MANSAROVAR COMMERCIAL PVT. LTD. vs. COMMISSIONER OF INCOME TAX DELHI

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 5769 OF 2022 Mansarovar Commercial Pvt. Ltd. …Appellant Versus Commissioner of Income Tax, Delhi …Respondent WITH CIVIL APPEAL NO. 5773 OF 2022 CIVIL APPEAL NO. 5772 OF 2022 CIVIL APPEAL NO. 5771 OF 2022 CIVIL APPEAL NO. 5770 OF 2022 J U D G M E N T M.R. SHAH, J. 1. Feeling aggrieved and dissatisfied with the impugned common judgment and order dated 22.02.2016 Signature Not Verified passed by the High Court of Delhi at New Delhi in Income Digitally signed by R Natarajan Date: 2023.04.10 16:38:20 IST Reason: CA 5769/2022 Etc. Page 1 of 67 Tax Appeal Nos. 162/2002, 164/2002, 165/2002, 167/2002 & 168/2002, by which the High Court has allowed the said appeals preferred by the Revenue and th has quashed and set aside the common order dated 08 January, 2002 passed by the Income Tax Appellate Tribunal, New Delhi (for short, ‘ITAT’) for Assessment Years 1987-88, 1988-89 and 1989-90 and restored the orders passed by the Assessing Officer, upheld by the Commissioner of Income Tax (Appeals) (for short, ‘CIT(A)), the respective assessees have preferred the present appeals. Facts: 2. The facts leading to the present appeals in nutshell are as under: The respective assessees, namely, Mansarovar Commercial Private Limited, Sovereign Commercial Private Limited, Swastik Commercial Private Limited, Trishul Commercial Private Limited and Pasupati Nath Commercial Private Limited were incorporated under the Registration of Companies (Sikkim) Act, 1961. Each of the assessee companies claim to be carrying on the CA 5769/2022 Etc. Page 2 of 67 business of commercial agents in cardamon and other agricultural products. 2.1 Sikkim became part of India in April, 1975. The Constitution (Thirty Sixth Amendment) Act, 1975 inserted Article 371-F into 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 th immediately before the appointed day, i.e., 26 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territories comprising the State of Sikkim or any part thereof were to continue to be in force therein until amended or repealed by a competent legislature or other competent authority.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 Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) 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 (for short, ‘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. th 2.2 By a notification No. S.O. 1028E dated 7 November, 1988 issued under Article 371-F(n) of the Constitution, the Act, the Wealth Tax Act, 1957 and the CA 5769/2022 Etc. Page 3 of 67 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. 148E dated rd st 23 February, 1989, the 1 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 Assessment st Year commencing on the 1 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 Assessment Year commencing from 1st April, 1990, thereby extending the date of applicability of the Act by one year from the date rd specified in the notification dated 23 February, 1989. 2.3 The case of the assessees was that each of them was a resident of Sikkim, carrying on business in Sikkim st and not elsewhere and that till 31 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 CA 5769/2022 Etc. Page 4 of 67 offices in Karol Bagh, New Delhi and therefore, were companies’ resident in India in terms of Section 6(3) of the Act. th 2.4 A search was conducted on 15 March, 1990 at the premises of M/s Rattan Gupta & Co., Chartered Accountant at Daryaganj, New Delhi and during the course of the search, books of account, cheque books, signed blank cheques, vouchers and other income documents of the assessees were found. The statements of the partners, former and current, of M/s Rattan Gupta & Co., CA were recorded. th 2.5 On 10 July, 1990, following the search conducted th on 15 March, 1990 at the premises of M/s Rattan Gupta & Co., CA at Daryaganj, New Delhi, notices were issued by the Assistant Commissioner of Income Tax (for short, ‘ACIT’) (Investigation), Circle 7(1), New Delhi to each of the assessees under Section 148 of the Act, in respect of Assessment Years 1987-88, 1988-89 and 1989-90 (Assessment Years under consideration). An order was th passed on 12 July, 1990 by ACIT (Investigation), Circle 13(1), New Delhi in respect of M/s Rattan Gupta & Co. under section 132(5) of the Act. It appears that the said Rattan Gupta informed the assessees about notices under section 148 of the Act issued to each of them at the CA 5769/2022 Etc. Page 5 of 67 address of M/s Rattan Gupta & Co. at Daryaganj, New Delhi and affixed at the said premises of M/s Rattan Gupta & Co. 2.6 Meanwhile, each of the assessees filed return of income in terms of the Sikkim Manual, 1948 for the th Assessment Years in question on 27 April, 1990. A demand notice was issued to each of them in respect rd thereof on 23 July, 1990. 2.7 The respective assessees filed writ petitions in the High Court of Sikkim, challenging the notices issued under section 148 of the Act. The Sikkim High Court initially passed an interim order staying further proceedings. The said interim order was modified in terms of which the Department was permitted to continue with its enquiry and seek facts and information from the Directors of the assessee companies. The assessee companies were required to furnish the necessary information and also to file returns and produce the books of accounts before the Assessing Officer, New Delhi in compliance of the notices under section 148 of the Act. Thereafter, the Sikkim High Court dismissed the writ petitions holding that it had no jurisdiction to entertain the said writ petitions since no part of the cause of action had arisen in the State of Sikkim. It was observed that as the CA 5769/2022 Etc. Page 6 of 67 notices were issued by the ACIT (Investigation), Circle 7(1), New Delhi and served on the assessees in New Delhi, it had no jurisdiction over the actions of that authority. It appears that the Sikkim High Court also observed that “mere fact that the companies have registered offices in Sikkim does not confer jurisdiction on this Court.” 