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In a recent judgment, Delhi High Court has ruled that even though a company may have been incorporated under the Companies Act of Sikkim, in the period prior to 1st April 1989, if it earned any income outside Sikkim but within India, the Income Tax Act 1961 would apply to such income.

Case Details:
ITA 162/2002, 164/2002, 165/2002, 167/2002, 168/2002
Commissioner of Income Tax  ...........(Appellant)
Vs
Mansarovar Commercial P Ltd,   
Sovereign Commercial P Ltd,
Swastik Commercial P Ltd,
Trishul Commercial P Ltd,
Pasupati Nath Commercial P Ltd ………… (Respondents)
Date of Order : 22-02-2016
Coram: Justice S. Muralidhar and Justice Vibhu Bakhru

Important Case Laws referred:
Alankar Commercial Pvt. Ltd. v. ACIT (2000) 244 ITR 31(SC)
Sikkim Manipal University v. State of Sikkim (2014) 369 ITR 57 (Sikkim)

Income Tax in Sikkim - Background
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territories comprising the State of Sikkim or any part thereof were to continue to be in force therein until amended or repealed by a competent legislature or other competent authority.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.

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. In terms of para 2 of the said Notification, the Central Government appointed, by Notification S.O. 148 E dated 23rd February 1989, the 1st of April, 1989 as the date on which the Act would come into force in the State of Sikkim in relation to the previous year relevant to the AY commencing on the 1st day of April, 1989. However, subsequently by virtue of Section 26 of the Finance Act, 1989 the Act was made applicable to the State of Sikkim from the previous year relevant to the AY commencing from 1 st April 1990, thereby extending the date of applicability of the Act by one year from the date specified in the notification dated 23rd February, 1989.

Facts of the Case(s):
All respondent companies were incorporated under the Registration of Companies (Sikkim) Act, 1961 and carried on the business of commercial agents in cardamom and other agricultural products. A search was conducted on 15th March 1990 at the premises of M/s Rattan Gupta & Co. Chartered Accountant (CA) at Daryaganj, New Delhi and during the course of the search books of account, check books, signed blank cheques, vouchers and other income documents of the respondent companies were found. Afterwards, notice under Section 148 had been issued to each of them at the address of M/s. Rattan Gupta & Co. at Daryaganj and affixed at the said premises of M/s. Rattan Gupta & Co.

The Assessees filed writ petitions in the High Court of Sikkim, challenging the notices issued u/s 148. Ultimately, the Sikkim High Court dismissed all the writ petitions holding that it had no jurisdiction to entertain the said petitions since no part of the cause of action had arisen in the State of Sikkim. It was stated that inasmuch as the notices were issued by the ACIT, (Investigation) Circle 7(10), New Delhi, and served on the Assessees in New Delhi, it had no jurisdiction over the actions of that authority. The Sikkim High Court observed that “mere fact that the companies have registered offices in Sikkim does not confer jurisdiction on this Court”.

Respondent companies filed writ petitions with Delhi High Court which by an interim order stayed the proceedings. Later, the Court directed that the Department may conclude the proceedings and pass orders thereon but the orders would not be given effect to unless permitted by the Court.

Subsequently, assessment order were passed concluding that each of the companies were “intentionally trying to take advantage of the prevailing laws at Sikkim by routing money through Sikkim and ploughing back in India.” The objections raised by the Assessees as to jurisdiction were rejected. Additions were made to the income of the Assessees for the three AYs in question 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.

Appeals of the companies were dismissed by CIT(A). Meantime Delhi High Court also rejected the Writ Petition of the respondent companies.

Later ITAT held that the notices under Section 148 were not validly served on the companies. The AO, therefore, did not acquire any jurisdiction under Section 148 of the Act to proceed with the assessments.

Question(s) framed by the High Court:

1. Whether the Tribunal was right in holding that the ACIT exceeded his jurisdiction in issuing notices under Section 148 of the Act and the notices were not served in accordance with law?

2. Whether the order made by the ITAT is perverse based on conjectures and surmise and ignorance of evidence and material and has relied upon incorrect facts?

3. Whether the income of the assessee is taxable in India?

4. Whether the ITAT was right in law in holding that the assessee is not a resident of India within the meaning of Section 6(3)(ii) of the Income-Tax Act, 1961 and whether the said finding of the ITAT is not also vitiated and perverse as it ignores relevant admissible evidence and materials and relies upon incorrect facts and has not given due consideration to several important materials and evidence relevant for determination of residence of the assessee

Contention of the Respondents Companies:
The case of the companies was that each of them was a resident of Sikkim, carrying on business in Sikkim and not elsewhere and that till 31st March, 1990, each of them were governed by the Sikkim Manual, 1948 and not the Act. The stand of the Assessees is that the income earned by them till that date was income earned in Sikkim from the business conducted done in Sikkim.

Contention of the Revenue:
The case of the Revenue was that the control and management of each of the Assessee companies was wholly with their auditor, M/s. Rattan Gupta & Company, Chartered Accountants (CAs), who had their offices in Karol Bagh, New Delhi and, therefore, were companies resident in India in terms of Section 6 (3) of the Act.

Excerpts from the Judgment:

(i) even though a company may have been incorporated under the Companies Act of Sikkim, in the period prior to 1st April 1989, if it earned any income outside Sikkim but within India, the Income Tax Act 1961 would apply to such income

(ii) the jurisdiction of the Indian income tax authorities would not get excluded as long as what is sought to be brought to tax is the income of a company incorporated in Sikkim which income accrued to it and was earned in India.

….. 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 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.

In the light of the finding of this Court 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.

Answers to the Questions framed:

92. To answer the questions framed, Question (1) viz., "Whether the Tribunal was right in holding that the ACIT exceeded his jurisdiction in issuing notices under Section 148 of the Act and the notices were not served in accordance with law?" is answered in the negative i.e. in favour of the Revenue and against the Assessees.

93. Question (2) viz. "Whether the order made by the ITAT is perverse based on conjectures and surmise and ignorance of evidence and material and has relied upon incorrect facts?" is answered in the affirmative, i.e. in favour of the Revenue and against the Assessees.

94. Question (3) viz. "Whether the income of the assessee is taxable in India?” is answered in the affirmative i.e. in favour of the Revenue and against the Assessees.

95. Question (4) viz., “Whether the ITAT was right in law in holding that the assessee is not a resident of India within the meaning of Section 6 (3) (ii) of the Income-Tax Act, 1961 and whether the said finding of the ITAT is not also vitiated and perverse as it ignores relevant admissible evidence and materials and relies upon incorrect facts and has not given due consideration to several important materials and evidence relevant for determination of residence of the assessee" is answered in the negative i.e. in favour of the Revenue and against the Assessees.

Download Full Judgment Click Here >>

Income earned by a company incorporated under Companies Act of Sikkim within India Prior to 01-04-1989 is also covered under Income Tax Act 1961 | 22-02-2016 |

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