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TMI Blog2016 (2) TMI 671X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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territories comprising the State of Sikkim or any part thereof were to continue to be in force therein until amended or repealed by a competent legislature or other competent authority.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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 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: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lmia 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. 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 affai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses 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. 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 provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 infere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen asked whether there was any employer or director based in Sikkim in respect of the other four 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 bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttan 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermining 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 boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urisdiction 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 reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 79. In the instant case, that the facts that Rattan Gupta & Co. did not merely render professional services but had a vital say in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad 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. Answers to the Questions framed 92. To answer the questions framed, Question (1) viz., &qu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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