LI Network
Published on: 23 July 2023 at 12:10 IST
The Bombay High Court has ruled that a subsequent Authority for Advance Rulings (AAR) ruling, which takes a contradictory view, cannot bind a taxpayer or displace the binding effect of an AAR ruling in the taxpayer’s case.
The court set aside reassessment notices issued for Assessment Years (AYs) 1997-98 to 2000-01 on the grounds that the taxpayer had been incorrectly granted benefits under the India-UAE Double Taxation Avoidance Agreement (DTAA).
The case involved an application filed by the taxpayer, a resident of the UAE, seeking clarity on the taxability of income earned in India.
The AAR ruled that capital gains on the realization of Indian movable assets would not be taxable in India under Article 13(3) of the India-UAE DTAA. Based on this ruling, the taxpayer filed returns for AYs 1997-98 to 2000-01 and did not include the capital gains in their taxable income, but correctly offered dividend and interest income at the specified rates under the DTAA.
However, the Revenue Department issued reassessment notices under Section 148, alleging that the benefits of the DTAA were wrongly given to the taxpayer. The Revenue relied on a subsequent AAR ruling in the case of Cyril E. Pereira, which contradicted the earlier ruling in the taxpayer’s case. The taxpayer’s husband, representing the taxpayer, filed a petition challenging the validity of the reassessment notices.
The Bombay High Court, comprising Justices K.R. Shriram and Firdosh P. Pooniwalla, ruled that the Revenue Department exceeded its jurisdiction by proposing to reopen the taxpayer’s assessment based on the contradictory AAR ruling in Cyril E. Pereira.
The court referred to Section 245S of the Income Tax Act, which specifies that an AAR ruling is binding on both the taxpayer and the Revenue in relation to the transaction for which the ruling was sought. Therefore, the subsequent AAR ruling taking a different view could not bind the taxpayer or displace the binding effect of the earlier AAR ruling.
The court further noted that Section 245S(2) did not apply to the present case since there was no change in law or facts based on which the advance ruling was pronounced. As such, the subsequent ruling in Cyril E. Pereira could not be considered as a ruling that changed the law.
The court concluded that merely because another AAR ruling took a different view in a separate case could not be a sufficient basis for the Revenue to believe that income chargeable to tax had escaped assessment.
The Bench observed that the Assessing Officer had manifestly exceeded their jurisdiction by proposing to reopen the taxpayer’s assessment based on the AAR ruling in Cyril E. Pereira.
The court held that the Revenue’s reasons to believe, which sought directions from the Additional Director to reopen the assessment, did not demonstrate a personal belief that income liable to tax had escaped assessment.
This rendered the reopening of assessment invalid, leading the court to declare the Section 148 notices as illegal.
