 that
although the Assessees had been registered in Sikkim and had been subject
to tax in Sikkim "but most of factors so emanated later proved that the total
management and control lies in India is liable to be taxed in India under
Section 6 (3) (ii) of the Act".
35. This finding was relevant for determining the validity of the exercise of
jurisdiction by the ACIT, Circle 7 (1), New Delhi, who issued the notices to
the Assessees under Section 148 of the Act. In other words, unless it was
found as a matter of fact that the management and control of the Assessees
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 21 of 51
was wholly situated in New Delhi, the ACIT Circle 7 (1), New Delhi, would
not have jurisdiction, since otherwise the Assessees would be taken to be
resident Indian companies located in Gangtok, Sikkim over which the
Commissioner of Income Tax, West Bengal alone would have jurisdiction.
36. A notification was issued on 30th March 1998, by the Central Board of
Direct Taxes (`CBDT'), whereby in respect of the territorial area of the State
of Sikkim, it was notified that the Chief Commissioner, Calcutta having
office at Calcutta would have jurisdiction with effect from 1st April 1989. By
notification dated 19th May 1989, the Chief Commissioner (Administration)
notified that the jurisdiction over Chief Commissioner, Circle-1, Gangtok
would be that of the Commissioner of Income Tax, West Bengal-1.
37. In the present case, it is sought to be urged by the Assessees that they
had no income accruing to them in India and that their the source of income
as stated in the return of income was at Sikkim. The ordinary jurisdiction
vested on the basis of residential status with ACIT, Circle (1), Gangtok in
terms of the CBDT Notification No. 1770, dated 19th May 1989. In as much
as only the CIT West Bengal could exercise administrative control over the
ACIT, Circle-1, Gangtok, no order could have been passed on 8 th July 1993
by the CIT, Delhi-1 under Section 127 of the Act, transferring the case of
the Assessees to the ACIT, ICC-4, New Delhi. For the same reason, it is
contended that even the subsequent order dated 7th August 1996 under
Section 127 of the Act by the CIT, Circle-1, New Delhi transferring the case
from ACIT ICC-4 to the ACIT Circle 7(1) could not have been issued. A
further point urged is that although the notice was issued by the ACIT,
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 22 of 51
Circle 7(1), the assessment was in fact completed by the ACIT Coy. Cir 2(2)
and was, therefore, bad in law. It is pointed out that the jurisdiction as far as
M/s Rattan Gupta & Co. was concerned was vested with ACIT
(Investigation) 13(1), New Delhi. It is however emphasised that the
Assessees are not challenging the place of assessment but the jurisdiction of
the AO. Reliance is placed on the decisions in Pannalal Binjraj v. Union of
India 31 ITR 565(SC) Rai Bahadur Seth Teomal v. CIT 36 ITR 9 (SC) and
Industrial Trust Ltd. v. CIT [1973] 91 ITR 550 (SC). It is contended that
the Assessees have been challenging the jurisdiction of the ACIT,
Investigation Circle 7(1), New Delhi and also of ACIT, Central Circle - 4,
New Delhi.
38. An objection is raised by learned counsel for the Revenue to the Court
permitting the Assessees to urge the above pleas on the ground that Section
124 (3) of the Act constituted a bar inasmuch as such objection was not
raised at the first available opportunity in the assessment proceedings. It is
submitted that the principal place of business of the Assessees was located
in Delhi. It is submitted that by not raising the plea of jurisdiction at the
earliest opportunity, the Assessees waived their right to raise such challenge
by virtue of Section 124 (4) and by virtue of the fact that they urged that
plea for the first time before the ITAT. Further it is pointed out that the
objection raised was generally to the applicability of the Act. It is stated that
the Assessees also had a right of appeal under Section 246 of the Act which
he failed to exercise. On this aspect it is further submitted that this was only
an irregularity at the highest and the ITAT ought to have remanded the
matter and not set aside the assessments. Reliance is placed on the decisions
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 23 of 51
in CIT v. SS Ahluwalia [2014] 46 Taxmann.com 169 (Delhi); Kanji Mai &
Sons v. CIT, [1982] 138 ITR 391 (Delhi) and Hindustan Transport Co. v.
Inspecting Asstt. CIT [1991] 189 ITR 326 (All).
