AAR ruling is binding on the revenue authorities despite any contrary ruling in other tax payer’s case
- Prudential Assurance Company Ltd. (Prudential) is a foreign company incorporated in United Kingdom and is engaged in the business of Insurance.
- Prudential registered with the Securities and Exchange Board of India as a sub-account of a Foreign Institutional Investor (FII).
- Prudential had made an application to the Authority for Advance Rulings (AAR) to determine whether income arising from its activities of purchase and sale of shares will be liable to tax in India. The AAR by order dated 30 April 2001 ruled that the activity of purchase and sale of shares by Prudential was in the ordinary course of its business and the income resulting from the said activities constitutes business profits and not capital gains.
- The AAR had further held that in terms of the tax treaty between India and the United Kingdom such business profits will not be taxable in India since Prudential does not have a permanent establishment in India.
- Prudential continued to file return of income for various assessment years on the basis of AAR ruling claiming that the profit from sale of shares is business income and is not chargeable to tax in the absence of permanent establishment in India.
- For the assessment years 2004-05 and 2005-06, the Assessing Officer (AO) accepted the claim of Prudential in assessment /reassessment proceeding in view of the AAR ruling.
- Subsequently, the Director of Income tax, International Taxation (the Commissioner) issued a show cause notice for revision of the assessment orders passed by the AO for the assessment years 2004-05 and 2005-06 on the ground that they are erroneous and prejudicial to the interests of the Revenue.
- In the show cause notice, the Commissioner relied on the subsequent ruling of AAR in the case of Fidelity Northstar Fund (“Fidelity Northstar”), wherein it was held that the profits derived on account of purchase and sale of equities would constitute capital gains and would be chargeable to tax accordingly. The Commissioner was of the view that in view of the provision of section 245S(2) of Income-tax Act (ITA) (See note-1) the subsequent ruling of the AAR issued in the case of Fidelity Northstar will apply to the facts of Prudential.
- Prudential filed a Writ Petition before the Bombay High Court challenging the issue of show cause notice for revision of the orders passed by the AO.
Issue Before the High Court
Whether the Commissioner of Income-tax is justified in invoking the revisional jurisdiction under the ITA holding that the order passed by assessing officer is erroneous and prejudicial to the interest of revenue, in the light of the ruling passed by the AAR in the case of Fidelity Northstar.
Decision of the High Court
The High Court set aside the show cause notice issued by the Commissioner for revision of order holding that where the assessing officer has followed the ruling of the AAR in the case of Prudential which has a binding force and effect, it is not open to the Commissioner to exercise his revisional jurisdiction under the ITA.
The key observations of the High Court are given below:
- As per the provisions of the ITA an advance ruling pronounced by the AAR is binding on:
(a) The applicant who had sought and in respect of the transaction for which the ruling had been sought; and
(b) On the Commissioner and the revenue authorities subordinate to him, in respect of the applicant and the said transaction.
- The ruling is binding unless there is a change in the law or the facts on the basis of which the advance ruling has been pronounced.
- There is no dispute that a transaction in respect of which Prudential sought the ruling and in respect of which AAR issued a ruling to Prudential is of the same nature as that for the assessment years 2004-05 and 2005-06.
- The subsequent ruling in the case of Fidelity Northstar cannot bind Prudential nor can it displace the binding character of the advance ruling rendered in the case of Prudential.
- Unless the binding ruling in the case of Prudential is displaced through the legal recourse available under the law, the ruling must continue to operate and be binding between Prudential and the Revenue authorities.
- The assessment order which gives effect to a binding precedent (the ruling of the AAR) cannot be regarded as erroneous or prejudicial to the interests of the revenue and hence it is not open to the commissioner to exercise his revisional jurisdiction under the ITA.
The basic principle of law that an AAR ruling is binding on the applicant and the relevant revenue authorities in relation to the transaction for which it was obtained, has been upheld by the Bombay High Court. The fact that there was a contrary ruling in the case of any other tax payer does not change the binding effect of the earlier ruling in case of the applicant.
Source:The Prudential Assurance Company Ltd. vs. DIT, Writ Petition no. 866 of 2010 dated 29 April 2010
Note :1. Section 245S(2) : The advance ruling referred to in sub-section (1) shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced.