The Supreme Court ruled that mere domicile or the registration of the company does not create residence, but the intrinsic test is where central control and management actually lies for determining the jurisdiction of income tax authorities.

A bench led by justice MR Shah said the sum and substance of the earlier Supreme Court decisions as well as various high courts is “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”.

It upheld the Delhi revenue authorities’ jurisdiction to tax the income earned by Sikkim-based companies led by Mansarovar Commercial for the assessment years prior to April 1, 1990, the date when the Income Tax Act, 1961 was extended to Sikkim. The apex court said that since the control and management of the affairs of the assessees was with their auditor in Delhi, the Income Tax Act, 1961 was applicable to them and not the state Tax Manual, 1948, the view also taken by the Delhi High Court.

The Sikkim High Court had dismissed their petitions against the demand notices issued by the Delhi tax department for lack of jurisdiction since no part of the cause of action had arisen in Sikkim and the mere fact that the companies had registered offices in Sikkim did not confer jurisdiction on it.

While Sikkim’s Income and Sales Tax Department also raised the demand notices, the assessing officer in Delhi concluded that each of the assessees was “intentionally trying to take advantage of the prevailing laws at Sikkim by routing money through Sikkim and ploughing back in India”.

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