39. In Industrial Trust Ltd. v. CIT (supra), it was observed: "Ordinarily an
assessee has to be assessed by the ITO within whose territorial jurisdiction
he resides. But, it is open to the Central Board of Revenue to assign any
particular class of assessees or any particular type of assessments to an ITO
of its choice." In Hindustan Transport Co v. Inspecting Assistant
Commissioner of Income Tax (supra), it was explained that the stage of
raising an objection on the grounds of jurisdiction was prior to the
completion of the assessment. It was held:
"As provided in Section 124(5)(a), the right is lost as soon as the
assessment has been completed. Even where the right is exercised
before the assessment is completed, the question is to be decided by
the Commissioner or by the Board. Courts do not come into the
picture."
40. The decision in Pannalal Binjraj v. Union of India (supra) 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. In Rai Bahadur Seth
Teomal v. CIT (supra) it was held that the objection as to the place of
assessment having not been raised before the ITO (of Calcutta in that case)
could not be raised thereafter in an appeal to the Appellate Assistant
Commissioner and then before the ITAT. 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
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 24 of 51
jurisdiction of the Delhi officers to issue notices to them under Sections
147/148 of the Act.
41. Nevertheless the Court proposes to examine if the management and
control of the Assessee companies could be said to be situated wholly in
New Delhi. This question also becomes relevant to the issue concerning
service of notice on the Assessees in terms of Section 148 read with Section
282 (2) of the Act.
Statement of Rattan Gupta
42. The Court has examined the statement recorded by the Department of
Mr. Rattan Gupta, CA, on 24th April 1990 under Section 131 of the Act. He
first confirmed what he had stated in his previous statement recorded on 15th
March 1990 under Section 132 (4) of the Act. He stated that he had gone to
Sikkim only once during last two years, where he got to meet one Mr.
Bansal. In regard to the books and documents of the Assessees which were
found in the premises, Mr. Gupta sought to explain as under:
"We are rendering professional services to these companies. These
records were in our office premises in connection with the
professional services. The professional services which we render are
finalization of accounts, reconciliation of bank accounts,
reconciliation with various parties accounts, company law formalities
etc.".
43. Mr. Rattan Gupta stated that the professional work for the Assessees was
taken up by Rattan Gupta & Co. somewhere during the year 1987-88 from
Mr. Ravinder Singh, CA. When asked with whom he was corresponding on
behalf of the companies, Mr. Rattan Gupta stated:
"The persons to be contacted in Dalmia Resorts International Pvt. Ltd.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 25 of 51
and Gujarat Heavy Chemicals Ltd. were from Accounts Department
and I never noted or remember the names".
44. Specific to five Assessee companies, when asked with whom he had
been in touch, Mr. Rattan Gupta stated: "There was one person Sh. H.L.
Verma who used to come to our office and handover the papers sometime he
sent by the courier/post also". However, he claimed not to know the
whereabouts of Mr. Verma for the last one year. When asked how he was
doing the work of reconciliation of the accounts of the five Assessee
companies, Mr. Rattan Gupta stated:
"There is hardly any transaction in the above 5 companies namely
Pashupatinath, Swastik, Trishul, Sovereign and Mansarover during
the last one year or even more than one year. Mr. H.L. Verma had
handed over the entire record and from which we finalized the
accounts, reconciled the banks and accounts with the partner".
45. Mr. Rattan Gupta admitted that Mr. Rajeev Jain became "Director in 3
companies on my asking". He further stated that I also made directors in
these 5 Sikkim companies. I do not remember all but Mr. S.P. Sethi, Mr.
Vijay Goswami, Mr. Rajesh Goswami, Mr. Vedant Mehta are there". The
next question was whether the above persons were working in the office of
Rattan Gupta & Co. and what work was performed by them in their capacity
as Directors, Mr. Rattan Gupta categorically stated that "These persons
became directors on my asking and there was no work performed by these
persons except signing papers etc." When asked what kind of papers were
signed by them, he mentioned "papers relating to bank accounts and copi es
of resolution and statement of accounts".
46. Mr. Rattan Gupta did not deny that Mr Rajeev Jain resigned at his
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 26 of 51
instance. Instead he stated that he discussed with Rajeev Jain about the
directorship in these companies "as there was no professional talent required
Shri Rajeev Jain resigned". As regards the work done by five Assessee
companies and their source of income, Mr. Rattan Gupta stated that he had
come to know from the accounts and vouchers of the companies "the main
source of income was from commission earned in Sikkim on sale/purchase
of agriculture products". According to him, the work done by the five
Assessees' companies was "commission business". While answering the
subsequent question, he stated that he was not involved in the appointment
of Directors in World Growth Fund Ltd.(Sikkim based company) "However,
in other companies the persons have been become directors at my instance".