2.8 It appears that in the meanwhile, on the basis of the returns filed by the assessees in Sikkim, the Income and Sales Tax Department of Government of Sikkim raised a th revised demand on 30 November, 1990, cancelling the th earlier demand raised on 30 July, 1990. 2.9 After the dismissal of the writ petitions by the Sikkim th High Court on 20 July, 1993, the assessees filed writ petitions before the Delhi High Court being Writ Petition Nos. 5565 to 5569 of 1993. Initially, the Delhi High Court passed an interim order staying the proceedings. th However thereafter on 13 August, 1998, an order was passed by the Delhi High Court directing the AO to frame the assessment subject to outcome of the writ petitions. th 2.10 That thereafter on 24 August, 1998, notices were issued to the assessee companies under section 148 of the ACT by ACIT, Company Circle 2, New Delhi. CA 5769/2022 Etc. Page 7 of 67 th 2.11 That on 09 October, 1998, separate assessment orders were passed by the ACIT, Company Circle 2(2), New Delhi for each of the Assessment Years in question. The Assessing Officer concluded that each of the assessees were “intentionally trying to take advantage of the prevailing laws at Sikkim by routing money through Sikkim and ploughing back in India.” The Assessing Officer also rejected the objections raised by the assessees as to the jurisdiction. The Assessing Officer made additions to the income of the assessees for the aforesaid three Assessment Years in question under different heads of income, namely, (i) income from commission (ii) unsecured loan from Dengzong Charitable Trust (iii) interest accrued/paid on the unsecured loans and (iv) provision for income tax (which was disallowed). Separate penalty proceedings were initiated under sections 271(1)(a). 271(1)(c), 273/274 and 271-B of the Act. 2.12 The assessees then preferred appeals before the th CIT(A). Subsequently on 08 December, 2000, the writ petitions filed by the assessees came to be dismissed by the High Court as the respective assessees moved the Appellate Authority prescribed under the statute. The appeals preferred by the assessees before the CIT(A) CA 5769/2022 Etc. Page 8 of 67 th came to be dismissed vide order(s) dated 30 March, 2001. 2.13 Feeling aggrieved by the order(s) passed by the CIT(A) dismissing the appeals, the respective assessees preferred appeals before the ITAT. The ITAT observed and held that notices under Section 148 of the Act could not have been served on Mr. Rattan Gupta as the said Mr. Rattan Gupta cannot be said to be a “Principal Officer” of the assessees within the meaning of section 2(35)(a) of the Act and the AO 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. On the refusal of Mr. Rattan Gupta to receive notices, ITAT observed and opined that if Mr. Rattan Gupta refused to receive such notices, he was justified in doing so and his refusal did not authorise the AO to resort to substituted service within the meaning of Rule 20 of Order V of CPC. The order(s) passed by the ITAT allowing the appeals preferred by the assessees was/were the subject matter of appeals before the High Court at the instance of the Revenue. 2.14 The High Court framed the following questions of law: “1. Whether the Tribunal was right in holding that the ACIT exceeded his jurisdiction in issuing notices under section 148 CA 5769/2022 Etc. Page 9 of 67 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 surmises and ignorance of evidence and material and has relied upon incorrect facts? 3. Whether the income of the assessee is taxable in India?” At the instance of the Assessees, an additional question was also framed as under by the same order: 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 .” 2.15 By the impugned common judgment and order, the High Court has answered all the questions in favour of the Revenue and against the assessees and consequently has allowed the appeals preferred by the Revenue. The High Court in the impugned judgment and order has dealt with and considered the following main issues and both the parties were heard on the said issues. 1. Objection to the jurisdiction by the ACIT, Circle 7(1), New Delhi who issued notices to the assessees under Section 148 of the Act; 2. Control and management in New Delhi; 3. No income accrued or was earned in Sikkim; 4. Service of notice; CA 5769/2022 Etc. Page 10 of 67 5. Limitation for issuance of notice under section 147 of the Act; 6. Merits of the reopening of the assessments; and 7. Interest By the impugned common judgment and order, the High Court has summarised the conclusion in paragraph 91 as under: (i) The Assessees, incorporated under the company law of Sikkim, are resident Indian companies. If any income accrued to them or was earned by them in India prior to st 1 April 1990, then such income is taxable under the Act. (ii) The Revenue is justified in contending that the Assessees not having raised such objection at the first available opportunity should not be permitted to urge the ground of lack of jurisdiction of the Delhi officers to issue notices to them under Sections 147/148 of the Act. (iii) 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. CA 5769/2022 Etc. Page 11 of 67

