Anurag Jain vs Authority for Advance Rulings and Another

P. Jyothimani, J.—This writ petition is directed against the ruling of the Authority for Advance Rulings (Income Tax) dated March 30, 2005,

made in A.A.R. No. 643 of 2004. (2005) 92 ITD 411 .

The petitioner and four others were the shareholders in a private limited company known as M/s. Vision Healthsource India Private Limited,

registered under the Companies Act, 1956. Out of the paid-up share capital of the company which was Rs. 10,00,000, divided into 1,00,000

equity shares of Rs. 10 each, the petitioner was holding 15,000 shares while the other four shareholders were holding the remaining shares. The

company was carrying on business in medical billing which is an information technology enabling industry. The petitioner and the two others were

shareholders in a foreign company, namely, M/s. Vision Health Source Inc., incorporated in the USA engaged in out-sourcing business in

processing medical bills and medical insurance claims. The petitioner and other two shareholders have also decided to transfer all their respective

shares in M/s. Vision Health Sources in the USA and they have obtained approval from the Reserve Bank of India for transferring their shares to

one M/s. Perot Systems Investments BV and Perot Systems B.V. Two agreements were entered one relating to transfer of shares of the US

company M/s. Vision Health Source Inc., called stock purchase agreement and another share purchase agreement in relation to M/s. Vision Health

Source India Private Limited. The writ petition relates to the transfer of shares by the petitioner and others held in M/s. Vision Healthsource India

Private Limited under the share purchase agreement dated April 15, 2003. In accordance with the said share purchase agreement the

consideration for the sale of shares was in the following two terms:

(I) An amount equal to US $ 23 lakhs (2.3 U.S. million dollars) pay able at the time of transfer of shares, and

(II) Balance constituting the contingent payments to be made in first year, second year and third year after the closing payment, up to a max imum

of seven million U.S. $.

The closing date by which the first amount of 2.3 million dollar to be paid is 2003-04 and thereafter the contingent payment in three years,

namely, 2004, 2005 and 2006 to be made. Out of the five shareholders in M/s. Vision Healthsource India Private Limited, the petitioner and his

wife were non-resident living in the USA while others are Indian residents. The manner of determination of the contingent payment is provided in

the share purchase agreement. The share purchase agreement is supported by other documents like the employment agreement with one V. Jain

who was an Indian shareholder apart from a non-competition agreement with all the shareholders.

It is stated that the petitioner has approached the first respondent by making an application u/s 245Q(1) of the Income Tax Act, 1961

(hereinafter referred to as ""the Act"") seeking advance ruling of certain questions relating to the liability of capital gains tax in respect of the transfer

of 15,000 equity shares held by him in the Indian company, namely, M/s. Vision Healthsource India Private Limited covered under the share

purchase agreement dated April 15, 2003, with his contention that as per his interpretation of the agreement, the liability of the capital gains tax

accrues only when there is a transfer of capital assets and consideration is ascertainable and, therefore, according to him, in the circumstances that

the sale consideration for transfer was not determinable and dependent upon contingency, the payment of capital gains would not arise on the

transfer of shares held by him.

On the basis of the direction from the first respondent-Authority the petitioner has framed the questions to be ruled by the first respondent which

are as follows (page 5 of 277 ITR):

(i) Whether the gains arising from the transfer of 15,000 equity shares in M/s. Vision Healthsource India Private Limited covered by the share

purchase agreement dated April 15, 2003, read with exhibits A and B, namely, which are share purchase agreement and associated employment

agreement, respectively, is chargeable to capital gains tax or not, either wholly or in part?

(ii) If the aforesaid gains arising from the above transfer is liable to be charged to capital gains tax, either wholly or in part, in which year of

assessment does the liability to pay capital gains tax arise for the following amount received/receivable as consideration for the transfer of shares

aforesaid, which, in aggregate amounts to 93 lakh US dollars (9.3 million U.S. dollars) termed as purchase price as per Clause 1 of the share

purchase agreement dated April 15, 2003?

(i) Initial lump-sum payment equal to 23 lakhs US dollars (2.3 million U.S. dollars) (referred to in the share purchase agreement as the closing

payment) received on July 1, 2003, in the previous year relevant to the assessment year 2004-05.

