Supreme Court Clarifies Taxability of Sikkim-Registered Companies: Mansarovar Commercial Pvt. Ltd. vs. Commissioner of Income Tax, Delhi (2023)

Date of the Judgment: 10 April 2023

Citation: 2023 INSC 330

Judges: M.R. Shah, J., B.V. Nagarathna, J.

Can a company registered in Sikkim, but with its operations and management primarily based in Delhi, be taxed under the Income Tax Act, 1961? The Supreme Court of India recently addressed this complex question in a case involving several companies registered under the Registration of Companies (Sikkim) Act, 1961. The core issue revolved around whether these companies, which claimed to conduct business in Sikkim, were actually controlled and managed from Delhi, thereby making them liable to pay taxes under the Income Tax Act, 1961.

The Supreme Court bench, comprising Justices M.R. Shah and B.V. Nagarathna, delivered the judgment. The court examined the factual evidence and legal arguments to determine the true place of control and management of these companies, ultimately deciding on their tax liability.

Case Background

The case involves five companies: Mansarovar Commercial Private Limited, Sovereign Commercial Private Limited, Swastik Commercial Private Limited, Trishul Commercial Private Limited, and Pasupati Nath Commercial Private Limited. These companies were incorporated under the Registration of Companies (Sikkim) Act, 1961. They claimed to be commercial agents dealing in cardamom and other agricultural products.

Sikkim became a part of India in April 1975. The Constitution (Thirty-Sixth Amendment) Act, 1975, introduced Article 371-F, which did not automatically extend all Indian laws to Sikkim. Existing laws in Sikkim continued until amended or repealed. The Income Tax Act, 1961, was not immediately applicable to Sikkim. Until its extension, income tax was governed by the Sikkim State Income-tax Manual, 1948.

The Income Tax Act, 1961, was extended to Sikkim on November 7, 1988, via notification under Article 371-F(n). Initially, the effective date was April 1, 1989, but this was later changed to April 1, 1990, by the Finance Act, 1989. The companies argued that until March 31, 1990, they were governed by the Sikkim Manual, 1948, and their income was earned in Sikkim. However, the Income Tax Department contended that the companies’ control and management were based in Delhi, making them taxable under the Income Tax Act, 1961.

A search was conducted on March 15, 1990, at the premises of M/s Rattan Gupta & Co., Chartered Accountants, in Delhi, where the companies’ books of accounts and other financial documents were found. This led to notices being issued to the companies under Section 148 of the Income Tax Act, 1961 for the assessment years 1987-88, 1988-89 and 1989-90.

Timeline

Course of Proceedings

The companies initially filed writ petitions in the High Court of Sikkim, challenging the notices issued under Section 148 of the Income Tax Act, 1961. The Sikkim High Court dismissed these petitions, stating it lacked jurisdiction as the notices were issued and served in Delhi. The companies then filed writ petitions in the Delhi High Court, which initially stayed proceedings but later directed the Assessing Officer (AO) to frame assessments.

The AO concluded that the companies were attempting to exploit the laws of Sikkim by routing money through Sikkim and back into India. The AO made additions to the companies’ income under various heads and initiated penalty proceedings. The companies then appealed to the CIT(A), which dismissed their appeals. Subsequently, the ITAT allowed the companies’ appeals, holding that the notices under Section 148 of the Income Tax Act, 1961 were not properly served. The ITAT also held that the Assessing Officer did not serve any notices of his intention of treating Mr. Rattan Gupta as the “Principal Officer” for the purposes of section 2(35)(b) of the Act.

The Revenue appealed to the Delhi High Court, which reversed the ITAT’s decision, ruling in favor of the Revenue. The High Court held that the companies were residents of India, their income was taxable under the Income Tax Act, 1961, and the notices were validly served. The High Court also held 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. 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.

Legal Framework

The primary legal provisions in this case are:

• Article 371-F of the Constitution of India: This article deals with special provisions for the State of Sikkim. Specifically, clause (k) states that all laws in force in Sikkim before the appointed day (April 26, 1975) would continue until amended or repealed. Clause (n) allows the President to extend any law to Sikkim.
• Section 6(3) of the Income Tax Act, 1961: This section defines the residence of a company for tax purposes. It states that a company is considered a resident of India if the control and management of its affairs is situated wholly in India. The court considered the pre-amendment version of this section.
• Section 148 of the Income Tax Act, 1961: This section deals with the issuance of notices for reassessment of income that has escaped assessment.
• Section 2(35) of the Income Tax Act, 1961: This section defines “principal officer” of a company. It includes the secretary, treasurer, manager or agent of the company and any person connected with the management or administration of the company upon whom the Assessing Officer has served a notice of his intention of treating him as the principal officer.
• Sikkim State Income-tax Manual, 1948: This manual governed income tax in Sikkim before the extension of the Income Tax Act, 1961.