CA 5769/2022 Etc. Page 12 of 67 common judgment and order passed by the High Court is the subject matter of present appeals. Submissions: 3. Shri Arvind P Datar and Shri G. Umapathy, learned senior counsel have appeared on behalf of the respective assessee companies and Shri N. Venkataraman, learned Additional Solicitor General of India has appeared on behalf of the Revenue. 3.1 Shri Arvind P Datar, learned senior counsel appearing on behalf of the assessee companies has submitted that the issue involved in the present 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. It is submitted that the further issue is, 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 Income Tax Act, 1961. CA 5769/2022 Etc. Page 13 of 67 3.2 Challenging the impugned judgment and order passed by the High Court, Shri Arvind P Datar, learned senior counsel appearing on behalf of the assessee companies has vehemently submitted that the impugned judgment is based on an erroneous assumption that the effective control of the companies vested with one Mr. Rattan Gupta, a resident of Delhi, who was rendering accounting and auditing services. 3.3 It is submitted 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. 3.4 In support of his submission that the Income Tax Act, 1961 shall not be applicable for the period during the relevant assessment years, it is vehemently submitted by Shri Datar, learned senior counsel appearing on behalf of the assessee companies that the Income Tax Act, 1961 came to be extended to the State of Sikkim only on and st after 1 April, 1990. That therefore, the AO exceeded his jurisdiction. 3.5 It is contended that the assessee companies having been assessed to tax under the Sikkim Manual, 1948 and having paid and discharged income tax under the said law CA 5769/2022 Etc. Page 14 of 67 cannot be subjected to tax once over again by applying the “head and brain” rule in the absence of an express provision under the Income Tax Act, 1961, more so in view of the well settled law that “a taxing statute should not be interpreted in such a manner that its effect will be to cast a burden twice over for the payment of tax on the taxpayers unless the language of the statute is so compelling that the Court has no alternative than to accept it.” That in a case of reasonable doubt, the construction most beneficial to the taxpayer is to be adopted. 3.6 It is further contended that as such the present case is squarely covered by the decision of this Court in the case of Mahaveer Kumar Jain v. CIT, Jaipur, reported in (2018) 6 SCC 527 , wherein this Court considered a question whether the appellant, who was a resident of Rajasthan and had won a lottery from Sikkim during the Assessment Year 1986-87 was liable to be taxed in India where Income Tax Act, 1961 was in force, notwithstanding that the said income had accrued or arisen to him at a place where Income Tax Act, 1961 was not in force, i.e., Sikkim, more particularly when the said income had already been taxed in the State of Sikkim under the Sikkim Manual, 1948. Reliance is placed on certain CA 5769/2022 Etc. Page 15 of 67 observations made in paragraphs 13 to 15 of the said decision. 3.7 It is next submitted that the assessee companies filed income tax returns before the appropriate authority as per Sikkim Manual, 1948 and a demand was raised by the said authority, which was paid. That the fact that the appropriate Income Tax Authority under the Sikkim Manual, 1948 accepted the income tax returns filed by the assessee companies and raised demand based on such returns establish the bona fides of the assessee companies beyond reproach. Therefore, the allegation that the assessee companies have no real business in Sikkim is absolutely baseless, unfounded and untenable. 3.8 Making above submissions, it is urged that the Income Tax Act, 1961 shall not be made applicable so far as the assessee companies are concerned for the relevant assessment years. 3.9 It is further submitted that as such the ACIT, Delhi had no territorial jurisdiction to assess the assessee companies and therefore clearly exceeded in his jurisdiction in issuing notices under section 148 of the Act on the assumption that the assessee companies were carrying on business in India, on the basis of availability of books of accounts of the assessee companies at the CA 5769/2022 Etc. Page 16 of 67 premises of the Chartered Accountant of the assessee companies, i.e., M/s Rattan Gupta & Co. It is submitted that such an approach is wholly untenable in law, besides being perverse. 3.10 It is further submitted that as observed and held by this Court in the cases of Ajay Kumar v. State of Uttarakhand, 2021 SCC OnLine SC 48 and Kiran Singh v. Chaman Paswan, AIR 1954 SC 340 , an order passed by the authority without jurisdiction is a nullity. 3.11 It is contended that the exercise of territorial jurisdiction by CIT, Delhi is also wholly untenable in law in view of section 6(3) of the Act as it was at the relevant point of time. That Mr. Rattan Gupta was a practising Chartered Accountant and providing accounting and auditing services to several corporates and individuals and could have never been the “head and brain” behind the assessee companies. 3.12 It is further contended that even otherwise the re- assessment was impermissible in law in the absence of any original orders passed under section 143(3) of the Act. Reliance is placed on the decision of this Court in the case of trustees of H.E.H, the Nizam’s Supplemental Family Trust v. CIT, reported in (2000) 3 SCC 501 (paragraphs 10 & 11) . It is submitted that the said CA 5769/2022 Etc. Page 17 of 67 decision was subsequently followed and affirmed by this Court in the case of Standard Chartered Finance Limited v. CIT, Bangalore, (2016) 14 SCC 634 (Civil Appeal No. 1101 of 2016 dated 9.2.2016). 