The Supreme Court ruled that the interest under section 234A of Income Tax Act is statutory interest leviable and payable.
Facts
The assessees were incorporated under the Registration of Companies (Sikkim) Act, 1961. Each of the assessee companies claim to be carrying on the business of commercial agents in cardamon and other agricultural products.
The Income Tax Act, 1961 was not made straightway 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. The recovery of tax was under the scheme of the Sikkim (Collection of Taxes and Prevention of Evasion of Payment of Taxes) Act, 1987.
The case of the assessees 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.
Therefore, the stand of the assessees was that the income earned by them till that date was income earned in Sikkim from the business conducted/done in Sikkim.
On the other hand, 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 & Co., Chartered Accountants, 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.
Submissions
Arvind P Datar, senior counsel appearing for the assessee companies, submitted that the issue involved in the appeals is, as to whether the provisions of Income Tax Act, 1961 shall be applicable to the assessee companies which are registered under the Sikkim Companies Act and amenable to Sikkim Tax Manual, 1948 in respect of three Assessment Years, i.e., 1987-88, 1988-89 and 1989-90 when Income Tax Act, 1961 was not extended to the State of Sikkim.
He submitted that the judgment is based on an erroneous assumption that the effective control of the companies vested with one Rattan Gupta, a resident of Delhi, who was rendering accounting and auditing services.
He contended that the impugned judgment has erroneously allowed the Department to levy interest on the assessee companies without framing the issue as a specific question of law as mandated by Section 260A of the Act.
N. Venkataraman, Additional Solicitor General of India, appearing for the Revenue, contended that section 6 of the Act defines residence in India. That this principle of control and management of its affairs is not something which had originated for the first time in the Income Tax Act, 1961.
He submitted that it is well settled that a question, as to where the control and management lies is to be decided in light of the actual or the factual exercise of control, inasmuch as the Courts consistently have taken the view that mere presence of a partner firm in India even when he happens to be the managing partner, is not conclusive of the issue.
It is further submitted that to cull out the meaning of management and control under the old Section 6(3) preamendment 2017, which shall be applicable in the present case, section 6(3) post 1st April, 2017 is also required to be considered.
He further argued that it was rightly concluded that the control and management of the companies was in Delhi and that it was a clear design on the part of the respective assessees to treat the income as arising from Sikkim to avoid the payment of tax under the Act, 1961. It is submitted that the control and management of the companies was being done by Rattan Gupta from his Delhi office. Therefore, the assessees can be said to be residence in India and therefore liable to pay tax under the Income Tax Act, 1961.
Decision
The division bench of Justice M.R. Shah and Justice B.V. Nagarathna while observing various decisions said that where the head and seat and directing power of the affairs of the company and the control and management is must be shown is not merely theoretical control and power, i.e., not de jure control and power, but de facto control and power actually exercised in the course of the conduct and management of the affairs of the firm; that the domicile or the registration of the company is not at all relevant and the determinate test is where the sole right to manage and control of the company lies.
The court held that 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.
The bench noted that there are concurrent findings recorded by the AO and the CIT (A), as approved by the High Court, that no income by way of commission, as claimed by the assessees, has been established and proved by the assessees. In fact, the AO issued notices/summons to different persons who had allegedly paid amounts as commission, however, those persons had not responded. Therefore, the AO as such has rightly drawn an adverse inference.
“In absence of any material on record that the commission was earned 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”, the court said.
Case title: Mansarovar Commercial Pvt. Ltd v/s Commissioner of Income Tax, Delhi
Citation: CIVIL APPEAL NO. 5769 OF 2022