The case also touches upon the interpretation of ‘control and management’ of a company, which has been a subject of judicial interpretation. The court had to determine whether the companies’ control and management were indeed in Sikkim, as they claimed, or in Delhi, as the Income Tax Department argued.

Arguments

Arguments on behalf of the Assessees (Companies):

• The Income Tax Act, 1961, was not applicable to Sikkim during the assessment years 1987-88, 1988-89, and 1989-90. The Act was extended to Sikkim only from April 1, 1990. Therefore, the Assessing Officer (AO) in Delhi exceeded his jurisdiction.
• The companies were assessed and paid taxes under the Sikkim Manual, 1948. They cannot be taxed again under the Income Tax Act, 1961. Taxing statutes should not be interpreted to impose a double tax burden unless explicitly stated.
• The case is covered by the decision in Mahaveer Kumar Jain v. CIT, Jaipur, (2018) 6 SCC 527, where it was held that income accrued in Sikkim, when the Income Tax Act, 1961 was not applicable, could not be taxed under the Act.
• The companies filed income tax returns under the Sikkim Manual, 1948, and paid the taxes. This establishes their bona fides and proves that they had real business in Sikkim.
• The AO in Delhi had no territorial jurisdiction to assess the companies. The companies’ registered offices were in Sikkim. The seizure of books of accounts at the office of their Chartered Accountant in Delhi does not establish control in Delhi.
• The re-assessment was impermissible in the absence of original orders passed under section 143(3) of the Act. Reliance was placed on trustees of H.E.H, the Nizam’s Supplemental Family Trust v. CIT, (2000) 3 SCC 501 and Standard Chartered Finance Limited v. CIT, Bangalore, (2016) 14 SCC 634.
• There was no material to prove that the companies’ control and management were wholly in India. The High Court erred in presuming that Mr. Rattan Gupta, the Chartered Accountant, controlled the companies. The burden to prove control in India was on the Revenue, which it failed to discharge.
• The High Court erred in treating Mr. Ravinder Singh as a partner of M/s Rattan Gupta & Co.
• The High Court could not have levied interest on the companies without framing a specific question of law under Section 260A of the Act.
• The notices were not served upon the proper person. Mr. Rattan Gupta was not connected with the management or administration of the companies so as to treat him as a Principal Officer. The AO never served a notice on Rattan Gupta under section 2(35)(b) of the Act expressing his intention to treat him as the Principal Officer.
• The business was managed from Gangtok in Sikkim, where the business was carried on by one Mr. Ajay Kumar Agarwal, Local Director and Mr. H.L. Verma.
• The income was earned and assessed to income tax in Sikkim as per the Sikkim Manual, 1948, and income tax was paid in Sikkim under Sikkim Manual, 1948.
• Seized vouchers and records clearly establish that commission payments were received into the bank accounts of these companies from identified traders of large cardamom.

Arguments on behalf of the Revenue (Income Tax Department):