(ii) Contingent payments as per Clause 1 of the share purchase agreement dated April 15, 2003 (exhibit A) receivable for each of the three years

in the following terms:

Having regard to the fact that these amounts, contingent on the existence of the EBITDA, namely, Earnings Before Interest, Tax Depreciation

Allowance, can be determined only when the EBITDA as per Clause 1 of the said share purchase agreement dated April 15, 2003, relating to the

three contingent payments as defined in Clause 1 therein is computed.

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By whom paid and Year in which Where defined

nature of payment to be paid

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Payer and provider For year ended Exhibit A

first year 31.3.2004

contingent payment

Payer and provider For year ended

second 31-3-2005 Exhibit A

year contingent

payment

Fayer and provider For year ended

third year on 31.3.2006 Exhibit A

contingent payment

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(iii) If the gains arising from transfer of shares aforesaid is not to be charged as capital gains, either wholly or in part, under what head of income

the contingent payments made to/received by the applicant towards the transfer of shares covered by the aforesaid share purchase agreement

dated April 15, 2003, read with the exhibit attached thereto are taxable and in which of assessment ?

(iv) Whether any relief or concession in respect of income charged as capital gains or as other income under any other head is available under

applicable provisions of the Double Taxation Avoidance Agreement between India and United States of America and India and Netherlands ? and

if so, to what extent?

As far as question No. (iv) is concerned the same was not pressed by the petitioner and, therefore, no ruling was pronounced.

In respect of questions Nos. 1 to 3 the first respondent by the impugned order has pronounced the following ruling (page 21 of 277 ITR):

(i) The gains arising to the applicant from the transfer of 15,000 equity shares in M/s. Vision Healthsource India Private Limited covered by the

share purchase agreement dated April 15, 2003, read with exhibits A and B thereto computed by taking the closing amount of 2.3 U.S. million

dollars as the true value of the consideration are chargeable to tax under the head ''Capital gains''.

(ii)(I) The initial lumpsum payment equal to 2.3 million US dollars (referred to in the share purchase agreement as the closing payment) received on

July 1, 2003, in the previous year relevant to the assessment year 2004-05 as a consideration for the transfer of shares (including 15,000 shares of

the applicant) represents the full value of the consideration thereunder.

(II) Contingent payments as could be determined at the end of the first year March 31, 2004, second year March 31, 2005, and the third year

March 31, 2006, under exhibit A-4 are not in truth and substance part of the consideration under the share purchase agreement so they cannot be

taken into account in computing the capital gains but they would be taxable under the head ''Salaries''.

(III) Contingent payments received/receivable by the applicant would fall within the meaning of profits in lieu of or in addition to salary under

Clause (3)(ii) of Section 17 of the Act.

The above said ruling of the first respondent is challenged by the petitioner in this writ petition on the ground that the ruling in respect of the initial

lumpsum payment and contingent payment by which it was held that the initial lumpsum payment would be treated as consideration for the transfer

of shares and, therefore, the said consideration is taxable under capital gains and in respect of contingent payments in three years since the same is

not ascertainable it does not attract the payment of capital gains but at the same time it would be taxable under the head ""Salaries"" and according

to the petitioner it is contrary to Sections 45, 48, 28 and 17 of the Act, that even in respect of the closing payment of Rs. 2.3 million U.S. dollars

as well as the 7 million U.S. dollars of contingent payments though they are in respect of the transfer of shares the consideration are indeterminable

and, therefore, no liability of the capital gains could be made u/s 45 of the Act, that indeterminable contingent payment does not form part of the

consideration while including salaries as provided in lieu of or in addition to salary as taxable under the said head is opposed to the provisions of

the Act especially in the circumstances that the share purchase agreement and the Reserve Bank of India approval discloses that the sale

consideration is payable in respect of the shares taking into consideration the components of close payments as well as contingent payments, that

the salary payable as per the associated employment agreement forms part of the stock purchase agreement and not share purchase agreement as

stock purchase agreement relating to the transfer of shares to the U.S. based company while the share purchase agreement alone deals with the

transfer of shares with Indian companies and that even if it is admitted that the employment agreement is attached to the stock purchase agreement,

the contingent payments or in relation to the payments of performance under the employment agreement and as non-existent, in the share purchase

agreement and the salary payable only for ensuring performance.

On the other hand, it is the stand of the respondents in the counter-affidavit especially the second respondent that the petitioner has filed a return

before the assessing authority, namely, the Assistant Director of Income Tax (International Taxation), Chennai, for the assessment year 2004-05

(accounting year 2003-04) declaring the Income Tax of Rs. 8,04,465 on October 29, 2004, and he has declared nil income for capital gains. The

assessee in the working sheet along with the letter dated November 17, 2004, has computed long-term capital gain on sale of equity shares in M/s.

