2010 (4) TMI 237 - HC - Income Tax

Purchase and sale of shares revision by Commissioner of income tax (CIT) u/s 263 application of ruling of AAR delivered in a different case rejection of ruling of AAR in the own case of the assessee - Held that the invocation of the jurisdiction under Section 263 was improper - Firstly the Commissioner has exfacie made a determination contrary to the plain language of Section 245S when he holds that the ruling of the AAR in the case of Fidelity Northstar Fund would apply to the case of the assessee. Unless the binding ruling in the case of the petitioner is displaced by pursuing requisite procedures under the law that ruling must continue to operate and be binding between the petitioner and the Revenue. Secondly and in any event the Commissioner could not have possibly come to the conclusion that the view of the Assessing Officer was erroneous or that it was prejudicial to the interests of the Revenue when the Assessing Officer has followed a binding ruling of the AAR. The assessment order which gives effect to a binding precedent in this case of the AAR cannot be regarded as being erroneous or as being prejudicial to the interests of the Revenue.

Issues Involved:
1. Classification of income from share transactions as business profits or capital gains.
2. Binding nature of the Authority for Advance Rulings (AAR) decisions.
3. Jurisdiction of the Commissioner under section 263 of the Income-tax Act, 1961.
4. Reassessment under sections 147 and 143(3) of the Income-tax Act, 1961.

Detailed Analysis:

1. Classification of Income from Share Transactions:
The petitioner, a UK-based insurance company registered as a sub-account of a Foreign Institutional Investor (FII) with SEBI, contested the classification of its income from share transactions in India for the assessment years 2004-05 and 2005-06. The AAR had previously ruled that such income constituted business profits, not capital gains, and was not taxable in India due to the absence of a permanent establishment. This ruling was based on the provisions of Article 7 of the Agreement for the Avoidance of Double Taxation between India and the UK.

2. Binding Nature of AAR Decisions:
The AAR's ruling in the petitioner's case was binding under section 245S of the Income-tax Act, 1961. This section stipulates that an advance ruling is binding on the applicant, the Commissioner, and income-tax authorities subordinate to him, in respect of the transaction for which the ruling was sought. The petitioner argued that the Commissioner could not invoke section 263 to revise the assessment orders based on a subsequent AAR ruling in a different case (Fidelity Northstar Fund), which classified similar income as capital gains.

3. Jurisdiction of the Commissioner under Section 263:
The Commissioner issued a notice under section 263 to revise the assessments for 2004-05 and 2005-06, claiming they were erroneous and prejudicial to the interests of the Revenue. This was based on the AAR's ruling in Fidelity Northstar Fund, which held that profits from share transactions constituted capital gains. The petitioner contended that the Commissioner exceeded his jurisdiction as the AAR ruling in their case was binding and had not been displaced by any change in law or facts.

4. Reassessment under Sections 147 and 143(3):
For the assessment year 2004-05, the Assessing Officer issued a notice under section 148 to reopen the assessment, which was subsequently reassessed under section 143(3), accepting the petitioner's returned income based on the AAR ruling. Similarly, for the assessment year 2005-06, the Assessing Officer followed the AAR ruling and passed a reassessment order under section 143(3).

Court's Findings:
The court found merit in the petitioner's arguments, stating that the Commissioner had manifestly exceeded his jurisdiction by relying on the AAR ruling in Fidelity Northstar Fund to revise the assessments. The court emphasized that section 245S clearly mandates that an AAR ruling is binding only on the applicant and the Revenue in relation to the transaction for which it was sought. The ruling in Fidelity Northstar Fund could not displace the binding effect of the AAR ruling in the petitioner's case.

Additionally, the court noted that the Commissioner could not find fault with the Assessing Officer for following a binding AAR ruling. It cited precedents where courts held that an assessment order following a binding precedent could not be considered erroneous or prejudicial to the interests of the Revenue. Consequently, the invocation of section 263 was deemed improper.

Conclusion:
The court quashed the impugned notice dated March 18, 2010, issued by the Commissioner under section 263, and ruled in favor of the petitioner. The court clarified that it had not examined the correctness of the AAR ruling in the petitioner's case and left it open to the Revenue to pursue appropriate legal remedies if advised. There was no order as to costs.

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