Income Tax Act | For A Company To Be A "Resident" In India, Domicile Or Registration Irrelevant; Test Is Where De Facto Control Lies : Supreme Court

The Supreme Court has ruled that under the Income Tax Act, 1961, the domicile or the registration of the company is not at all relevant, and the determinate test is the place where, the sole right to manage the company and the control of the company lies.

The place where the “head and seat” and the “directing power” of the affairs of the company and the control and management is shown, must not merely be theoretical control and power, i.e., not de jure control and power. Rather, in order to hold that a non-Indian company is a resident in India during any previous year, it must be established that such company de facto controls and manages its affairs in India, the Apex Court has ruled.

The bench of Justices M.R. Shah and B.V. Nagarathna thus upheld the jurisdiction of the Assessing Officer at New Delhi to tax the income earned by the assessees incorporated under the company law of Sikkim, for the assessment years prior to the date the Income Tax Act, 1961 was extended to the State of Sikkim. The Court observed that since the control and management of the affairs of the assessee companies was with its auditor in New Delhi, the Income Tax Act was applicable to them.

Thus, the assessees who were incorporated under the company law of Sikkim, were resident Indian companies, and the income accrued to them/ earned by them in India for the assessment years prior to 1st April 1990, was taxable under the Income Tax Act, the bench ruled.

The Top Court upheld the Delhi High Court’s order, where the High Court had confirmed the findings recorded by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) that the assessees’ auditor was in de facto control of the assessee companies.

Section 6(3) of Income Tax Act provides that a company is said to be a resident in India in any previous year, if it is an Indian company or if its place of effective management, in that year, is in India.

The assessees, including Mansarovar Commercial Private Limited, carry the business of commercial agents in agricultural products, and were incorporated under the Registration of Companies (Sikkim) Act, 1961.

Before the Income Tax Act was made applicable to the State of Sikkim from the previous year relevant to the Assessment Year commencing from 1st April, 1990 by a notification issued by the Central Government, the income tax was to be charged and collected under the Sikkim State Income Tax Manual, 1948.

Each of the assessees filed an income tax return in terms of the Sikkim Manual for the Assessment Years 1987-88, 1988-89, and 1989-90.

During the course of the search operation conducted at the premises of the assessee companies’ auditor, M/s Rattan Gupta & Co., at New Delhi, the books of account, cheque books, vouchers and other income documents of the assessee companies was found.

The assessee companies were issued notices under Section 148 of the Income Tax Act by the Assistant Commission of Income Tax (ACIT), New Delhi, for the relevant assessment years, i.e., 1987-88, 1988-89 and 1989-90.

The Assessing Officer (AO) passed assessment orders making additions to the income of the assessees for the said three Assessment Years, while concluding that the commission income was not earned by the assessees in Sikkim.

The case of the Revenue was that the control and management of each of the assessee companies was wholly with their auditor, Gupta, who had his office in New Delhi and therefore, the assessee companies were residents of India, in terms of Section 6(3) of the Income Tax Act.

The appeal filed by the assessees against the order of the AO was dismissed by the Commissioner of Income Tax (Appeals) (CIT(A)). Against this, the assessees filed appeals before the Income Tax Appellate Tribunal (ITAT). The ITAT held that the notices under Section 148 could not have been served on Gupta, the assessees’ auditor, as he could not be said to be a “Principal Officer” of the assessees within the meaning of Section 2(35)(a) of the Act. While holding that the assessees were not a resident of India within the meaning of Section 6(3)(ii) of the Act, the ITAT allowed the appeal.

Against the order of the ITAT, the revenue department filed an appeal before the Delhi High Court.

While allowing the appeal, the High Court concluded that the factual determination made by the AO that the management and the control of the assessee companies was wholly situated in Delhi, was established and fortified. Further, the findings of the AO that the assessee had failed to prove that the commission payments were earned by them exclusively in Sikkim, had not been dislodged by producing any tangible material.

In an appeal filed before the Apex Court against the Delhi High Court’s decision, Senior Advocate Arvind P Datar, appearing for the assessees, argued that the Income Tax Act shall not be applicable for the period during the relevant assessment years since in respect of the said three Assessment Years, i.e., 1987-88, 1988-89 and 1989-90, the Income Tax Act was not extended to the State of Sikkim.

Since the Income Tax Act was extended to the State of Sikkim only on and after 1st April, 1990, the AO had exceeded his jurisdiction, the assessee pleaded.

The Supreme Court perused the findings recorded by the AO, as per whom the directors of the assessee companies were all from outside Sikkim. Further, the entire books of accounts of the assessee companies were found and seized at New Delhi. The said findings of the AO were upheld by the CIT(A).

The Supreme Court referred to its decision in Commissioner of Income Tax vs. Nandlal Gandalal (1960 40 ITR 1 (SC)), where the Court had held that the expression “control and management” in Section 4A(b) of the Income Tax Act, 1922, means de facto control and management and not merely the right or power to control and manage.

After perusing the facts of the case, the Apex Court held that it was rightly concluded by the AO, and upheld by the CIT(A), that the control and management of the affairs of the assessees was with their auditor, Gupta, in New Delhi. Thus, the High Court had rightly held that the AO at New Delhi was having the jurisdiction to issue notice under the Income Tax Act, the Court ruled.

“The findings of fact recorded by the AO, confirmed by the CIT(A) that the control and management of the affairs of the assessee companies was with Rattan Gupta are based on the entire material on record. In light of the aforesaid findings, the High Court has not committed any error in reversing the contrary findings recorded by the ITAT and it is rightly observed and held that service of notice upon Rattan Gupta treating him as the principal officer and/or as a principal officer for and on behalf of the assessee companies were valid notices and the High Court has rightly held that the AO at New Delhi was having the jurisdiction to issue notice under the Income Tax Act, 1961,” said the Court.

The Court added that in the absence of any material on record that the commission was earned by the assessees’ only in Gangtok, the assessees cannot be permitted to say that they were liable to pay the tax under the Sikkim Manual, 1948 and not under the Income Tax Act, 1961.

“It appears that the assessees with mala fide intention and to evade the payment of tax under the Income Tax Act, 1961 came out with a case that they earned the income within Sikkim, which has not been established and proved. It was a clear attempt on the part of the respective assessees to wriggle out of the clutches of the Income Tax Act, 1961,” the bench added.

The Court thus dismissed the appeal.

Case Titled: Mansarovar Commercial Pvt Ltd vs. Commissioner of Income Tax, Delhi

Citation : 2023 LiveLaw (SC) 291

Income Tax Act, 1961- The Supreme Court has upheld the jurisdiction of the Assessing Officer at New Delhi to tax the income earned by the assessees incorporated under the Registration of Companies (Sikkim) Act, 1961, for the assessment years prior to the date the Income Tax Act, 1961 was extended to the State of Sikkim.

Section 6(3) of Income Tax Act- The Court observed that since the control and management of the affairs of the assessee companies was with its auditor in New Delhi, the Income Tax Act, 1961 was applicable to them. Thus, the assesses who were incorporated under the company law of Sikkim, were resident Indian companies, and the income accrued to them/ earned by them in India for the assessment years prior to 1st April 1990, was taxable under the Income Tax Act, the bench ruled.

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