Vision Healthsource India Private Limited at Rs. 1,57,25,966 claiming exemption on the investment of the amount of Rs. 1,57,30,000 in

NABARD u/s 54ED/54F of the Act and in respect of the contingent payment received in 2004 the petitioner has stated that it would be covered

by the return of Income Tax for the assessment year 2005-06 to be filed.

It is the case of the second respondent that when the petitioner/assessee has approached the first respondent for advance ruling the same is

having binding effect as per Section 245S(1)(c) unless there is a change in law or facts on which the advance ruling has been pronounced. It is the

case of the second respondent that inasmuch as it is not even the case of the petitioner that the first respondent-Authority has acted contrary to its

jurisdiction or has violated the principles of natural justice or acted in such a manner it would violate the legal rights of the petitioner, the writ

petition challenging the ruling is not maintainable. It is also the case of the respondents by relying upon a judgment of the Supreme Court reported

in R.B. Shreeram Durga Prasad and Fatechand Nursing Das Vs. Settlement Commission (It and Wt) and Another, which relates to the Settlement

Commission''s decision that in the jurisdiction exercised by the High Court under Article 226 of the Constitution of India, the court is concerned

with the legality of the procedure followed or not as to the validity of the order. It is also stated that the benefit of approach to the Advance Rulings

Authority is enabled for the benefit of the non-residents so as to enable such person to get the clear picture of tax liability even before the

assessment in respect of the transaction which is a high level body presided over by a retired judge of the Supreme Court and the petitioner having

preferred the advance ruling authority and having invited a ruling it is not open to him to say that the said ruling should be quashed.

The basic contention of the learned senior Counsel for the petitioner is that inasmuch as under the share purchase agreement, which has nothing

to do with the associated employment agreement, there is no definite amount of profit computable in respect of transfer of shares and, therefore,

the question of treating it as a capital gain and making the assessment either on 2.3 U.S. million dollars or 7.7 million U.S. dollars does not arise.

His contention is that the first respondent having ruled that in respect of the contingent amount which is not ascertainable and, therefore, having

rejected even the case of the Department that the same should be treated as a profit or gain or business or profession u/s 28 of the Act has

committed a gross error in holding that the petitioner is liable in respect of the salaries received under the associated employment agreement u/s 17

of the Act. His further contention is that the salary receivable by the petitioner under the associated employment agreement which relates to the

share purchase agreement is relating to the service to be rendered by the petitioner and has nothing to do with the consideration for transfer of

shares and, therefore, according to him, the first respondent ought not have relied upon Section 17 of the Act taking into consideration the salaries

payable to the petitioner under the associated employment agreement in exhibit B. He would state that under the share purchase agreement dated

April 15, 2003, which relates to the agreement to purchase from the shareholders and the shareholders agreeing to sell and the purchase price has

been stated as up to 9.3 million U.S. dollars in the manner that out of which 2.3 U.S. million dollars to be treated as closing payment and the

remaining contingent payments payable in the first, second and third years, namely, 2004, 2005 and 2006, and the consideration for the transfer is

the payment of the amount and it has nothing to do with the employment agreement exhibit B-l. He would submit that the contents of the associated

employment agreement dated April 15, 2003, especially relating to the term ""employment"" has no relationship with the share purchase agreement

at all. It is his further contention that when such associated employment agreement has been entered into not with all the five shareholders of the

company and only in respect of the petitioner and another employee the contents of such agreement in relation to the employment wherein it is

agreed by the petitioner that in the event of the petitioner''s termination from the services due to the reasons of material failure to adhere to any

critical policy, gross negligence or wilful misconduct or commission of an act of fraud, embezzlement or theft involving more than 1,000 U.S.

dollars or conviction, of, or plea of noto contendere to, a felony or for a crime involving moral turpitude undertaking that in such an act, he would

not be entitled for any proceeds from the future payments made under the purchase agreement including without limitation any contingent payments

which may be received will be paid back to the company by way of forfeiture can only be treated as a penalty and can never be linked with the

purchase agreement and anything related with the consideration thereon and, therefore, according to him, the ruling of the first respondent in

placing reliance on the contents of the employment agreement is outside the scope of reference. To substantiate his contention that the capital gain

assessment under Sections 45 and 48 of the Act can be only on the determined amount he would rely upon the judgments reported in

(i) Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, ;

(ii) (2005) 92 ITD 11 ;

(iii) Evans Fraser and Co. Ltd. (In Liquidation) Vs. Commissioner of Income Tax, Bombay City-II, ; and

(iv) Commissioner of Income Tax, West Bengal-II, Calcutta Vs. Hindustan Housing and Land Development Trust Ltd., .

