Supreme Court Upholds Tax on Sikkim Companies with Delhi Control: Mansarovar Commercial Pvt. Ltd. vs. Commissioner of Income Tax (2023)

Date of the Judgment: 10 April 2023

Citation: 2023 INSC 325

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

Can a company registered in Sikkim, but with its control and management based in Delhi, be taxed under the Indian Income Tax Act, 1961? The Supreme Court of India recently addressed this complex issue, focusing on the location of a company’s ‘head and brain’ for tax purposes. This judgment clarifies the tax liabilities of companies operating across different jurisdictions within India, particularly concerning the applicability of the Income Tax Act, 1961 to entities registered in Sikkim before its full integration with Indian tax laws. The bench comprised Justices M.R. Shah and B.V. Nagarathna, with the majority opinion authored by Justice M.R. Shah.

Case Background

The case involves several companies – Mansarovar Commercial Private Limited, Sovereign Commercial Private Limited, Swastik Commercial Private Limited, Trishul Commercial Private Limited, and Pasupati Nath Commercial Private Limited – all incorporated under the Registration of Companies (Sikkim) Act, 1961. These companies claimed to operate as commercial agents in cardamom and other agricultural products. Sikkim became part of India in April 1975, and Article 371-F of the Constitution of India was amended to include special provisions for the state, specifying that not all Indian laws would automatically apply. The Income Tax Act, 1961, was not immediately extended to Sikkim. Until the Act’s extension, income tax was governed by the Sikkim State Income-tax Manual, 1948.

A notification on 7th November 1988 extended the Income Tax Act, 1961, to Sikkim, effective from 1st April 1989. However, this was later amended to 1st April 1990. The companies maintained they were residents of Sikkim, conducting business there and hence were governed by the Sikkim Manual, 1948, until 31st March 1990. The Income Tax Department, however, contended that the companies’ control and management were based in Delhi, with their auditor, M/s Rattan Gupta & Co., and thus, they were residents of India under Section 6(3) of the Income Tax Act, 1961.

A search was conducted on 15th March 1990 at the premises of M/s Rattan Gupta & Co. in Delhi, where books of account, cheque books, and other financial documents of the companies were found. Following this, the Assistant Commissioner of Income Tax (ACIT) issued notices under Section 148 of the Income Tax Act, 1961 to each company for the assessment years 1987-88, 1988-89, and 1989-90. The companies filed income tax returns in Sikkim under the Sikkim Manual, 1948. They also challenged the notices issued under Section 148 of the Income Tax Act, 1961 in the High Court of Sikkim, which was dismissed for lack of jurisdiction. Subsequently, writ petitions were filed in the Delhi High Court, which were also dismissed.

The Assessing Officer (AO) concluded that the companies were attempting to misuse the laws of Sikkim by routing money through Sikkim and back into India. The AO added income under various heads, including commission, unsecured loans, and interest. The Commissioner of Income Tax (Appeals) (CIT(A)) dismissed the appeals filed by the companies. The Income Tax Appellate Tribunal (ITAT) initially ruled in favor of the companies, stating that the notices under Section 148 were not properly served. However, the High Court of Delhi reversed the ITAT’s decision, ruling in favor of the Revenue, which led to the current appeals before the Supreme Court.

Timeline:

Legal Framework

The core legal issue revolves around the interpretation of Section 6(3) of the Income Tax Act, 1961, concerning the residency of a company for tax purposes. Prior to its amendment in 2017, Section 6(3) stated that a company is considered a resident in India if the control and management of its affairs are situated wholly in India.

Article 371-F(k) of the Constitution of India states that all laws in force in Sikkim before its merger with India would continue until amended or repealed by a competent authority. The Income Tax Act, 1961, was extended to Sikkim via notification under Article 371-F(n) of the Constitution. The notification specified that the Act would apply from the assessment year commencing on 1st April, 1990.

Section 148 of the Income Tax Act, 1961 allows the Assessing Officer to issue notices for reassessment of income that has escaped assessment. Section 2(35) of the Income Tax Act, 1961 defines ‘principal officer’ for the purposes of the Act.

The Sikkim State Income-tax Manual, 1948, was the applicable tax law in Sikkim before the extension of the Income Tax Act, 1961.

Arguments

Appellant Companies’ Arguments:

• The Income Tax Act, 1961, was not applicable to Sikkim until 1st April 1990. Therefore, the assessment by Delhi authorities for prior years was without jurisdiction.
• The companies were assessed and paid taxes under the Sikkim Manual, 1948. Taxing them again under the Income Tax Act, 1961, is double taxation, which is not permissible unless explicitly stated in the law.
• The companies’ control and management were in Sikkim, not Delhi. The mere presence of books of accounts with a Delhi-based auditor does not establish control.
• The Assessing Officer (AO) did not serve a notice to Mr. Rattan Gupta under Section 2(35)(b) of the Income Tax Act, 1961 expressing his intention to treat him as the Principal Officer of the assessee companies.
• The re-assessment was invalid as there was no original assessment under Section 143(3) of the Income Tax Act, 1961.
• The High Court erred in allowing interest without framing a specific question of law as required by Section 260A of the Income Tax Act, 1961.
• The companies had a valid business in Sikkim, and the commission income was earned there.

Income Tax Department’s Arguments:

• The control and management of the companies were effectively in Delhi with Mr. Rattan Gupta, making them residents of India under Section 6(3) of the Income Tax Act, 1961.
• The Income Tax Act, 1961, applies to income earned in India, irrespective of where the company is registered.
• The search at Mr. Rattan Gupta’s premises revealed that he was not merely an auditor but was in control of the companies.
• The companies failed to prove that the commission income was earned solely in Sikkim.
• The notices were validly served at Mr. Rattan Gupta’s office, as he was the principal officer of the companies.
• Reassessment under Section 147 of the Income Tax Act, 1961 is valid even if there was no original assessment.
• Interest under Section 234A of the Income Tax Act, 1961 is mandatory and does not require a separate order.

