2016 (2) TMI 671 - HC - Income Tax

Resident Indian companies - extension of laws of India to the new State of Sikkim - whether the Assessee is a resident of India within the meaning of Section 6(3) (ii) of the Act? - Held that - 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. - Decided against assessee Reopening of assessment - authority to receive the notices - Held that - 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. Mr. Rattan Gupta auditor of the Assessee companies 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. The findings of the AO that the Assessees failed to prove that the commission payments were earned by them exclusively in Sikkim has not been dislodged by the Assessees by producing any tangible material. 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 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. 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. On merits there were sufficient grounds for exercising the power under Section 148 of the Act. - Decided against assessee 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.

Summary

Issues Involved:
1. Jurisdiction of the ACIT to issue notices under Section 148 of the Income Tax Act.
2. Validity of service of notices on the Assessees.
3. Determination of the residential status of the Assessee companies.
4. Taxability of the income of the Assessee companies in India.
5. Validity of reopening assessments under Section 148.
6. Charging of interest under Sections 234A and 234B.

Detailed Analysis:

1. Jurisdiction of the ACIT to Issue Notices:
The Assessees contended that the ACIT, Circle 7(1), New Delhi, lacked jurisdiction to issue notices under Section 148 of the Income Tax Act. The Court found that the management and control of the Assessee companies were wholly situated in Delhi, specifically in the office of their auditor, Mr. Rattan Gupta. Consequently, the ACIT, Circle 7(1), New Delhi, had the jurisdiction to issue notices. The Court rejected the Assessees' argument that jurisdiction should lie with the ACIT, West Bengal, since the companies were incorporated in Sikkim.

2. Validity of Service of Notices:
The Court examined whether the notices were properly served on the Assessees through Mr. Rattan Gupta. It was established that Mr. Rattan Gupta had significant control over the companies, including appointing directors and handling financial matters. Therefore, he was deemed to have the implied authority to receive notices. The Court held that the refusal by Mr. Rattan Gupta to accept the notices amounted to deemed service, making the service of notices valid under Section 282 of the Act.

3. Determination of Residential Status:
The Court analyzed whether the Assessee companies were residents of India under Section 6(3)(ii) of the Act. It was found that despite being incorporated in Sikkim, the management and control of the companies were in Delhi. This was evidenced by the presence of signed blank cheques, company seals, and other documents in Mr. Rattan Gupta's office. The Court held that the companies were resident Indian companies and thus subject to Indian tax laws for income accrued or earned in India.

4. Taxability of Income in India:
The Assessees claimed that their income was earned exclusively in Sikkim and thus not taxable under the Indian Income Tax Act. However, the Court found that the Assessees failed to prove that the commission payments were genuinely earned in Sikkim. The evidence suggested that the companies were routing money through Sikkim to avoid Indian taxes. The Court upheld the findings of the AO and CIT(A) that the income was taxable in India.

5. Validity of Reopening Assessments:
The Court addressed whether there were sufficient grounds for reopening the assessments under Section 148. The search and seizure operation in March 1990 revealed that the companies had not filed returns under the Indian Income Tax Act despite earning income in India. The Court found that there were valid reasons for reopening the assessments, rejecting the ITAT's conclusion that the reasons were not valid.

6. Charging of Interest:
The ITAT had concluded that interest under Sections 234A and 234B could not be charged as no specific notice was issued. The Court overruled this conclusion, citing decisions that clarified the charging of interest does not require a specific notice. The Court held that the interest was correctly charged by the AO.

Conclusion:
The Court set aside the ITAT's order and restored the AO's orders as upheld by the CIT(A). The Assessees were directed to pay costs of Rs. 50,000 in each appeal to the Revenue. The Court provided detailed answers to the framed questions, all in favor of the Revenue and against the Assessees.