• Section 6(3) of the Income Tax Act, 1961, defines residence in India based on the control and management of a company’s affairs. This principle is not new and existed under the Income Tax Act, 1922.
• The control and management of a company’s affairs is determined by where the “head and brain” of the company is located, not just where the business is carried out. The place of effective management is where key management and commercial decisions are made.
• The Revenue relied upon various judgments to define control and management, including San Paulo v. Carter (1896) AC 31, V.V.R.N.M. Subbayya Chettiar v. CIT, AIR 1951 SC 101, Erin Estate v. CIT, 1959 SCR 573, Narottan and Pereira Ltd. v. CIT, 1953 23 ITR 454, Estate of A. Mohammed Rowther v. CIT, 1963 49 ITR 39, CIT v. Chitra Palayakat Co., 1985 156 ITR 730, Commissioner of Income Tax v. Nandlal Gandalal, 1960 40 ITR 1, A.M.M. Firm v. Reserve Bank of India, 1982 SCC OnLine Mad. 187, Commissioner of Income Tax v. Bank of China, 1985 SCC OnLine Cal. 24, and Universal Cargo Carriers Inc. v. Commissioner of Income Tax, 1990 SCC OnLine Cal. 385.
• The control and management of the companies were in Delhi, with Mr. Rattan Gupta managing the affairs from his Delhi office. The companies were intentionally trying to avoid tax by claiming income from Sikkim.
• The decision in Commissioner of Income Tax v. Sun Engineering Works P. Ltd. (1992) 4 SCC 363, clarified that “escaped assessment” includes both non-assessment and under-assessment. Therefore, re-assessment is valid.
• The notices were validly served at Delhi, the principal place of business, and the service was sufficient as per India Glycols Ltd. v. Commissioner of Income Tax, 2004 SCC OnLine Cal. 736.
• Interest under Section 234A of the Act is mandatory and does not require a specific order. The decision in Anjum M.H. Ghaswala, (2002) 1 SCC 633, supports this. The decision in CIT v. Ranchi Club Limited, (2001) 247 ITR 209, was overruled.
• The issue of interest is incidental and collateral and does not require a separate question of law. The decisions in State Bank of India v. S.N. Goyal, (2008) 8 SCC 92 and Commissioner of Income Tax, Delhi v. Bhagat Construction Company Private Limited, (2016) 15 SCC 738, support this.
• The decision in Shiv Raj Gupta v. CIT, Delhi, AIR 2020 SC 3556, is not applicable as it dealt with capital gains, which is a separate head of income, unlike interest, which is automatic and mandatory.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the provisions of the Income Tax Act, 1961, are applicable to the assessee companies, registered under the Sikkim Companies Act, for the assessment years 1987-88, 1988-89 and 1989-90, when the Income Tax Act, 1961, was not extended to the State of Sikkim.
2. Whether jurisdiction on authorities in Delhi can be conferred solely based on the alleged effective place of control and management of the assessee companies for the purpose of applicability of Income Tax Act, 1961.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court upheld the Delhi High Court’s judgment, ruling against the companies. The court found that the control and management of the companies were indeed in Delhi, not Sikkim. The court emphasized that the location of the “head and brain” of a company, where key decisions are made, determines its residence for tax purposes, not just where it is registered or where it conducts business.

How each submission made by the Parties was treated by the Court?

The Court held that the companies were attempting to exploit the laws of Sikkim to avoid paying taxes in India. The Court emphasized that the location of the control and management of a company is crucial for determining its tax liability, and not just where it is registered or where it conducts business.

Decision

The Supreme Court dismissed the appeals of the companies, upholding the judgment of the Delhi High Court. The court ruled that:

• The Income Tax Act, 1961, is applicable to companies registered in Sikkim if their control and management are situated in India.
• The Income Tax authorities in Delhi had jurisdiction to assess the companies as their control and management were found to be in Delhi.

The Supreme Court held that the companies were established with the sole objective of avoiding payment of income tax. The Court held that the companies were not carrying on any business in Sikkim. The Court further held that the companies were being managed and controlled from the office of M/s Rattan Gupta & Co. in Delhi. The Court held that the notices issued under section 148 of the Income Tax Act, 1961 were validly served. The Court also held that the interest levied was valid.

Implications: This judgment clarifies that companies cannot evade tax by merely registering in a tax-exempt region if their actual control and management are located in a taxable jurisdiction. It reinforces the principle that the “head and brain” of a company, where key decisions are made, determines its tax residence. This ruling has significant implications for companies operating across different tax jurisdictions within India.

Flowchart of the Case

Key Takeaways

• Control and Management: The tax residence of a company is determined by where its control and management are located, not just where it is registered.
• Substance over Form: Tax authorities will look beyond the formal registration of a company to determine where its actual control and management lies.
• Jurisdiction: Tax authorities have jurisdiction over companies whose control and management are within their territory, even if the company is registered elsewhere.
• Tax Evasion: Companies cannot evade tax by merely registering in a tax-exempt region if their actual control and management are located in a taxable jurisdiction.
• Mandatory Interest: Interest under Section 234A is mandatory and automatic and does not require a specific order.
• Validity of Notices: Notices served at the principal place of business are valid.