47. When asked whether he was taking these decisions independently or
whether someone else directed him, Mr Rattan Gupta stated:
"I was taking decision in my professional capacity only. Sometime I
have taken advise from Dalmia Bros. Pvt. Ltd. I am talking about
National, Norbu, Sikkim Ispat and Sikkim Produce.
Q. 22. Why did you take the advice of Dalmia Bros(P) Ltd.? Was the
first step taken by you or take took the initiative.?
Ans 22. There was no obligation on me to take the advice of Dalmia
Bros Pvt. Ltd. The funds in the Sikkim companies were to be invested
for which decision was to be taken by me in professional capacity.
The advise become important for safety of funds".
48. On appointment of brokers for sale of shares of the Sikkim company, Mr
Rattan Gupta stated: "The Directors of the company after discussing with
me appointed the brokers for the sale of shares". When asked whether there
was any employer or director based in Sikkim in respect of the other four
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 27 of 51
Sikkim companies, i.e., Nova Investment Pvt. Ltd., Lovely Investment Pvt.
Ltd., Altar Investment Pvt. Ltd and Illac Investment Pvt. Ltd. (which were
also part of the Dalmia Group of Companies), Mr. Gupta stated: "There is
no employer/director based in Sikkim". He was again asked why Dalmia
Bros. (P) Ltd., should know about where the four investment companies
were investing. He answered that as Dalmias were his clients and these
investment companies were making investment in the Dalmias companies,
their names were referred by the manufacturing companies of Dalmia
49. In his statement made on 29th May 1990, Mr. Rattan Gupta mentioned
that he was associated with five Assessees' companies only in professional
capacity. Answering to questions 5 and 6 which are relevant, read as under:
"Q5. From statement of some directors recorded u/s 131, the directors
who are in these 5 companies, named in Q1, it is clear, that you
appointed them and it is only at your behest that they sign any papers
or documents. They are directors only for name sake. Is this correct?
A5. Yes, as far as the business conducted by these companies is
concerned.
Q6. You have also stated in your earlier statement of 24/4/90 that you
are rendering professional services comprising of finalization of
accounts, finalization of bank accounts, reconciliation of party
accounts, company law matters etc. In effect, considering your answer
to Q5, you are managing the affairs of these 5 companies. Is this
correct?
A6. I do not want to argue this at this stage but I have already stated
that I was not associated in the business of earning commission which
was done at Sikkim only.
Q.7. How do you know that these 5 companies were doing any kind
of business at Sikkim?
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 28 of 51
A.7. Because the Commission was earned at Sikkim as the vouchers
like shows which were given to us for the finalization of accounts, the
amount of commission were received and deposited in Sikkim and
then transferred to Delhi for utilization and investment etc."
50. The question then turned to Mr. H.L. Verma, and he claimed that Mr.
Verma used to come frequently and that he met him many times upto
April/May 1989 and not thereafter. It was Mr. Verma who was looking after
the company in Sikkim. According to him, the papers, documents, cheques
and drafts were all sent by Mr. Verma himself through one Mr. Sitani. He
stated that the cheque books found in the office have been kept by Mr.
Verma "as this was required for making draft for transfer to Delhi".
According to him the blank signed cheques were given to Mr. Verma since
he was depositing the funds "and there was no risk on our side in handing
over the signed cheque book to Mr. H.L. Verma for utilization".
51. An analysis of the statement of Mr. Rattan Gupta indicates that he could
not have acted merely as an Auditor, giving professional advice to the five
Assessees. Clearly his own employees were appointed as Directors of the
companies. The four names, he subsequently mentioned are Mr. S.P. Sethi,
Mr. Vijay Goswami, Mr. Rajesh Goswami and Mr. Vedant Mehta. The
explanation for the signed cheque books, the rubber seals of the companies
and their letter-heads being available in his office is also not convincing. He
seeks to shift the entire responsibility for the handing of the cheques to Mr.
Verma but then Mr. Verma was never produced by the Assessees.
52. The burden shifted to the Assessees to show that the control and
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 29 of 51
management did not only vests with Mr. Rattan Gupta but that it was Mr.
