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Commissioner of Income-tax Vs. Bank of China (In Liquidation) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 182 of 1978
Judge
Reported in[1985]58CompCas285(Cal),[1985]154ITR617(Cal)
ActsIncome Tax Act, 1961 - Section 6(3); ;Companies Act, 1956 - Section 491
AppellantCommissioner of Income-tax
RespondentBank of China (In Liquidation)
Cases ReferredHari Prasad Jayantilal and Co. v. V.S. Gupta
Excerpt:
- .....within the meaning of section 6(3)(ii) of the income-tax act, 1961 ?'8. under section 6(3), a non-indian company is said to be resident in india in any previous year if during that year the control and management of its affairs is situated wholly in india. the determination as to at what place or places the control and management of a particular company is situated is essentially a question of fact to be determined on the facts and circumstances of the particular case. a company can be simultaneously resident in more than one place but the question is whether the control and management is situated wholly in india during the relevant previous year. the expression 'control and management' signifies the controlling and directive power, 'the head and brain', as it is sometimes called, and.....
Judgment:

Ajit R. Sengupta, J.

1. The question in this reference under Section 256(1) of the I.T. Act, 1961, is whether the Bank of China (in liquidation) should be assessed to income-tax on the footing that it is a company resident in India.

2. By an order of the High Court at Calcutta dated December 10, 1962, in Company Petition No. 229 of 1962 [Bank of China, In re [1964] 34 Comp Cas 90 (Cal)], moved by the Reserve Bank of India under Sections 457 and 456 read with Section 491 of the Companies Act, 1956, the assessee-company, Bank of China, went into liquidation. The official liquidatior was appointed as the liquidator of the assessee-bank and the entire assets and liabilities of the assessee-bank came under the control and management of the High Court.

3. While framing the assessment for the assessment year 1975-76, the ITO treated the assessee as a non-resident company. Sources of income of the assessee were from interest and rent. The said assessment was made on the official liquidator.

4. Being aggrieved by the said assessment, the official liquidator preferred an appeal before the AAC. It was submitted on behalf of the assessee that the ITO was wrong and unjustified in taking the status of the assessee as non-resident. The AAC, however, following his appellate order for the earlier year in the assessee's own case, held that the ITO was right and justified in taking the status of the assessee as non-resident company for the year under reference.

5. The AAC for the earlier year (1974-75), in disposing of the contention of the assessee, observed as follows :

'According to the provisions of the Income-tax Act, a company can be treated as resident if the control and management of its affairs is situated wholly in India in the accounting year. The affairs of this company are carrying on of banking business. The bank went into liquidation in 1962 due to hostilities between India and China. The official liquidator of the Calcutta High Court has been realising the interest on fixed deposits and making payments towards the liabilities. The liquidator has been merely acting as an agent for a limited purpose. He has no authority tocarry on banking business which is the main affair of the bank. It may be stated that the banking activities have been suspended temporarily and these activities may be renewed after normal relationship is re-established between the two countries. There is no evidence that the constitution of the board of directors which was formed in China, has been changed or in any way has ceased to exist. It cannot, therefore, be said that the control and management of the affairs of the company were wholly in India during the relevant accounting year. The ITO was, therefore, justified in treating the appellant company as non-resident.'

6. The assessee went on appeal before the Tribunal. Before the Tribunal it was submitted that for the assessment year 1974-75, the Tribunal had already held that the status of the assessee should be taken as a resident within the meaning of Section 6(3)(ii) of the I.T. Act, 1961. It was submitted that the income-tax authority was not justified in taking the status of the assessee as non-resident. Concurring with the order for the assessment year 1974-75, the Tribunal directed the ITO to treat the assessee as a resident within the meaning of Section 6(3)(ii) of the Act and recompute the tax accordingly.

7. On the aforesaid facts, the following question of law has been referred to this court :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the control and management of the affairs of the assessee during the relevant previous year corresponding to the assessment year 1975-76, was situated wholly in India and, therefore, the assessee should have been treated as a resident in India within the meaning of Section 6(3)(ii) of the Income-tax Act, 1961 ?'

8. Under Section 6(3), a non-Indian company is said to be resident in India in any previous year if during that year the control and management of its affairs is situated wholly in India. The determination as to at what place or places the control and management of a particular company is situated is essentially a question of fact to be determined on the facts and circumstances of the particular case. A company can be simultaneously resident in more than one place but the question is whether the control and management is situated wholly in India during the relevant previous year. The expression 'control and management' signifies the controlling and directive power, 'the head and brain', as it is sometimes called, and 'situated' implies the functioning of such power at a particular place with some degree of permanence. The word 'wholly' as used in Section 6(3) would indicate that the seat of such power may be divided between two distinct and separate places. The expression 'control and management' means de facto control and management and not merely the right or powerto control and manage. In order to hold that a non-Indian company is resident in India during any previous year, it must be established that such company de facto controls and manages its affairs in India. The principles are by now well settled.

