Determining Residential Status of A Company depends on the Defacto Control and Management: SC [Read Judgement]

The Supreme Court has held that determining the residential status of a company under the Income Tax Act, 1961 lies in the defacto control and management of the company.

The 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 claims to be carrying on the business of commercial agents in cardamom and other agricultural products.

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.  The Income Tax Act, of 1961 was not made straightway applicable to the State of Sikkim. 

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 was 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 were whole 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.

The assessees preferred appeals before the CIT(A) came to be dismissed vide order(s) dated 30th March 2001. It was contended that the exercise of territorial jurisdiction by CIT, Delhi is also wholly untenable in the law given to section 6(3) of the Act as it was at the relevant point of time. That Mr Rattan Gupta was a practising Chartered Accountant providing accounting and auditing services to several corporates and individuals and could have never been the “head and brain” behind the assessee companies.

It was argued that a mere allegation that he oversees the conduct of the company is not sufficient to hold that he is the Principal Officer. There should be credible material showing the involvement in the conduct and management of the business.

The ITAT gave a finding that the AO did not proceed further and since no adverse material has been brought on record, the AO could not have proceeded to draw an adverse inference as the burden was heavy on the revenue.

It was observed that the AO, CIT(A) and the High Court have specifically held against the assessees that Rattan Gupta did not merely render professional services but had a vital say in the control and management of the assessee companies and he was in control and management of the affairs of the respective assessee companies.

The bench comprising of Justices M.R. Shah and B.V. Nagarathna upheld the view taken by the AO, CIT(A) and the High Court on the issue of control and management of the affairs of the assessee companies by Rattan Gupta from Delhi and the applicability of the Income Tax Act, 1961. The Court dismissed the appeal.

To Read the full text of the Order CLICK HERE

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