H.L. Verma who was handling the affairs of the companies. Even otherwise
with Mr. H.L. Verma himself not being Director of any of the Assessees'
companies, the answer given by Mr. Rattan Gupta raised more questions
which required an explanation. In other words, in view of the fact that the
books of accounts, the signed blank cheques of the accounts of the five
Assessees' companies with banks in Gangtok and their letterheads being
found in his office, the conclusion drawn by the AO as regards the precise
role of Mr. Rattan Gupta as being in de facto control of the five Assessees
appears to be correct.
Statement of Ravinder Singh
53. Turning to the statement of Mr. Ravinder Singh, recorded on 30th April
1990, he admits to having been present during the incorporation of four of
the Assessee companies i.e. MCPL, SCPL, PCPL and TCPL. He became a
Director of the said companies on November/December 1985 and his basic
function was to operate bank accounts in the said companies. He was clear
that he performed the function of Director from Delhi and his basic role was
to invest the monies that he received from Gangtok. He continued as
Director till March 1988. He identified two sources of earning of these five
Assessee companies. One was loan from charitable trust i.e. Dengzong
Charitable Trust (`DCT') and the second from trading commission.
According to him, till September 1986 "monies were coming Gangtok to
Delhi via telegraphic transfer and later on it came in the shape of drafts ". As
far as loan obtained from DCT, according to him, no security was furnished
for procuring the loan.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 30 of 51
54. According to Mr. Ravinder Singh, the trading business for the five
companies was done by Mr. H.L. Verma, who was not an employee but the
Manager of DCT. He was then confronted with certain documents which
contained notings in his own handwriting, in which he seemed to be
"agitated on some point regarding the working of 40 companies". It
contained reference "an immediate meeting with Sh. Anurag Dalmia".
When asked to explained, he stated "I do not remember as to what sta te of
my mind does it explain". He further stated that he had written the said letter
to Mr. Dalmia because the compensation he was getting at that time was not
adequate keeping in view the expenses incurred. According to him Mr.
Anurag Dalmia "represented the principal shareholders of these companies.
The other shareholders were companies which were either Sikkim
Companies or which had became subsidiaries of Sikkim companies". He
claimed that he "did not come to in contact with anybody except Mr.
Anurag Dalmia on behalf of these companies".
55. As regards the telegraphic transfer or transfer of monies through drafts,
Mr. Ravinder Singh explained:
"Sir, the drafts were sent from Sikkim by Shri Hira Lal Verma, the
person who were conducting the business on behalf of our companies
in Sikkim. These drafts were always send by hand by that gentleman.
Generally, these drafts were coming through the employees of Shri
Uma Shankar Sitani who would either cause the drafts to be deposited
in our bank on his own or ask me to collect these drafts from his
office at Nehru Place or from his resident at Sainik Farms. In his
absence, I used to get phone calls from his brother Rajan Sitani or his
nephew Shammi".
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 31 of 51
56. In response to two other questions, Mr. Ravinder Singh stated as under:
"Q 22. As, I understand, all the decision in respect of investment of
the money of the 5 companies registered in Sikkim when you were the
Managing Director, were taken by Shri Anurag Dalmia and introduce
by you. On the basis of the answers given by you, is this a facts?
Ans. There was no managing director in the companies. I was only a
director responsible to the shareholders. It is a fact that from May 86
onwards all decisions regarding investment were taken by Shri
Anurag Dalmia and also communicated to me.
Q. 23. Shri Ravinder Singh, please remember and let me know
whether in your meetings with Shri Anurag Dalmia regarding these 5
Sikkim based companies, you also found Shri U.S. Sitani in the same
meeting? Remember you are in oath.
Ans. Sir, I had take strong objection to your saying that I have to
remember that I am on oath. I know it very clearly that I am giving a
statement on oath. I do remember that sometimes Shri Uma Shankar
Sitani used to be present during and at the time of my meetings with
Shri Anurag Dalmia."
57. Two persons he identified as having handled the business and supervised
it are Mr. H. L. Verma and Mr. Uma Shankar Sitani. Significantly, neither
of these persons were produced by the Assessees for their statements to be
recorded.
Other statements
58. In his statement, Mr. R.K. Goswami, who was Director of SCPL, inter
alia, stated "As per advised by Mr. Rattan Gupta I become the director in
this company". Mr. Rakesh Maggo, also when asked how he became a
Director of MCPL, he stated "Shri Rattan Gupta asking me" and it was only
on account of "Shri Rattan Gupta" that he became a Director. When asked
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 32 of 51
whether he had done any work for MCPL, he stated "I did nothing except
signing some papers" and further clarified that it was Mr. Rattan Gupta who
asked him to sign those papers.
