Not really ‘Domicile’, rather ‘De facto control & power’ of company, is determinant test for application of I-T Act

While remarking 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 Supreme Court of India held that domicile or registration of company is neither the relevant nor the determinate test to ascertain where the sole right to manage and control of the company lies.

A Division Bench of Justice MR Shah and Justice BV Nagarathna observed that in absence of any material on record that commission was earned only in Gangtok, the Sikkim resident companies cannot be permitted to say that they were liable to pay tax under Sikkim Manual, 1948 and not under Income Tax Act, 1961.

Senior Advocates Arvind P. Datar along with AOR Rohit K. Singh appeared for the Assessee, while the Revenue was represented by ASG N. Venkataraman.

Briefly, the Assessees are companies engaged as commercial agents distributing Cardamom and other products. All the Assessees are resident of and carried on business in Sikkim. Till 31.03.1990, they claimed to be govered by the Sikkim Manual of 1948, rather than the Income Tax Act 1961. The Assessees claimed that the income earned by them till 31.03.1990, was income earned in Sikkim from the business conducted in Sikkim. Subsequently, Search under Section 132 was conducted at the premises of a party in New Delhi, whereupon certain income documents pertaining to the Assessees were found. Following the Search and recovery therefrom, the AO issued SCN under Section 148 to each of the Assessees in respect of three Assessment Years (AYs), namely 1987-88, 1988-89 & 1989-90. Meanwhile, the Delhi-based party communicated to the Sikkim-based Assessees about having received notices issued under Section 148, and which had been affixed at the office of the Delhi-based party. In response thereto, the Assessees furnished returns, in terms of the Sikkim Manual, 1948 for the three AYs in question. Subsequently, demand notice under Section 156 was issued to each Assessee.

Challenging the re-assessment proceedings, the Assessees moved the High Court of Sikkim, which dismissed the petitions on grounds that it lacked the jurisdiction to entertain them. The High Court reasoned that the cause of action had not taken place in Sikkim and that the notices were issued by the AO based in New Delhi, due to which the High Court of Sikkim lacked jurisdiction over the actions of the AO. Meanwhile, based on the returns furnished by the Assessees, the Income & Sales Tax Department of Government of Sikkim raised a revised demand cancelling the earlier demand. The Assessees again approached the High Court, which passed interim order directing the AO to frame assessment subject to the outcome of the petition. Thereafter, the AO framed addition on account of income from commission, unsecured loan, interest accrued/paid on the unsecured loans and provision for income tax, which was disallowed.  Moreover, penalty proceedings were initiated u/s 271(1)(a), 271(1)(c), 273/274 and 271-B of the Act.

On appeal, the ITAT observed that the burden lay on the Revenue to prove that the control and management of the Assessee companies was situated wholly in India in the three AYs in question. It was also held that recovery of account books from the Delhi-based party did not establish that the Assessees operated from there or that their control and management was in Delhi. The High Court also settled the issues in favour of the Revenue.

After considering the submission, Bench observed 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”.

Thus, the Bench held that the Revenue has rightly concluded that the control and management of the affairs of the respective assessees were with Rattan Gupta, Chartered Accountant in Delhi.

Moreover, the validity of service of Show Cause Notices issued in the name of the Assessees, but served at the premises of the Delhi-based party, was upheld, as was the jurisdiction of the Delhi-based AO to issue the same.

With regard to the Assessees’ contentions that the Commission income earned by them in Sikkim could not be taxed under the Income Tax Act 1961, and touching upon the aspect of onus of proof, the Bench observed that once the AO issued summons to parties which allegedly paid commission to the Assessees and the summons were issued under Section 131 of the Act, which were not complied with and it was the assertion on behalf of the respective Assessees that they earned the income of commission within Sikkim, then the burden to prove the same was upon the Assessees.

With these observations, the Apex Court concluded that the Assessees failed to demonstrate that commission income had been earned by them within Sikkim, and held that the High Court had correctly set aside the contrary findings recorded by the ITAT. The Assessees were thus found liable to pay tax under the Income Tax Act 1961.

Cause Title: Mansarovar Commercial Pvt. Ltd. & others vs. CIT [ Civil Appeal No. 5769 of 2022 / 2023-Enterslice-11-SC-IT]

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