3.13 It is further submitted by Shri Datar, learned senior counsel appearing on behalf of the assessee companies that as such there was no material to substantiate that the assessee companies’ control and management was situated wholly in India. That the High Court has proceeded on an erroneous presumption that the assessee companies were controlled by one Rattan Gupta, who was rendering accounting and auditing services, simply because books of accounts had been found in his office. It is submitted that no evidence was produced to the effect that he ever appointed any person as the Director of the assessee companies or dictated the manner in which such Directors were to discharge duties towards assessee companies. That the finding of the High Court that the control over management vested with Rattan Gupta and therefore the assessee companies were situated in India, is therefore wholly untenable and consequently to draw such presumption is legally unsustainable. CA 5769/2022 Etc. Page 18 of 67 3.14 It is further submitted that there was no cogent material at the time of issuance of notices under section 148 of the Act to form a belief that income was chargeable under the Income Tax Act, 1961 and that the burden to prove that the control and management of assessee companies was situated wholly in India lie with the Department. That the law is well settled that the onus was on the Revenue, which has not been discharged. That on the contrary the High Court has erred in shifting the onus on the assessee companies to prove that they had legitimate business interest and income arising from the State of Sikkim. 3.15 It is contended that the impugned order is based solely on an erroneous supposition that Mr. Rattan Gupta was in control of the management of the assessee companies. That as such until the Assessment Years 1988-89, the audit and accounts of the assessee companies were being handled by one Ravinder Singh & Co. That the High Court has committed an error in treating the said Ravinder Singh to be the partner of M/s Rattan Gupta & Co. It is submitted that therefore, the impugned order is based on a flawed presumption of a critical fact and therefore the impugned judgment deserves to be set aside by this Court. CA 5769/2022 Etc. Page 19 of 67 3.16. Shri Datar further submitted that in the absence of framing of any substantial question of law under Section 260A of the Act on levy of interest, the liability of interest could not have been fastened upon the assessee companies. That section 260A of the Income Tax Act is analogous to Section 100 CPC which mandates framing of question of law before exercising its jurisdiction on the said issue. It is submitted that as such no issue of levy of interest was framed by the High Court. That therefore the High Court has committed a jurisdictional error in recording a finding that ITAT’s conclusion that interest under section 234 A & B of the Act could not be charged since a specific notice in that behalf was not issued by the Assessing Officer, is unsustainable in law. 3.17 In addition, it is submitted on the aspect on territorial jurisdiction of the authorities at Delhi that the assessee companies were having their registered offices in Sikkim. Therefore, the issuance of notices under Section 148 of the Act is beyond jurisdiction. That on the issue of territorial jurisdiction, the ITAT found that since the business premises of the assessees were in Sikkim, the territorial jurisdiction to assess vested with the ACIT, Gangtok. Therefore, the ITAT rightly held that the ACIT Delhi who issued notices under section 148 of the Act had CA 5769/2022 Etc. Page 20 of 67 no territorial jurisdiction. That the proper course for the Department was to have the matter entrusted to ACIT, Gangtok after complying with the mandate of section 127 of the Act for transferring jurisdiction of ACIT, Gangtok to New Delhi. It is submitted that though the Revenue in its appearance before the High Court raised a question of law on the finding recorded by the ITAT on territorial jurisdiction of the authorities at Delhi, while framing question(s) of law, the High Court did not frame an issue with regard to territorial jurisdiction. Thus, the finding with regard to lack of territorial jurisdiction by ITAT had attained finality. 3.18 Insofar as the levy of interest is concerned, it is submitted that the ITAT specifically observed that no direction was made by the AO for levy of interest. Therefore relying upon the decision of this Court in the case of CIT v. Ranchi Club Limited, (2001) 247 ITR 209 taking the view that levy of interest was under Section 234A, B & C of the Act, without a direction by the AO in the assessment order is not legally sustainable. It is further submitted that the High Court, while upsetting the finding recorded by the ITAT on levy of interest, has erred in relying upon the decisions of this Court in the cases of Commissioner of Income Tax, Mumbai v. Anjum M.H. CA 5769/2022 Etc. Page 21 of 67 Ghaswala, (2002) 1 SCC 633 and Commissioner of Income Tax, Delhi v. Bhagat Construction Company Private Limited, (2016) 15 SCC 738 . 