59. Mr. Vedant Mehta, a Director associated with SCPL and TCPL also
stated that he did nothing except signing documents and that he did this only
on asking Mr. Rattan Gupta.
60. The statement of Mr. Rajiv Jain who was another partner of Mr. Rattan
Gupta & Co. became Director of SCPL, TCPL, PCPL and MCPL. He
clearly stated "I agreed to become a director on a request of Mr. Rattan
Gupta, my senior partner and no work was performed by me in these
companies except signing some papers on different occasions".
'Control and Management'
61. The earliest formulation of the 'control and management test' for
determining where a company could be said to be resident, in preference to
the place of incorporation was in the decision of the House of Lords in De
Beers Consolidated Mines, Limited v. Howe (Surveyor Of Taxes) [1905] 2
K.B. 612. The Assessee company was incorporated and registered in South
Africa. The denominated head office was in Kimberley in the Cape Colony,
and there was an office in London. The essential part of the company's
business was the sale of the diamonds from its mines to a syndicate of
diamond merchants of London. The contracts of sale, which were annual
contracts dealing with a year's output, were executed in London. The control
of the company was vested in three life governors and sixteen ordinary
directors, of whom four had to reside in England. The majority of the
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 33 of 51
directors was always in London. The chairman and six ordinary directors
resided in the Cape Colony. Meetings of the directors were held weekly in
Kimberley and London with an interchange of minutes between the two
places. Company by laws provided that directors in London were to be
consulted on matters of exceptional importance. Further, certain decisions
were only taken in London. However, general meetings of shareholders
were always held at Kimberley. In the above factual background, the `place
of incorporation' test for determining residence of the company was
rejected. Since the Commissioners recorded a finding of fact that "the head
and seat and directing power of the affairs of the Appellant Company were
at the office in London from whence the chief operations of the Company,
both the UK and elsewhere, were in fact, controlled, managed and directed,"
it was held by the House of Lords that the company was resident in the UK.
The control and management test was laid down as under:
"The real business is carried on where the central management and
control actually abides. This is a pure question of fact to be
determined, not according to the construction of this or that regulation
or byelaw but upon a scrutiny of the course of business and trading"
62. In Mitchell (Surveyor of Taxes) v. Egyptian Hotels Ltd [1915] UKHL 2
the Assessee, whose registered office was located in England, carried on its
operations in Egypt. A special resolution was passed by the company that
the Egyptian business of the Assessee should be carried on and managed by
a local board, to the exclusion of the board of directors of the company, and
that such local board should be wholly independent of any other directors
and board of the company and of general meetings of the company (not
being general meetings held in Egypt), and in no way under the control
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 34 of 51
thereof. Holding that the business was carried on in the U.K., it was
observed:
"A trade or business cannot be said to be wholly carried on abroad if
it be under the control and management of persons resident in the
United Kingdom, although such persons act wholly through agents
and messengers resident abroad. Where the brain which controls the
operations from which the profits and gains arise is in this country,
the trade or business is, at any rate partly, carried on in this country.'
63. In V.V.R.N.M. Subbayya Chettiar v. CIT [1951] 19 ITR 168 (SC) it was
held by the Supreme Court that in case of dual residence, it is necessary to
show that the company performed 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. The Appellant was a karta of an HUF and
permanently lived in Colombo, with the family domiciled in Ceylon. In the
relevant PY he visited India for 101 days to participate in a litigation and
certain income tax proceedings in relation to certain properties he owned in
India. The question was whether the HUF could be taxed as a resident of
India? It was noted that no material evidence was produced to prove the
existence of more than one centre of control for the affairs of the family It
was held:
"9. 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 company may be divided,
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 35 of 51
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."
64. To the same effect is the decision in Narottam and Pereira Ltd. v. CIT
[1953] 23 ITR 454 (Bom) where the Assessee was carrying on the business
of stevedoring in Ceylon. It was registered in Bombay and its registered
office was also in Bombay. The meetings of the board of directors are held
in Bombay and also the meetings of the shareholders. The question before
the Court was whether the company was a resident within the meaning of
Section 4A (c) of the Income Tax Act? It was held that "Control and
management" was a compendious expression which has acquired a definite
significance and connotation. It was observed that the whole of the business
may be outside India and yet its control and management may be wholly
within India. It was further clarified that the control and management
contemplated by this sub-section was not the carrying on of day to day
business by servants, employees or agents. It was held that:
"A company or for the matter of that a firm or an undivided Hindu
family has got to work through servants and agents, but it is not the
servants and agents that constitute the seat of power or the controlling
and directing power. It is that authority to which the servants,
employees and agents are subject, that controls and manages them".