Therefore, in short his contention is that even if it is taken that 2.3 U.S. million dollars to be treated as an amount of consideration ascertainable

which may be chargeable for capital gain, in respect of the unascertained amount applying Section 17 of the Act is not valid in law apart from the

fact that even in respect of the contingent payment for the salary payable to the petitioner and another person who are only two among the five

total shareholders is taken that would be an arbitrary decision affecting even other shareholders.

On the other hand, it is the submission of the learned Counsel appearing for the Income Tax Department-the respondents that the petitioner

having invited a ruling from the first respondent as per Section 245S of the Act is bound by the decision. She would also submit that inasmuch as

the first respondent whose rulings are invited by the petitioner is at New Delhi, this court could not have jurisdiction under Article 226 of the

Constitution of India. She would also submit that even though there are no specific rulings or procedures or regulatons enabling any party who is

aggrieved by the ruling of the first respondent Authority which is headed by a retired Supreme Court judge that an appeal or a proceeding can be

initiated only in the Supreme Court, normally that appeals are being filed to the Supreme Court. She would also further submit that the entire

averments of the petitioner in the affidavit do not disclose the first respondent has either acted outside its jurisdiction or the ruling was without giving

an opportunity and, therefore, it is violative of principles of natural justice and on the other hand the intention of the petitioner is to find fault with the

decision of the ruling authority and not the decision-making process and, therefore, the High Court cannot decide about the validity or otherwise of

the decision. She also would rely upon a judgment reported in Jyotendrasinhji Vs. S.I. Tripathi and others, to substantiate her contention that when

the finding of the Settlement Commission has become final the validity of it can only be challenged on the ground that there is a defect in decision

making. It is also her submission that it is not as if the amount should be treated as contingent inasmuch as the maximum amount of 9.3 U.S. million

dollars had been agreed between the parties. She would submit that when the employment conferred to the petitioner and another person is for

three years and the contingent amount payable to the extent of 7 U.S. million dollars is also in the said period, the terms of the service agreement

has the relationship with the share purchase agreement and there is no illegality or irregularity in the ruling given by the first respondent.

A perusal of the entire documents including the ruling given by the first respondent makes it is clear that the basic issue that is raised by the

petitioner in this petition is as to whether the ruling of the first respondent in directing that the lumpsum payment equal to 2.3 million U.S. dollars as

closing payment attracts capital gain and hence chargeable under Sections 45 and 48 of the Act and in so far as the contingent payment for three

years namely in the end of March 31, 2004, March 31, 2005, and March 31, 2006, with a minimum of 7 million U.S. dollars having decided that

the same cannot be treated as a capital gain and therefore it cannot be even assessable u/s 28 of the Act, can the same be linked to Section 17 of

the Act based on the associated employment agreement. In effect, it is clear that the petitioner seeks this court to decide while exercising

jurisdiction under Article 226 of the Constitution of India that the ruling of the first respondent and the basis of the said decision is not legal. As

correctly submitted by the learned Counsel for the respondent it is nowhere the case of the petitioner throughout that while passing such ruling the

first respondent has either not followed the procedure or failed to give adequate opportunity or the decision is basically against law except to say

that the associate employment agreement should not be linked with the share purchase agreement.

On the other hand, it is not also factually in dispute that the said associated employment agreement formed part of the share purchase

agreement. The contents of the associated employment agreement makes it very clear in its preamble which is as follows:

Vision Healthsource India Private Limited (''the company'') and Anurag Jain agree to enter into an employment relationship in accordance with the

terms of this agreement and any written offer of employment delivered to me on or before the date of this associate employment (''the agreement'').

Unless otherwise defined herein, capitalized terms used herein have the meanings ascribed thereto in that certain share purchase agreement

(including exhibit A thereto) among Perot Systems Corporation (''the Perot''), Perot Systems Investments BV, Perot Systems BV, company and

the shareholders named therein, dated April 15, 2003 (''the purchase agreement''.)

