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Mansarovar Commercial Pvt. Ltd. vs Commissioner of Income Tax, Delhi

Civil Appeal · 2023 INSC 330Decided 10 Apr 2023
Civil Appeal No. 5769 of 2022
M.R. Shah · B.V. Nagarathna

Background

Five companies incorporated in Sikkim claimed to earn commission income from cardamom trading in Sikkim during 1987-90, a period before the Income Tax Act, 1961 was extended to Sikkim (Sikkim was then taxed under its own 1948 tax manual). A search at the Delhi office of the companies' chartered accountant, Mr. Rattan Gupta, turned up the companies' books, blank signed cheques, seals and letterheads, suggesting the real "head and brain" of the companies was in Delhi, not Sikkim. The tax department reopened assessments and taxed the companies under the Income Tax Act; the Income Tax Appellate Tribunal ruled for the companies, but the Delhi High Court reversed and ruled for the department.

Decision Breakdown

The Supreme Court upheld the High Court, dismissing the companies' appeals. It held that the overwhelming evidence: blank signed cheques and company seals sitting in the accountant's Delhi office, directors who had never visited Sikkim, no genuine business activity or expenses in Sikkim, and commission figures implausibly larger than Sikkim's actual cardamom output: proved that "control and management" of the companies was wholly in Delhi, making them Indian tax residents whose income was taxable under the Income Tax Act despite their Sikkim incorporation. The Court also held the companies failed to prove their claimed commission income was genuinely earned in Sikkim, that the reassessment notices were validly issued and served, and that statutory interest under Section 234A was mandatory once the tax authorities used it in the assessment worksheet, regardless of whether it was separately spelled out as a question of law.

Lesson Learnt

Incorporating a company in a low-tax jurisdiction does not by itself shield income from tax elsewhere. Courts will look at where the company is actually controlled and managed (the "head and brain" test), and paperwork formalities cannot substitute for genuine business substance.

Official source (sci.gov.in)View Judgment (PDF)

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