65. It was further held as under:
"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
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 36 of 51
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...In order to determine the
head and brain of the company we are not to concern ourselves with
any other work that the company does except its business which
yields profits, and in this particular case we have got to consider
where the head and brain of the company is with regard to the
stevedoring business in Ceylon which has yielded the income. But
even applying that tests, as already pointed out, we do come to the
conclusion that the head and brain of the company with regard to this
particular business or with regard to its affairs was in Bombay and not
in Ceylon."
66. In Erin Estate v. CIT (1958) 34 ITR 1a (SC) the expression `control and
management' was held to signify not de jure control and power but that de
facto control and power actually exercised in the course of the conduct and
management of the affairs of the firm. In the context of Section 4A(b) of the
Indian Income-tax Act, 1922, it was observed that what would constitute
'control and management' was a mixed question of fact and law. It was
observed:
"The control and management must no doubt be shown to have been
actually exercised; and the exercise of the control and management
should not be illusory or merely notional. Once it is shown that
control and management in the affairs of the firm was exercised by
the partners residing in India, it would not be relevant to enquire
whether the control and management thus exercised amounted to a
substantial part of the control and management of the affairs of the
firm."
67. In CIT v. Bank of China [1985] 154 ITR 617 (Cal) it was held:
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 37 of 51
"The question depends on the fact of the management and not on the
physical situation of the thing that is managed. A company is
managed by the board of directors and if the meetings of the board of
directors are held within India, it may be said that the central control
and management is situated here. The direction, management and
control "the head and seat and directing power" of a company's affairs
is, therefore, situate at the place where the directors' meetings are held
and, consequently, a non-Indian company, would be a resident in this
country if the meetings of the directors who manage and control the
business are held here. The word "affairs" means affairs which are
relevant for the purpose of the I.T. Act and which have some relation
to the income sought to be assessed. It is not the bare possession of
powers by the directors, but their taking part in or controlling the
affairs relating to the trading, that is of importance in determining the
question of the place where the control is exercised."
68. In light of the law explained in the above decisions, when the facts of the
present case are examined, it is seen that 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.
69. An attempt was made by Mr. Rattan Gupta to suggest that it was Mr.
H.L. Verma or Mr. Uma Shankar Sitani who were actually handling the
affairs of the five Assessee companies. That was, however, not made good
by offering either of them for examination. Once the documents were seized
and the statements of Rattan Gupta, Ranvir Singh, Vedant Mehta and Rajiv
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 38 of 51
Jain were recorded, the burden shifted upon the Assessees to produce some
evidence to counter the picture emerging from his statement regarding
management and control of the five Assessee companies wholly located in
Delhi. It is extremely unusual that the seals and the signed blank cheque
books of the companies would be lying with their CA who was entrusted
with the professional work of auditing of the accounts.
70. The above facts have also to be appreciated in the context of the
Assessees filing their returns for AYs 1987 to 1990 only in 1990. 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.
71. It appears to the Court that the ITAT has not upset the factual finding of
the AO, which was confirmed by the CIT(A). The above exhaustive
evidence gathered by the Revenue, without being countered by the
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. The finding by the ITAT in this
regard is plainly perverse and unsustainable in law.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 39 of 51
Jurisdiction of the ACIT
72. Once it is held that the management and control of the Assessee
companies was in Delhi in the office of Rattan Gupta & Co., the question
that would next arise is the jurisdiction of the ACIT which issued the notice
under Section 148 of the Act to these companies. The question arises in two
contexts. One is regarding the authority of the ACIT to issue the notice and
the second is whether Rattan Gupta & Co. could be said to be authorized
representatives/agents of the Assessees having authority to receive notices.
73. On the first aspect, the question arises for determination is the
jurisdiction of the income tax authority under Section 127 of the Act to
transfer the cases from one jurisdiction to the other. In the first place, it is
required to be noticed that 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 Ratan Gupta & 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) of
the Act and were operating from Delhi.
No income accrued or was earned in Sikkim
74. In terms of Section 5(1) of the Act, 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
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 40 of 51
material.