The intention of the parties in entering into the associated employment agreement appears to be that the share purchase agreement dated April 15,

2003, also should form part of the same. Even in Clause (8) relating to employment under the associated employment agreement while there is a

forfeiture Clause a reference has been made to the purchase agreement also and, therefore, it cannot be said that the undertaking given by the

petitioner to forfeit the contingent, payments which is the crux of the purchase agreement does not form part of the associated employment

agreement. Clause (8) of the associated employment agreement makes the same clear which is as follows:

Employment. I understand that this agreement is for a term beginning on the date hereof and ending on December 31, 2006, unless company

terminates my services for cause (as defined below) or I resign for good reason (as defined below). I understand that company may transfer my

employment among its affiliates and I hereby consent to the assignment of this agreement by company to an affiliate in connection with any such

transfers). I agree that this agreement will continue to apply to me if I am transferred to an affiliate of company. As used herein, cause means (a)

material failure to adhere to any critical policy (after written notice and a period of at least five days to cure such failure); (b) violation of any term

or condition of this agreement (after written notice and a period of at least five days to cure such violation); (c) Wilful misconduct or gross

negligence in the performance of a material duty to company; (d) commission of an act of fraud embezzlement or theft involving more than $ 1,000

or conviction of, or plea of noto contendere to, a felony or for a crime involving moral turpitude; or (e) the failure of the sum of the aggregate

EBITDA for both the payer and provider businesses for any applicable period set forth in exhibit A to the purchase agreement to equal or exceed

the sum of the payer cumulative threshold EBITDA and the provider cumulative threshold EBITDA for such applicable period, without regard to

the allocation between payer EBITDA or provider EBITDA. A termination by company for any reason other than as set forth in the preceding

sentence shall be a termination without cause. Company will give me written notice of (30 days) in the case of termination for cause. If I am

terminated for cause pursuant to the preceding Clause (a) or (c) or with respect to Clause (d) due to an act against the company or any of its

affiliates, I will no longer be entitled to any proceeds from future payments made under the purchase agreement, including without limitation, any

contingent payments, and if I receive any such payments, such payments shall be immediately paid to company. Any such proceeds forfeited by me

pursuant to the preceding sentence shall be paid as an anonymous gift to a bona fide tax exempt charitable organization to be designated by me

prior to the payment date. As used herein, the term good reason means, without my prior written consent, and so long as company has no right to

terminate me for cause, (1) any reduction in my basic salary or benefits (other than a reduction applicable to all similarly situated associates of

company) or (2) a material reduction in my responsibilities and duties.

It was taking the said factual circumstances the first respondent advance ruling authority has given a categoric factual finding which is as follows

(page 16) :

However, where the agreement is terminated for any of the specified causes which does not include the aforementioned Clause (e), the applicant

will no longer be entitled to any proceeds from future contingent payments payable under the purchase agreement including without limitation any

contingent payments and if he had already received any such payment, he is obliged to pay back the amount immediately to the company. The

non-competition agreement also includes a Clause identical to Clause (e) in the employment agreement, quoted above. Clause (4) of the

employment agreement refers to ''non-competition agreemenf which in turn mentions that the applicant will receive a portion of the purchase price

in respect of ownership interest and substantial direct and indirect benefits from the transactions contemplated by the share purchase agreement.

The non-competition agreement is linked to the employment agreement which has nexus with the purchase agreement. Indeed, it is stated that the

applicant''s obligations under the non-competition agreement are a material inducement and condition to the buyers entering into the purchase

agreement and the share purchase agreement under which substantial direct and indirect benefits are assured. Had the contingent payments been

the second part of the full value of the consideration for the sale of shares and the business of the Indian company, there is no reason why failure on

the part of the applicant in regard to fulfilling his obligations under the employment agreement (which include the achieving the target mentioned

above) should result not only in termination of the agreement for the specified cause but also in forgoing receipt of the second part of the

consideration by way of contingent payments under the share purchase agreement and in refunding the same to the company where he has already

received them. A combined reading of the employment agreement, non-competition agreement and the share purchase agreement which are

contemporaneous leaves us in no doubt to conclude that contingent payments payable under the share purchase agreement, are in substance and

reality payments for ensuring performance under the employment agreement to achieve the desired object in exceeding EBITDA and have no real

nexus to the consideration for the sale of the shares, etc., under the purchase agreement.