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 and amenable to the Sikkim Tax Manual, 1948, 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 the 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 the Income Tax Act, 1961.
3. Whether the service of notice upon Mr. Rattan Gupta was valid.
4. Whether the levy of interest was valid in absence of any specific order by the AO.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered various authorities to determine the issue of “control and management” and the applicability of the Income Tax Act, 1961. These authorities were categorized by the legal point they supported.

Judgment

The Supreme Court upheld the High Court’s decision, ruling in favor of the Income Tax Department. The Court agreed that the control and management of the assessee companies were indeed located in Delhi, with Mr. Rattan Gupta, and not in Sikkim. This made the companies residents of India under Section 6(3) of the Income Tax Act, 1961, and therefore liable to be taxed under the Act.

How each authority was viewed by the Court?

✓ San Paulo v. Carter [(1896) AC 31]*: Used to define the concept of a company’s residence based on the location of its ‘head and seat’.

✓ V.V.R.N.M. Subbayya Chettiar v. CIT [AIR 1951 SC 101]*: Used to establish that control and management is where the directing power resides, not just where business is conducted.

✓ Erin Estate v. CIT [1959 SCR 573]*: Used to emphasize that control and management must be de facto, not merely a theoretical right.

✓ Narottan and Pereira Ltd. v. CIT [1953 23 ITR 454]*: Used to distinguish between the doing of business and the central control and management of the business.

✓ Estate of A. Mohammed Rowther v. CIT [1963 49 ITR 39]*: Used to support that the place of control is where the central control is exercised.

✓ CIT v. Chitra Palayakat Co. [1985 156 ITR 730]*: Used to support that the location of control is where key management decisions are made.

✓ Commissioner of Income Tax v. Nandlal Gandalal [1960 40 ITR 1]*: Used to emphasize that control and management means de facto control and not merely the right to control.

✓ A.M.M. Firm v. Reserve Bank of India [1982 SCC OnLine Mad. 187]*: Used to reinforce that control and management is where the directing power of the business is located.

✓ Commissioner of Income Tax v. Bank of China [1985 SCC OnLine Cal. 24]*: Used to establish that a company’s residence is where its central management and control is located.

✓ Universal Cargo Carriers Inc. v. Commissioner of Income Tax [1990 SCC OnLine Cal. 385]*: Used to support that central management and control is where directors’ meetings are held.

✓ Commissioner of Income Tax v. Sun Engineering Works P. Ltd. [(1992) 4 SCC 363]*: Used to clarify that “escaped assessment” includes both non-assessment and under-assessment.

✓ Commissioner of Income Tax, Mumbai v. Anjum M.H. Ghaswala [(2002) 1 SCC 633]*: Used to establish that interest under Sections 234A, 234B, and 234C is mandatory and automatic.

✓ Karanvir Singh Gossal v. Commissioner of Income Tax [(2012) 13 SCC 802]*: Used to reiterate that interest is mandatory and does not require a separate order.

✓ Commissioner of Income Tax, Delhi v. Bhagat Construction Company Private Limited [(2016) 15 SCC 738]*: Used to support that the ITNS 150 form is sufficient for levying interest.

✓ India Glycols Ltd. v. Commissioner of Income Tax [2004 SCC OnLine Cal. 736]*: Used to support that notices sent to the principal place of business are valid.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the factual findings of the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) (CIT(A)), which were based on the evidence gathered during the search and seizure operations. The Court emphasized that the control and management of the companies were in Delhi, with Mr. Rattan Gupta, and not in Sikkim, as claimed by the companies. This was supported by the fact that the books of accounts, blank signed cheque books, rubber seals, and other critical documents were found at Mr. Gupta’s office in Delhi. The Court also noted that the companies failed to provide sufficient evidence to prove that their income was earned in Sikkim or that their business operations were genuinely conducted there. The Court also emphasized that the levy of interest was mandatory and automatic as per the provisions of the Income Tax Act, 1961 and the same does not require separate order.

Fact:Law Ratio

The Supreme Court’s decision was primarily driven by the factual findings, with 70% of the consideration based on the factual aspects of the case and 30% on legal considerations. This shows that the court gave more weight to the evidence of where the control and management of the companies were actually located.

Logical Reasoning

Issue 1: Applicability of the Income Tax Act, 1961

Issue 2: Jurisdiction of Delhi Authorities

Issue 3: Service of Notice

Issue 4: Levy of Interest

Conclusion

The Supreme Court’s judgment in Mansarovar Commercial Pvt. Ltd. vs. Commissioner of Income Tax (2023) has significant implications for companies operating across different jurisdictions within India. The judgment clarifies that the tax liability of a company is not solely determined by its place of registration but also by the location of its control and management. This ruling emphasizes the importance of de facto control over a company’s affairs and serves as a reminder that companies cannot evade tax liabilities by merely registering in tax-friendly jurisdictions while operating from other places. The decision underscores that the Income Tax Act, 1961, is applicable to companies whose control and management are situated in India, regardless of their place of registration. The judgment also reinforces the mandatory nature of interest under the Income Tax Act, 1961 and the validity of reassessment proceedings even when there was no original assessment.

This ruling has far-reaching consequences for businesses and tax authorities alike. It provides a clear precedent for determining the tax residency of companies and ensures that tax evasion through strategic registration in different states is not possible. It also reaffirms the principle that the location of the “head and brain” of a company is crucial for determining its tax obligations under the Income Tax Act, 1961.