75. In support of their plea that they had proved that they earned their
income exclusively in Sikkim, the Assessees seek to rely on the fact that
they produced the relevant copies of bills and vouchers from the commission
agents and the receipt of money from its agents at Sikkim in its bank
accounts. It is further submitted that all the agents were identified. The
assessments had been made under Sikkim Income Tax Manual whereby the
demand originally raised was cancelled and a higher demand was raised,
which established that as per the Sikkim Tax authorities the income had
been earned in Sikkim and not in India.
76. The Assessees may have produced the receipt of the money in their bank
accounts. However, 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
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 41 of 51
companies in India.
77. The further finding of the AO that the commission earned is more than
the entire turnover of the sales of cardamom even from the accounts
produced by the Assessees has again not been dislodged by the Assessees.
The repeated assertion during the course of the arguments that no income
was accrued to the Assessees or earned by them in India, cannot be accepted
in the absence of any tangible material produced before the AO by the
Assessees to substantiate such plea. The finding by the ITAT in this regard
is contrary to the record and is based on surmises and unsustainable in law.
Service of notice
78. This then brings up a question whether the notices were rightly served
on the Assessees by tendering them at the address of Ratan Gupta & Co. at
Ansari Road, Daryaganj. A reference has been made to the dictionary
meaning of an agent in the Black's Law Dictionary wherein a general
agency is described as "that which exists when there is a delegation to do all
acts connected with a particular trade, business or employment. It implies
authority on the part of the agent to act without restriction or qualification in
all matters relating to the business of his principal". The Agent is also
described as "one who represents and acts for another under the contract or
relation of agency" and "one who deals not only with things, as does a
servant, but with persons, using his own discretion as to means, and
frequently establishing contractual relations between his principal and third
persons". This is inconsistent with the definition of agent under the Contract
Act, 1872 as well.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 42 of 51
79. In the instant case, that the facts that Rattan Gupta & Co. did not merely
render professional services but had a vital say in the control and
management of the five Assessee companies. This has been more than
adequately established by the Revenue through the statements recorded of
Mr. Rattan Gupta and Mr. Ravinder Singh and some of the other directors
who were erstwhile partners of Mr. Rattan Gupta & Co. Significantly, at no
point of time was there any plea that this evidence should be offered for
cross-examination.
80. The question concerning the service of notice under Section 282 was not
raised before the AO. On the contrary, the AO noted in his order:
"After the directions of the Hon'ble High Court of Delhi, Notices u/s
143(2) , u/s 142(1) along with questionnaire were issued at the
following addresses:
(i) Dorjee Building, Nam Nang Road, Gangtok 737101 (Sikkim).
(ii) Sh. U.P. Kama - H No 24, Tyagi Vihar, Nangloi, New Delhi-l
10041 (present Director)
Notices u/s 143 (2) and 142(1) along with questionnaire were received
unserved by the postal department with the remarks "left without
information" for Dorjee Building and "No such person exists" from
Shri U P Kama respectively. Interestingly, on 7.9.98 Shri Brahma
Prakash Sud, FCA and AR of the company appeared and offered to
accept the Notices which had come 'unserved'. The counsel was,
therefore, given the copy of questionnaire and notices u/s 142(1) &
143(2)."
81. While the CIT(A) rejected the plea of the Assessees on the ground that it
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 43 of 51
could not be raised in view of the judgment of the High Court of Sikkim, the
Court is of the view that this judgment did not preclude the Assessees from
raising this issue. However, the ITAT proceeded on the basis that Rattan
Gupta could not have been served notices, because he was not authorized to
receive notices.
82. The submission of the Revenue is that there was valid service of notice
in terms of Section 282 since Mr. Rattan Gupta was the principal officer of
the Assessees in terms of Section 282 (2) (c) read with Section 2 (35). The
evidence brought on record bear out the submission of the Revenue that "As
long as Rattan Gupta is the principal officer of the assessee, notice can be
addressed and served upon him, without the need to establish authority to
receive notice under Order V Rule 12 of the CPC." In any event the AR of
the Assessees appeared before the AO and accepted that notice had been
issued.
83. In the light of the finding of this Court that the management and control
was with Mr. Rattan Gupta & Co., 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. The finding by the ITAT in this regard is contrary to the
evidence on record and is unsustainable in law.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 44 of 51
Jurisdiction of ACIT Circle 7 (1)
84. The other major ground of objection is regarding authority of the ACIT,
Circle 7(1) to issue notice under Section 148 of the Act.