3.19 Shri Datar, learned senior counsel appearing on behalf of the assessee companies contended that as such there was no notice served upon the proper person and the notice served upon Rattan Gupta cannot be said to be a valid service of notice. That under section 2(35)(b) of the Act, the Assessing Officer is required to serve a notice only on persons who are connected with the management or administration of the assessee company to treat them as Principal Officer. That Rattan Gupta was never connected with the management or administration of the assessee companies so as to treat him as a Principal Officer. That Rattan Gupta was not the Secretary, Treasurer, Manager or Agent of the assessee companies under section 2(35)(a) of the Act. Therefore, the AO ought to have served a notice on Rattan Gupta informing him of his intention to treat him as the Principal Officer of the assessee companies on the ground that he was a person connected with the management or administration of the assessee companies under section 2(35)(b) of the Act. However, in the present case, the AO never served a notice on Rattan Gupta under section 2(35)(b) of the Act CA 5769/2022 Etc. Page 22 of 67

CA 5769/2022 Etc. Page 23 of 67 He had clearly stated that the books of accounts, ledgers etc. were handed over to him for providing professional services and that the business operations were carried out from Gangtok in Sikkim by Mr. Ajay Kumar Agarwal, Local Director and Mr. H.L. Verma and that he had nothing to do with the business operations of the assessee companies. A mere allegation that he is in charge of the conduct of the company is not sufficient to hold that he is the Principal Officer. There should be credible material to how his active involvement in the conduct and management of the business. 3.23 It is next submitted that assumption of jurisdiction based on the seizure of books of accounts from the office premises of the practising Chartered Accountant Mr. Rattan Gupta at New Delhi and treating him as the Principal Officer or “head and brain” of the companies incorporated under the Sikkim Companies Registration Act, 1961 when the said Chartered Accountant had categorically stated on oath that he was rendering professional accounting and reconciliation services to the companies in question, is without jurisdiction, perverse and deserves to be set aside. The failure of same would set a very bad precedent and have far reaching CA 5769/2022 Etc. Page 24 of 67 consequences on the rights of Chartered Accountants to carry on their profession. 3.24 Making above submissions and relying upon the aforesaid decisions, it is prayed that the present appeals be allowed. 4. The present appeals are vehemently opposed by Shri N. Venkataraman, learned Additional Solicitor General of India appearing on behalf of the Revenue. He has taken us through the findings recorded by the Assessing Officer in the Assessment Order, findings of the th CIT(A) vide order dated 30 March, 2001, findings th recorded by the ITAT vide order dated 8 January, 2002 and the findings recorded by the High Court including the findings recorded regarding the issue pertaining to service of notice and levy of interest. 4.1 Insofar as the submission on behalf of the appellants on control and management of affairs of the companies is concerned, it is submitted that section 6 of the Act defines residence in India. That the relevant provision is section 6(3) of the Act. 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. This expression had existed even under the Income Tax Act, 1922. It is submitted that under the CA 5769/2022 Etc. Page 25 of 67

CA 5769/2022 Etc. Page 26 of 67

CA 5769/2022 Etc. Page 27 of 67 b) Domicile or registration of the company is not relevant. The making, maintaining, managing and working is insufficient. c) Directors authorised to manage the work and employees rendering service again are insufficient. d) The determinative test is where the sole right to manage and control every department of its affairs lies. Managers and directors whose services are merely remunerated is not a relevant criterion. The profits although received by the employees as remuneration, do not belong to them and are not in their disposal. Incurring of debts or payment to agents are of no consequence. e) The test is, where the head and seat and directing power of the affairs of the company is, which works with some degree of permanence while the expression ‘wholly’ would seem to recognize the possibility of the seat of such power being divided between two distinct and separate places. f) The question to be asked is from where the person or group of persons control or direct the business. g) Mere activity by the company does not create residence. CA 5769/2022 Etc. Page 28 of 67 h) In case of dual residence, it is necessary to show that the company performs some of the vital organic functions incidental to its existence in both the places so that there are in fact two centres of management. i) Control and management which must be shown is not merely theoretical control and power, or de jure control and power but the de facto control and power actually exercised in the course of the conduct and management of the affairs of the firm. Mere presence of directors or vesting of power in them is insufficient unless otherwise they had exercised the power elsewhere in the territory under question. j) Even acting under a power of attorney is not sufficient as the same can be cancelled at any moment and as a power of attorney holder they must submit to the principal an explanation of what they have been doing and the principal has the right of keeping a vigilant eye over their work from the board room and the power exercised by the power of attorney holder is only de jure control and not de facto control and management. k) The intrinsic test is where the central control and management actually abides. Mere presence of even CA 5769/2022 Etc. Page 29 of 67

