The Prudential Assurance Company vs. DIT (Bombay High Court)

AAR rulings are binding despite contrary rulings of AAR. Assessment order following binding precedent is not amenable to s. 263 revision

The assessee, a FII based in UK, applied for an advance ruling on whether the profits arising to it from purchase and sale of Indian securities was “business profits” and whether in the absence of a ‘permanent establishment’ in India, the said profits were chargeable to tax under the India-UK DTAA. The AAR issued a ruling dated 30.4.2001 holding that the profits were “business profits” and that they were not chargeable to tax in India in the absence of a PE. Subsequently, the AAR took the contrary view in Fidelity Northstar Fund 288 ITR 641 that as a FII was prevented by SEBI regulations from trading in shares, the profits arising to it was assessable as “capital gains” and not “business profits”. Based on the said ruling in Fidelity Northstar Fund, the DIT issued a notice u/s 263 in which the view was taken that the subsequent ruling of the AAR was a “change in law” and the ruling obtained by the assessee was no longer “binding” u/s 245S(2) and that the assessment orders passed on the basis of the ruling were “erroneous and prejudicial to the interests of the revenue”. The assessee filed a writ petition to challenge the said notice. HELD, upholding the challenge:

(i) S. 245S stipulates that an advance ruling is binding on the applicant, the CIT and the authorities subordinate to him in relation to which it was sought. S. 245S(2) postulates that the ruling shall cease to be binding if there is a change in law or facts on the basis of which the advance ruling has been pronounced. Once a ruling has been pronounced by the Authority, its’ binding effect can only be displaced in accordance with the procedure stipulated in law;

(ii) The CIT manifestly exceeded his jurisdiction in relying upon the ruling of the AAR in Fidelity Northstar Fund as a basis to hold that the ruling obtained by the assessee was not binding on the department. The CIT ignored the clear mandate of the statutory provision that a ruling was binding only on the Applicant and the Revenue in relation to the transaction for which it is sought. The ruling in Fidelity cannot possibly, as a matter of the plain intendment and meaning of s. 245S, displace the binding character of the advance ruling rendered between the assessee and the Revenue;

(iii) That apart, the CIT could not have found fault with the AO for having followed a binding ruling. Where the AO has followed a binding principle of law laid down in a precedent which has binding force and effect, his order cannot be termed “erroneous and prejudicial to the interests of the revenue” and it is not open to the CIT to exercise revisional jurisdiction u/s 263. Russell Properties 109 ITR 229 (Cal), Paul Brothers 216 ITR 548 (Bom) and Rajan Ramkrishna 127 ITR 1 (Guj) followed.