In such circumstances, it cannot be said that even on the merits of the findings the first respondent has not considered the factual issue. On the

other hand, the entire issue has been considered in a threadbare manner and there is absolutely no reason for this court to come to a conclusion

that the finding is either perverse or totally opposed to law. On the factual assertion of the entire material, it has been considered by the first

respondent authority and, therefore, there is no scope for this court to hold as if the reference did not relate to the salary receivable by the

petitioner under the associated employment agreement.

In Jyotendrasinhji Vs. S.I. Tripathi and others, the Supreme Court while dealing with the finding of the Settlement Commission under Chapter

XIX-A of the Act by way of an order passed under Sections 245D(4) and 245-I wherein the order of settlement is stated to be conclusive, the

Supreme Court has held that the decision of the Settlement Commission in interpreting a trust deed even if such interpretation is not correct it

would not be a ground for interference by the Supreme Court even in an appeal filed from the order of the Settlement Commission in Section

254D of the Act, holding that a wrong interpreting of a deed cannot be said to be a violation of the provisions of the Act, equally holding that the

interpretation placed upon a deed by the Commission does not bind the authorities in proceedings relating to other assessment years.

In that judgment, while dealing with the jurisdiction of the High Court under Article 226 of the Constitution of India apart from that of the

Supreme Court under Article 136, the Supreme Court has confirmed with approval the earlier judgment in R.B. Shreeram Durga Prasad and

Fatechand Nursing Das Vs. Settlement Commission (It and Wt) and Another, that the court is concerned with the legality of the procedure

followed and not the validity of the order and the courts under judicial review are concerned not with the decision but with the decision-making.

The relevant portion of the judgment of the Supreme Court in this regard is as follows (page 623 of 201 ITR):

The scope of enquiry, whether by the High Court under Article 226 or by this court under Article 136 is also the same whether the order of the

Commission is contrary to any of the provisions of the Act and if so, apart from ground of bias, fraud and malice which, of course, constitute a

separate and independent category, has it prejudiced the petitioner/appellant. Reference in this behalf may be had to the decision of this court in

R.B. Shreeram Durga Prasad and Fatechand Nursing Das Vs. Settlement Commission (It and Wt) and Another, , which too was an appeal against

the orders of the Settlement Commission. Sabyasachi Mukharji J., speaking for the Bench comprising himself and S.R. Pandian J., observed that,

in such a case, this court is ''concerned with the legality of the procedure followed and not with the validity of the order''. The learned judge added

''judicial review is concerned not with the decision but with the decisionmaking process''. Reliance was placed upon the decision of the House of

Lords in Chief Constable of North Wales Police v. Evans [1982] 1 WLR 1155 (HL). Thus, the appellate power under Article 136 was equated

with the power of judicial review, where the appeal is directed against the orders of the Settlement Commission. For all the above reasons, we are

of the opinion that the only ground upon which this court can interfere in these appeals is that the order of the Commission is contrary to the

provisions of the Act and that such contravention has prejudiced the appellant. The main controversy in these appeals relates to the interpretation

of the settlement deeds though it is true, some contentions of law are also raised. The Commission has interpreted the trust deeds in a particular

manner. Even if the interpretation placed by the Commission on the said deeds is not correct, it would not be a ground for interference in these

appeals, since a wrong interpretation of a deed of trust cannot be said to be a violation of the provisions of the Income Tax Act. It is equally clear

that the interpretation placed upon the said deeds by the Commission does not bind the authorities under the Act in proceedings relating to other

assessment years.

Applying the said judicial dictum laid down by the Supreme Court to the facts of the present case even assuming that the first respondent

authority has not interpreted the associated employment agreement which on fact forms part of the share purchase agreement in the proper

manner, it is certainly not open to this court to go into the correctness or otherwise or validity or otherwise of the findings given by the first

respondent.

The provisions under the Act relating to the advance rulings is incorporated under Chapter XIX-B next to the settlement proceedings by the

Finance Act, 1993, with effect from June 1, 1993. That the definition of advance ruling in so far as it relates to the factual situation in this case is u/s

245N(a)(ii) which is as follows:

245N.(a). ...(ii) a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction which has been

undertaken or is proposed to be undertaken by a resident applicant with such non-resident, and such determination shall include the determination

of any question of law or of fact specified in the application;

The advance ruling authority consists of the following members as per Section 245O(ii), namely:

245-O ...(2)(a) a Chairman, who is a retired judge of the Supreme Court;

(b) an officer of the Indian Revenue Service who is qualified to be a member of the Central Board of Direct Taxes;

(c) an officer of the Indian Legal Service who is, or is qualified to be, an Additional Secretary to the Government of India.