CA 5769/2022 Etc. Page 30 of 67 st prescribed by the Parliament, w.e.f. 1 April, 2017, in alignment with the global needs and business practices. 4.6 Taking us to the findings recorded by the AO, CIT(A) and the High Court which are on appreciation of evidence/material on record, it is vehemently submitted by Shri N. Venkataraman, learned ASG 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. 4.7 Insofar as the submission on behalf of the appellants that in the absence of any original assessment, there shall not be any re-assessment under sections 147/148 of the Act, Shri N. Venkataraman, learned ASG has heavily relied upon the decision of this Court in the case of Commissioner of Income Tax v. Sun Engineering Works P. Ltd. (1992) 4 SCC 363 (paragraph 14) . It is submitted that in the said decision, it is observed and held by this Court that under section 147, CA 5769/2022 Etc. Page 31 of 67 the AO has been vested with the power to ‘assess or reassess’ the escaped income of an assessee. That the term ‘escaped assessment’ includes both “non- assessment” as well as “under assessment.” 4.8 Insofar as the submission on behalf of the appellants on service of notice is concerned, it is submitted that the principal place of business is the seat of control and therefore notice sent to Delhi is sufficient. On the service of notice at Delhi, Shri N. Venkataraman, learned ASG has heavily relied upon the observations/findings recorded by the High Court in the impugned judgment and order in paragraphs 78 to 83. Thereafter, relying upon the decision of the Calcutta High Court in the case of India Glycols Ltd. v. Commissioner of Income Tax, 2004 SCC OnLine Cal. 736 , it is submitted that notices sent/served at Delhi can be said to be valid notice/service. 4.9 As regards levy of interest under Section 234A of the Act is concerned, it is urged by Shri N. Venkataraman, learned ASG that interest levied under Section 234A is mandatory and there is no discretion with the AO and therefore there is no question of non-compliance of principles of natural justice. It is submitted that so far as the penalty leviable under section 271 of the Act is CA 5769/2022 Etc. Page 32 of 67 concerned, the same is discretionary, however the interest is not discretionary. Therefore, for imposing penalty, principles of natural justice are required to be complied with, however in case of interest, the same being mandatory in nature and automatic there is no requirement of following principles of natural justice and/or even if in the assessment order there is no specific order to levy the interest but the interest charged is indicated in the ITNS 150 accompanying the assessment order and the same would be sufficient compliance for demanding interest. Heavy reliance is placed on the Constitution Bench decision of this Court in the case of Anjum M.H. Ghaswala (supra) as well as subsequent decision in the case of Karanvir Singh Gossal v. Commissioner of Income Tax, (2012) 13 SCC 802 and the decision of this Court in the case of Bhagat Construction Company Private Limited (supra) . 4.10 It is submitted that the ITAT has relied upon the decision of this Court in the case of Ranchi Club Ltd. (supra) . However, the said decision has been subsequently overruled and/or held not to be good law in view of the subsequent decisions in the cases of Anjum M.H. Ghaswala (supra) and Bhagat Construction Company Private Limited (supra). CA 5769/2022 Etc. Page 33 of 67 4.11 Insofar as the submission regarding non-framing of the substantial question of law on levy of interest is concerned, heavy reliance is placed on the decision of this Court in the case of State Bank of India v. S.N. Goyal, (2008) 8 SCC 92 (paragraph 13) . It is submitted that as observed and held by this Court in the aforesaid decision, when a question of law arises incidentally or collaterally, having no bearing on the final outcome, it will not be a substantial question of law. It is submitted that in the present case, the Constitution Bench in Anjum M.H. Ghaswala (supra) has held that the interest is both mandatory and automatic and the decision of this Court and various High Courts had concluded that it does not require a separate notice, hearing and an independent order. It is submitted that this Court in the case of Bhagat Construction Company Private Limited (supra) had in no uncertain terms made the legal position clear by holding that should the assessing authority enclose an ITNS 150 form computing the interest liability and annexed the same with the assessment order, the same would constitute adequate compliance for sustaining the interest and upholding it. That the aforesaid judgment makes it evidently clear that when an issue is incidental or collateral then it does not give rise to a substantial CA 5769/2022 Etc. Page 34 of 67 question of law. Once the tax liability is upheld, interest become automatic, mandatory and collateral. 4.12 It is next submitted that the final outcome of the tax liability or the final outcome of the substantial questions raised and decided by the High Court, had been decided without any sense of dependence on the issue of interest. That the final legal outcome of the substantial questions raised and decided is not dependent or contingent upon a decision on interest. On the contrary, the moment the tax liability gets upheld, if the AO had imposed interest at the first instance, (which in this case is not under dispute) then interest would get added to the tax liability as it does not require an independent and stand alone consideration as to whether the same is leviable. 