TMI Blog2010 (4) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the AAR, cannot be regarded as being erroneous or as being prejudicial to the interests of the Revenue. - 866 of 2010 - - - Dated:- 29-4-2010 - CHANDRACHUD D. Y. DR., DEVADHAR J. P. JJ Mr.Percy J. Pardiwala, senior Advocate with Mr.R. Murlidharan and Mr. P.C. Tripathi i/by Mr. Atul K. Jasani for the petitioner. Mr. Suresh Kumar for the respondents. JUDGMENT 1. Dr. D. Y. Chandrachud J.-Rule . With the consent of the learned counsel appearing on behalf of the petitioner and the learned counsel appearing on behalf of the Revenue, the petition is taken up for hearing and final disposal. Counsel for the respondents waives service. 2. The petitioner is a company incorporated in the United Kingdom and is engaged in the business of insurance. The petitioner is registered as a sub-account of a foreign institutional investor (FII) with the Securities and Exchange Board of India. The dispute in this case relates to the assessment years 2004-05 and 2005-06. On April 30, 2001, the Authority for Advance Rulings (AAR) constituted under section 245 of the Income-tax Act, 1961 held that the purchase and sale of shares by the petitioner was in the ordinary course of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as inter alia called upon to explain by a letter dated October 22, 2007 as to why the activity of the sale and purchase of shares should be regarded as trading activity and not as an investment. The petitioner responded by a reply dated November 7, 2007 and submitted a note containing its comments on the position of law as to whether income generated in India constituted capital gains or business income. The petitioner also relied upon the ruling of the Authority for Advance Rulings in the case of Fidelity Advisor Series VIII, In re [2004] 271 ITR 1 (AAR). After considering the explanation of the petitioner, the Assessing Officer passed an order of assessment under section 147 read with section 143(3) for the assessment year 2004-05. The returned income of the petitioner was accepted in view of the ruling of the Authority for Advance Rulings in the case of the petitioner. 5. During the course of the assessment year 2005-06, the Assessing Officer, as part of the inquiry, called upon the petitioner by a letter dated July 25, 2007, to submit comments on the position of law as to whether the income of FIIs in India would be capital gains or business income with reference to the lates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of purchase and sale of equities is 'capital gains' and chargeable to tax accordingly. It has also been observed by the Authority for Advance Rulings that FIIs are not permitted to trade in equities. In view of this, the subsequent ruling of the Authority for Advance Rulings which clarifies the position on the subject as to the taxability of and nature of income is applicable to the facts of your case. Accordingly the provisions of section 245S(2) are clearly applicable to your case for the assessment years 2004-05 and 2005-06 and the profits derived on account of purchase/sale of shares is chargeable to tax as 'capital gains'." 7. In assailing the invocation of the jurisdiction under section 263, counsel appearing on behalf of the assessee relied upon the provisions of section 245S, under which a ruling rendered by the Authority for Advance Rulings is binding on the applicant who has sought it; in respect of the transaction in relation to which the ruling had been sought; and on the Commissioner, and income-tax authorities subordinate to him, in respect of the applicant and the said transaction. Counsel urged that under sub-section (2) of section 245S, an advance ruling sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing before any income-tax authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or of fact relating to such computation of total income specified in the application. 10. Section 245S stipulates that an advance ruling pronounced by the Authority under section 245R shall be binding only on (a) the applicant who had sought it; (b) in respect of the transaction in relation to which the ruling had been sought; and (c) on the Commissioner and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction. In other words, upon an advance ruling being rendered under section 245R, the ruling binds the applicant, the Commissioner and the authorities subordinate to him and the ruling would apply to the transaction in relation to which it was sought. Sub-section (2) of section 245S postulates that the ruling shall be binding unless there is a change in law or facts on the basis of which the advance ruling has been pronounced. The rules which have been made under section 245V regulate the procedure before the Authority. These rules which are called the Authority for Advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. There is merit in the submission which has been urged on behalf of the petitioner that the Commissioner has manifestly exceeded his jurisdiction in relying upon the ruling of the Authority for Advance Rulings in the case of Fidelity Northstar Fund, In re [2007] 288 ITR 641 (AAR) as a ruling which would apply to the petitioner. Ex facie, section 245S shows that a ruling of the Authority for Advance Rulings binds the applicant, the Commissioner and the income-tax authorities subordinate to him and shall apply in relation to the transaction in which the ruling was sought. The ruling rendered in the case of Fidelity Northstar Fund, In re [2007] 288 ITR 641 (AAR) by the Authority for Advance Rulings cannot bind the petitioner nor can it displace the binding effect of the ruling rendered in the case of the petitioners. There is no dispute before this court that the transaction in respect of which the petitioners sought a ruling and in respect of which the Authority for Advance Rulings had issued a ruling to the petitioners is of the same nature as that for the assessment years 2004-05 and 2005-06. Evidently, the Commissioner has ignored the clear mandate of the statutory provision tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Paul Brothers [1995] 216 ITR 548 and by a Division Bench of the Gujarat High Court in Rajan Ram-krishna v. CWT [1981] 127 ITR 1 (Guj). 15. For the aforesaid reasons, we are of the view that on both counts the invocation of the jurisdiction under section 263 was improper. Firstly, the Commissioner has ex facie made a determination contrary to the plain language of section 245S when he holds that the ruling of the Authority for Advance Rulings 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 Authority for Advance Rulings. The assessment order which gives effect to a binding precedent, in this case of the Authority for Advance Rulings, cannot be regarded as being erroneous or a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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