The Supreme Court examined whether companies incorporated under the Sikkim Companies Registration Act, 1961 could be subjected to tax under the Income Tax Act, 1961 for assessment years prior to the formal extension of the Act to the State of Sikkim, and whether the income tax authorities at Delhi had jurisdiction to issue notices and frame assessments against such companies.

The assessees claimed that they were residents of Sikkim, carrying on business exclusively in Sikkim, and that until 1 April 1990 they were governed by the Sikkim State Income-tax Manual, 1948. It was contended that income earned during the relevant assessment years was not taxable under the Income Tax Act, 1961. The Revenue, on the other hand, contended that the real control and management of the assessees’ affairs was situated in Delhi and that Sikkim was merely used as a façade to avoid taxation.

Pursuant to a search conducted at the premises of the assessees’ Chartered Accountant in Delhi, extensive incriminating material including books of account, blank signed cheques, rubber stamps, letterheads, and statutory records of the assessees were recovered. Statements recorded during the search revealed that key decisions relating to the assessees’ affairs, including appointment of directors and operation of bank accounts, were effectively controlled from Delhi. Based on this material, notices under Section 148 were issued and assessments were framed by the Assessing Officer at Delhi.

The Income Tax Appellate Tribunal allowed the assessees’ appeals primarily on the ground that the companies were incorporated in Sikkim and that the notices were not properly served. The High Court reversed the Tribunal’s findings, holding that the Tribunal had ignored overwhelming evidence establishing that the control and management of the assessees’ affairs was wholly in Delhi and that the Tribunal’s conclusions were perverse.

The Supreme Court upheld the judgment of the High Court. It reiterated the settled legal principle that for determining the residence of a company under Section 6(3) of the Income Tax Act, the decisive test is where the central control and management of its affairs is situated, commonly referred to as the “head and brain” test. Mere incorporation or registration of a company in a particular place is not determinative of its tax residence.

On facts, the Court held that the findings recorded by the Assessing Officer and affirmed by the High Court clearly established that the effective control and management of the assessees’ affairs was exercised from Delhi. The Court further held that once income is found to have accrued or arisen in India and the company is resident in India, such income is taxable under the Income Tax Act notwithstanding that the company was incorporated in Sikkim or had paid tax under the Sikkim Manual.

The Court also upheld the validity of the reassessment proceedings, the service of notice through the Chartered Accountant who was found to be exercising de facto control over the assessees’ affairs, and the levy of interest under Sections 234A and 234B, holding that such interest is mandatory and automatic once tax liability is upheld.

Accordingly, the Supreme Court dismissed the appeals and affirmed the applicability of the Income Tax Act, 1961 to the assessees for the relevant assessment years.

Source Link - https://api.sci.gov.in/supremecourt/2016/10230/10230_2016_4_1503_43314_Judgement_10-Apr-2023.pdf

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