4.13 As regards the reliance placed upon the decision of this Court in the case of Shiv Raj Gupta v. CIT, Delhi, AIR 2020 SC 3556, by the learned senior counsel appearing on behalf of the appellants on non-framing of substantial question of law in terms of Section 260A of the Act so far as the interest liability is concerned, it is submitted that the said decision shall not be applicable to the facts of the case at hand and more particularly in case of an interest which is automatic and mandatory. It is submitted that in the said case, the dispute was with CA 5769/2022 Etc. Page 35 of 67 respect to capital gains which by its very nature is a separate head of income and the issue relates to the very taxability. That therefore, failure to raise a question of taxability of capital gains in a particular case may tantamount to a failure in raising a substantial question of law in terms of Section 260A of the Act. However, the same may not apply on interest as the interest is automatic and mandatory. 4.14 Making above submissions and relying upon the aforesaid decisions, it is prayed that the present appeals be dismissed. Consideration: 5. We have heard learned counsel for the respective parties at length. We have also gone through the orders passed by the Assessing Officer, CIT(A), ITAT and the impugned judgment and order passed by the High Court in great detail. At the outset, it is required to be noted that the AO held against the respective assessees on all points including Rattan Gupta being the main person in management and control of the respective companies CA 5769/2022 Etc. Page 36 of 67

CA 5769/2022 Etc. Page 37 of 67 ii) The entire books of accounts were found and seized at New Delhi at the address of Mr. Rattan Gupta, Chartered Accountant, 4556/4, Ansari Road, Darya Ganj, New Delhi. Returns were filed without audit reports and auditors have not signed balance sheets and the auditors were also based out of Delhi. Though bank accounts were available both in Delhi and Sikkim, the authorized signatories, to operate both the accounts were located only in Delhi; iii) The statutory books, registers and the shareholders were all located in Delhi; iv) No evidence was ever produced for having conducted board meetings in Sikkim; v) When it came to earning of commission from various agents, the genuineness of the addresses given at Sikkim could not be proved. When notices were issued under Section 131 of the Act, no response was forthcoming and, from the memorandum and articles of association it was clear that the agents were kith and kin of the directors; vi) Shockingly, the total commission alleged to have been earned was more than the sale of CA 5769/2022 Etc. Page 38 of 67

CA 5769/2022 Etc. Page 39 of 67 instructions and he had also made directors in all the 5 Sikkim companies and named a few of them. It was conceded clearly that though these persons became directors at his behest no work was performed by these persons except signing papers; th x) Mr. Rajiv Jain in his statement dated 15 March, 1990 confirmed that cheque books and pass books were found at the office of Mr. Rattan Gupta and so is the case with rubber stamps and blank printed letter heads; xi) Mr. Ravinder Singh in his statement confirmed that he had been looking after the day-to-day affairs of these companies from Delhi till March, 1998, after which Rattan Gupta took over the position as the only director and the other directors were his nominees, and Rattan Gupta functioned and operated only from Delhi and no office expenses have been incurred in Sikkim; xii) The AO also entered a finding that there has been a fund transfer from Delhi into the bank accounts at Sikkim to claim exemption and these have been round tripping of money going from CA 5769/2022 Etc. Page 40 of 67

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CA 5769/2022 Etc. Page 46 of 67 the affairs of the 5 entities could not be made good by offering either of them for examination. d) Once documents were seized and statements were recorded from various persons, the burden gets shifted to the assessees to produce some evidence to counter the picture and, the court found that its extremely unusual that the seals and the signed blank cheques would be lying with the Chartered Accountant. e) The High Court in paragraph 70 held that the revenue is right as there can be no presumption in law that control and management is at the registered office. f) In paragraph 71, the High Court held that “it appears to the Court that the ITAT has not upset the factual finding of the AO, which was confirmed by the CIT(A). The above exhaustive evidence gathered by the revenue, without being countered by the assessee despite opportunity being afforded, serves to substantiate the case of the revenue that the management and control of the 5 assessee companies was in fact located in Delhi. The finding by the ITAT in this regard is plainly perverse and unsustainable in law.” g) On commission and accrual of income, the High Court concluded as under: CA 5769/2022 Etc. Page 47 of 67 i) The findings by the AO that the assessee had failed to prove that the commission payments earned by them is exclusively in Sikkim had not been dislodged by the assessee by producing any tangible material; ii) The evidence produced by the assesses are only copies of bills and vouchers and receipt of money from such agents at Sikkim in its bank accounts and assessments have been made under the Sikkim Manual, 1948; iii) The High Court in para 76 held that “none of the 5 entities named by the assessees as having paid the commission to them appeared in the course of assessment proceedings to confirm the payments having been made to the assessees.” The High Court also recorded that the rate of commission paid was unrealistic and beyond human probabilities, non- existence of any employees in Sikkim, non-incurring of any expenditure in Sikkim as found in the P&L account and finally the balance sheet showing that notwithstanding that the income was from commission the assets were in the form of investments in Dalmia Group would stare at the face of the assessees and remains unrebutted. The High CA 5769/2022 Etc. Page 48 of 67