85. At the outset, it requires to be noticed is that in view of the finding that
five Assessees are resident in India and whose management and control was
in New Delhi, the question of ACIT, West Bengal having jurisdiction over
the companies does not arise. Therefore, the issue raised that transfer of the
jurisdiction in respect of all these companies could not have been ordered by
the CIT, New Delhi, requires to be rejected.
86. The only further question that arises is whether CIT, New Delhi was
required to pass specific order, placing the ACIT, Circle 7(10) with
jurisdiction to issue notice under Section 282 of the Act, considering that
jurisdiction in respect of the Daryaganj area was with the ACIT, Circle 13.
The further question was whether the ACIT, who issued the notice i.e.ACIT-
7 (10) had to himself pass the assessment order since in the present case it
was ACIT Circle -4. In this regard, it must be pointed out that the issue was
raised for the first time by the Assessees before the ITAT and not before the
AO or the CIT(A). It was improper for the ITAT to have permitted the
Assessees to raise this point for the first time. The decision of this Court in
CIT v. S.S. Ahluwalia (2014) does support the case of the Revenue that at
best this could be an irregularity and not an illegality that vitiated the orders
of the assessment.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 45 of 51
Limitation for issuance of notice under Section 147
87. It was urged on behalf 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. It is submitted that the notice under Section 143(2) of the Act
had to be issued within a period of twelve months from the end of the month
in which return was filed. In this case return was filed on 17th February
1992 whereas the notice under Section 143 (2) was issued only on 24th
August 1998. It is further submitted that the Order sheet entries of the AO
show that no such notice was issued other than the one dated 24th August
1998. It is submitted that there can be no acquiescence against validity of the
assumption of jurisdiction. Reliance is paced on the decision in CIT vs.
Hotel Blue Moon 321 ITR 362(SC).
88. The Court finds merit in the submission of the Revenue that the above
plea was raised for the first time by the Assessees before the ITAT and
ought not to have been permitted by it. This objection finds support in the
decisions in CIT v Indovax (2014) 220 Taxman 164 (Delhi) and CIT v
Sushil Modi (2003) 130 Taxman 286 (Delhi). Even otherwise, it is seen that
the Assessees engaged in protracted litigation first before the High Court of
Sikkim and thereafter this Court. There was an interim order staying the
assessment proceedings from 10th July 1990 to 13th August 1998. Having
benefited by that interim protection, the Assessees cannot be heard to submit
that there was delay in the issue of notice under Section 143 (2). For that
purpose, the time during which the proceedings were pending in the two
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 46 of 51
High Courts would have to be accounted for. In that view of the matter, this
plea of the Assessees is rejected.
The merits of the reopening of the assessments
89. Turning to the merits of the re-opening of the assessments, the Court is
unable to agree with the ITAT that the reasons for reopening the assessment
are not valid. 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 of the Act. 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 of the Act.
Interest
90. The 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 (1996) 222 ITR
66 (Patna). That view has since been overruled by the decisions in CIT v.
Bhagat Constructions [2012] 279 CTR 185 (SC) and CIT v Anjum [2001]
252 ITR 1 (SC). The decision of the ITAT in this regard is therefore
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 47 of 51
overruled.
Summary of conclusions
91. To summarize the conclusions of the Court:
(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 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
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 48 of 51
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.
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 49 of 51
Answers to the Questions framed
92. To answer the questions framed, Question (1) viz., "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?" is answered in the negative i.e. in favour of the
Revenue and against the Assessees.
93. Question (2) viz. "Whether the order made by the ITAT is perverse
based on conjectures and surmise and ignorance of evidence and material
and has relied upon incorrect facts?" is answered in the affirmative, i.e. in
favour of the Revenue and against the Assessees.
94. Question (3) viz. "Whether the income of the assessee is taxable in
India?" is answered in the affirmative i.e. in favour of the Revenue and
against the Assessees.
95. Question (4) viz., "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" is answered in the negative i.e. in favour of the
Revenue and against the Assessees.
96. The impugned common order dated 8th January 2002 passed by the
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 50 of 51
ITAT for AYs 1987-88, 1988-89 and 1989-90 is hereby set aside and the
corresponding orders of the AO as upheld by the CIT(A) are restored. The
appeals are allowed with costs of Rs. 50, 000 in each appeal which will be
paid by the respective Respondent Assessees to the Revenue.
S.MURALIDHAR, J.
VIBHU BAKHRU, J.
FEBRUARY 22, 2016
b'nesh/mg
ITA Nos.162, 164, 165, 167 & 168 of 2002 Page 51 of 51
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