9. Lord Loreburn L. C. in De Beers Consolidated Mines Ltd. v. Howe [1906] 5 TC 198 , observed as follows :

'Mr. Cohen propounded a test which had the merits of simplicity and certitude. He maintained that a company resides where it is registered, and nowhere else......I cannot adopt Mr. Cohen's contention. In applyingthe conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see whether it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a company. Otherwise, it might have its chief seat of management and its centre of trading in England, under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad. The decision of Chief Baron Kelly and Baron Huddleston in Calcutta Jute Mills Co. Ltd. v. Henry Nicholson [1876] 1 TC 83 ; [1876] 1 Ex D 428 and Cesena Sulphur Co. Ltd. v. Henry Nicholson [1876] 1 TC 83 ; [1876] 1 Ex D 428, now thirty years ago, involved the principle that a company resides for purposes of income-tax where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule ; and the real business is carried on where the central management and control actually abides. ' (Emphasis* supplied).

10. Since that judgment, the words underlined have been taken as the test, although central management and control has sometimes been stated in the form 'head, seat and directing power'. The question depends on the fact of the management and not on the physical situation of the thing that is managed. A company is managed by the board of directors and if the meetings of the board of directors are held within India, it may be said that the central control and management is situated here. The direction, management and control 'the head and seat and directing power' of a company's affairs is, therefore, situate at the place where the directors' meetings are held and, consequently, a non-Indian company would be a resident in this country if the meetings of the directors who manage and control the business are held here. The word 'affairs' means affairs which are relevant for the purpose of the I.T. Act and which have some relation to the income sought to be assessed. It is not the 'bare possession of powers by the directors, but their taking part in or controlling the affairs relating to the trading, that is of importance in determining the question of the place where the control is exercised. They must exercise their power of control in relation to business or activity wherefrom the profit is derived. (See Egyptian Hotels Ltd. v. Mitchell [1915] 6 TC 542 .

11. Under Section 449 of the Companies Act, 1956, on a winding-up order being made in respect of a company, the official liquidator shall, by virtue of his office, become the liquidator of the company. Under Section 178 of the I.T. Act, 1961, every liquidator of a company which is being wound up, whether official liquidator, provisional liquidator or others, must within 30 days of his becoming a liquidator give notice of his appointment to the ITO, who is entitled to assess the income of the company. Section 456 of the said Act provides that upon the appointment of a liquidator, he becomes the custodian of the company's property. The company's assets are to be treated as being in the custody of the court. Although under rule 233 of the Companies (Court) Rules, 1959, the position of the official liquidator is the same as that of the receiver but the property of the company does not vest in him as in the case of the official assignee on an insolvent's estate. The property of the company continues to vest in the company itself and on the winding-up order, all the properties and effects of the company will be custodia legis. Section 457 of the said Act enumerates the powers of the official liquidator. Section 491 of the Companies Act provides that on the appointment of a liquidator, all the powers of the board of directors, and of the managing or whole-time directors and manager, if there be any of these, shall cease. The position of the official liquidator is essentially that of an agent employed for the purpose of the winding-up of the company. The Supreme Court in the case of Hari Prasad Jayantilal and Co. v. V.S. Gupta, ITO : [1966]59ITR794(SC) , has observed (at p. 798) ' that the property of the company does not vest in the liquidator: it continues to remain vested in the company. On the appointment of a liquidator, all the powers of the board of directors and of the managing or whole-time directors, managing agents, secretaries and treasurers cease (section 491) and the liquidator may exercise the powers mentioned in Section 512, including the power to do such things as may be necessary for winding-up the affairs of the company and distributing its assets. The liquidator appointed in a members' winding-up is merely an agent of the company to administer the property of the company for purposes prescribed by the statute. In distributing the assets including accumulated profits, the liquidator acts merely as an agent or administrator for and on behalf of the company'.