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CA 5769/2022 Etc. Page 53 of 67 resident. In this connection it is perhaps necessary to look at the converse definition for a Hindu undivided family, firm or other association of persons. In their case they are resident unless the control and management of its affairs is situated wholly without the taxable territories. Therefore; whereas in the case of a Hindu undivided family or firm or association of persons any measure of control and management within the taxable territories would make them resident, in the case of a company any measure of control and management of its affairs outside the taxable territories would make it non-resident. In construing the expression “control and management” it is necessary to bear in mind the distinction between doing of business and the control and management of business. Business and the whole of it may be done outside India and yet the control and management of that business may be wholly within India. In this particular case considerable emphasis is placed upon the fact that the whole of the business of the company is done in Ceylon and the whole of the income which is liable to tax has been earned in Ceylon. But that is not a factor which the Legislature has emphasised, It is entirely irrelevant where the business is done and where the income has been earned. What is relevant and material is from which place has that business been controlled and managed. “Control and management” referred to in Section 4A(c) is, as we shall presently point out on the authorities, central control and management. The control and management contemplated by this sub-section is not the carrying on of day to day business by servants, CA 5769/2022 Etc. Page 54 of 67 employees or agents. The real test to be applied is, where is the controlling and directing power, or rather, where does the controlling and directing power function or to put it in a different language there is always a seat of power or the head and brain, and what has got to be ascertained is, where is this seat of power, or the head and brain. A company or for the matter of that a firm or an undivided Hindu family has got to work through servants and agents, but it is not the servants and agents that constitute the seat of power or the controlling and directing power. It is that authority to which the servants, employees and agents are subject, it is that authority which controls and manages them, which is the central authority, and it is at the place where the central authority functions that the company resides. It’ may be in some cases that like an individual a company may have residence in more than one place. It may exercise control and management not only from one fixed abode, but it may have different places. That would again be a question dependent upon the circumstances of each case. But the contention which Mr. Kolah has most strongly pressed before us is entirely unacceptable that a company controls or manages at a particular place because its affairs are carried on at a particular place and they are carried on by people living there appointed by the company with large powers of management. A company may have a dozen local branches at different places outside India, it may send out agents fully armed with authority to deal with and carry on business at these branches, and yet it may retain the central management and control in Bombay CA 5769/2022 Etc. Page 55 of 67 and manage and control all the affairs of these branches from Bombay and at Bombay. It would be impossible to contend that because there are authorised agents doing the business of the company at six different places outside India, therefore the company is resident not only in Bombay but at all these six different places. 4. ….It is perfectly true that these two managers do all the business of the company in Ceylon and in doing that business naturally a large amount of discretion is given to them and a considerable amount of authority. But the mere doing of business does not constitute these managers the controlling and directing power. Their power-of-attorney can be cancelled at any moment, they must carry out any orders given to them from Bombay, they must submit to Bombay an explanation of what they have been doing, and throughout the time that they are working in Ceylon a vigilant eye is kept over their work from the directors' board room in Bombay. The correspondence which has also been relied upon between the company here and its office in Colombo also goes to show and emphasises the same state of affairs. Mr. Kolah is right again when he puts emphasis upon the fact that what we have to consider in this case is not the power or the capacity to manage and control, but the actual control and management, or, in other words, not the dejure control and management but thede facto control and management, and in order to hold that the company is resident during the years of account it must be established that the company de facto controlled and managed its affairs in Bombay. Mr. CA 5769/2022 Etc. Page 56 of 67

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