Sikkim State Income Tax Manual 1948 – Where management & control is outside Sikkim, income to be taxed under Income Tax Act, 1961 – Delhi High Court.
Brief of the Case
Delhi High Court held In the case of CIT vs. Mansarovar Commercial Pvt. Ltd. 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. So, in the instant case, it is a fact 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. Hence all the Assessee, incorporated under the company law of Sikkim, are resident Indian companies as there whole management & controls are situated outside state of Sikkim. If any income accrued to them or was earned by them in India even prior to 1st April 1990, then such income is taxable under the Income Tax Act.
Facts of the Case
All assessee are 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 cardamom and other agricultural products. Sikkim became part of India in April 1975. 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territories comprising the State of Sikkim or any part thereof were to continue to be in force therein until amended or repealed by a competent legislature or other competent authority.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).
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 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, thereby extending the date of applicability of the Act by one year from the date specified in the notification dated 23rd February, 1989.
The case of the Assessees 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. On the other hand, the Revenue contention 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 and income is taxable under Income Tax Act, 1961.
Held by CIT (A)
CIT (A) dismissed the appeal of the assessee. It was held that 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. The complete books of accounts of each of the Assessee were 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. Further held that 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 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.
Held by ITAT
ITAT allowed the appeal of the assessee and dismissed the order of CIT (A). It was 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 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. 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 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.
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.
Held by High Court
High Court held that 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”. 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. 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.
In CIT v. Bank of China  154 ITR 617 (Cal) it was held that “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.”
In light of the law explained in the above decision, 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.
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.
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. Hence all the Assessee, incorporated under the company law of Sikkim, are resident Indian companies as there whole management & controls are situated outside state of Sikkim. 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 Income Tax Act.
Accordingly, appeal of the revenue allowed.