12. For the purpose of winding-up, foreign companies are treated as unregistered companies. Section 582(b) provides that an unregisteredcompany will include companies incorporated outside India. Section 583 provides for the winding-up of an unregistered company. All the provisions of the Companies Act with respect to winding-up shall apply to an unregistered company with the exceptions and additions mentioned in Sub-sections (2) to (5) of Section 583. Therefore, upon the winding-up of the foreign company, the board of directors ceases to exist in terms of Section 491 of the Companies Act. The liquidator shall exercise the powers and discharge the duties as enumerated in Section 457 and rule 232 and rules 270 to 280 of the Companies (Court) Rules, 1959. Section 457 provides as follows :

'Section 457. Powers of liquidator.--(1) The Liquidator in a winding-up by the court shall have power, with the sanction of the court,--

(a) to institute or defend any suit, prosecution, or other legal proceeding, civil or criminal, in the name and on behalf of the company ;

(b) to carry on the business of the company so far as may be necessary for the beneficial winding-up of the company ;

(c) to sell the immovable and movable property and actionable claims of the company by public auction or private contact, with power to transfer the whole thereof to any person or body corporate or to sell the same in parcels ;

(d) to raise on the security of the assets of the company any money requisite ;

(e) to do all such other things as may be necessary for winding-up the affairs of the company and distributing its assets.

(2) The liquidator in a winding-up by the court shall have power-

(i) to do all acts to execute, in the name and on behalf of the company, all deeds, receipts, and other documents, and for that purpose to use, when necessary, the company's seal ;

(i-a) to inspect the records and returns of the company on the files of the Registrar without payment of any fee ;

(ii) to prove, rank and claim in the insolvency of any contributory, for any balance against his estate, and to receive dividends in the insolvency, in respect of that balance, as a separate debt due from the insolvent, and rateably with the other separate creditors ;

(iii) to draw, accept, make and endorse any bill of exchange, hundi or promissory note in the name and on behalf of the company, with the same effect with respect to the liability of the company as if the bill, hundi, or note had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business ;

(iv) to take out, in his official name, letters of administration to any deceased contributory, and to do in his official name any other actnecessary for obtaing payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company; and in all such cases, the money due shall, for the purpose of enabling the liquidator to take out the letters of administration or recover the money, be deemed to be due to the liquidator himself :

Provided that nothing herein empowered shall be deemed to affect the rights, duties and privileges of any Administrator-General ;

(v) to appoint an agent to do any business which the liquidator is unable to do himself.

(3) The exercise by the liquidator in a winding-up by the court of the powers conferred by this section shall be subject to the control of the court ; and any creditor or contributory may apply to the court with respect to the exercise or proposed exercise of any of the powers conferred by this section.'

13. Rule 232 of the Companies (Court) Rules, 1959, provides as follows :

'232. Powers of official liquidator.--The duties imposed on the court by Sub-section (1) of Section 467 with regard to the collection of the assets of the company and the application of the assets in discharge of the company's liabilities shall be discharged by the official liquidator as an officer of the court subject to the control of the court and to the proviso in Section 643(2).'

14. Rule 275 of the said rules provides as follows :

'Dividends and returns of capital in a winding-up by court.

275. Declaration of dividend or return of capital.--No dividend to creditors or return of capital to contributories shall be declared by the official liquidator without the sanction of the court.'

15. From the aforesaid provisions of the Act and the Rules, it is clear that the liquidator has to exercise certain powers with the sanction of the court, but all the powers exercisable by him under Section 457 are subject to the control of the court. Sanction of the court may be obtained before or after the exercise of the power. But if the court does not accord sanction, the exercise of the power by the liquidator will have no effect at all. The company court exercises control over the acts and deeds of the liquidator and the method and manner of exercise of powers by the liquidator. Thus under the provisions of the Companies Act, the control and management of the affairs of the company in liquidation vests in the official liquidator who is only empowered to do all acts and deeds for winding-up the affairs of the company subject to sanction and/or control of the court.

16. In course of the winding-up if the company earns any income, it is liable to pay tax under the I.T. Act. The word 'affairs' within the meaning of Section 6(3) of the I.T. Act, 1961, means affairs which have some relation to income. In this case, the company in liquidation has income from interest and rent in India and the affairs relating to the earning of such income are being controlled and managed in India by the official liquidator. By virtue of the provisions of the Companies Act, the liquidator has not only the right or power to control and manage the affairs of the foreign bank in liquidation, but, he has, in fact, been exercising control and management over its affairs in India so far as the sources of income which are sought to be taxed in India. In that view of the matter, the assessee-company in liquidation must be deemed to be resident in this country.

17. For the reasons aforesaid, we answer this question in this reference in the affirmative and in favour of the assessee. The official liquidator will be entitled to retain the costs of this reference out of the funds lying in his hands.

Dipak Kumar Sen, J.

18. I agree.


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