The binding effect of the ruling of the advance ruling authority is u/s 245S which is as follows:

245S.(1) The advance ruling pronounced by the Authority u/s 245R shall be binding only-

(a) on 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.

(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.

It is also relevant to point out that u/s 245T of the Act the ruling of the advance ruling authority becomes void if the same is obtained by fraud,

misrepresentation of the facts, etc. Therefore the petitioner who has voluntarily invited the ruling from the first respondent is certainly bound by the

ruling unless it is shown that the procedure followed by the authority while passing the said ruling is not in accordance with law and the same is

basically opposed to law or against the principles of natural justice.

Learned Counsel for the Income Tax Department-respondents who has also raised an issue about the maintainability of the writ petition in this

court under Article 226 of the Constitution of India stating that even though there is no bar for this court to entertain the writ petition under Article

226 of the Constitution of India, in fact against the orders of the authority for advance ruling, appeals are filed before the Supreme Court, however

has produced an order of the Supreme Court passed in the Special Leave to Appeal (CM) Nos. 21519 of 2008 dated September 8, 2008,

preferred against order dated May 9, 2008, of the Authority for Advance Rulings (Income Tax), New Delhi, passed in AAR 736/06, wherein the

hon''ble apex court by putting a query as to why the petitioner has not moved the High Court under Article 226 of the Constitution of India has

permitted the petitioner therein to withdraw the said SLP with permission to move the High Court under Article 226 of the Constitution of India

and the following is the operative portion of the order:

This SLP is filed against the ruling given by the Authority for Advance Rulings under the Income Tax Act.

When the matter reached hearing, we raised the query as to why the petitioner has not moved the High Court under Article 226 of the

Constitution? Realizing the difficulty, learned Counsel for the petitioner seeks permission to withdraw the SLP Permission granted with liberty to

move the High Court within two weeks, if so advised. For a period of two weeks, the Income Tax Department will not commence the assessment

proceedings.

Special leave petition is, accordingly, permitted to be withdrawn.

Hence, it is not necessary for this court to give any finding as to the jurisdiction of this court under Article 226 of the Constitution of India.

The distinction sought to be made between Section 45 of the Act which is the computation provision and Section 48 which is a charging

section, that when the computation provision cannot apply the same is applicable in respect of the charging Section also as held by the Supreme

Court in Commissioner of Income Tax, Bangalore Vs. B.C. Srinivasa Setty, and the same is not applicable to the facts of the present case at all.

Even if it is taken on fact of the present case that in respect of the contingent amounts payable in three years since the same is not computable the

advance ruling authority has come to the conclusion that it cannot be treated as a capital gain but at the same time treated as a salary u/s 17(3)(ii)

of the Act by treating it as a profit in lieu of salaries or in addition to the salary the same cannot be said to be against law. The reliance placed by

the learned senior Counsel on the judgment of the Supreme Court in Commissioner of Income Tax, Mumbai Vs. D.P. Sandu Bros. Chembur (P)

Ltd., has no application since that is a case relating to tenancy right surrender of such right would attract Section 45 of the Act and, therefore, it

was held that the same cannot be treated as a casual and non-recurring deposit u/s 10(3) of the Act subject to tax u/s 56.

It was on that factual situation the Supreme Court has held that the tenancy right being capital asset, surrender would attract capital gain u/s 45

of the Act, if Section 45 is not applicable it cannot be taxed at all in the following words (headnote of (2005) 92 ITD 11 ):

(iv) That it was not open for the Department to impose tax on such capital receipt by the assessee under any other head for the assessment year

1987-88, since income derived from a source falling under a specific head has to be computed under the appropriate Section and no other. A

tenancy right is a capital asset and its surrender would attract Section 45 and the gains derived would be assessable, if at all, only under the head

''Capital gains''. That being so, it cannot be treated as a casual and non-recurring receipt u/s 10(3) and be subjected to tax u/s 56. If the income

cannot be taxed u/s 45, it cannot be taxed at all.

Certainly the present finding given by the Authority in respect of the salaries receivable under the associated employment agreement which is

stated to be assessable u/s 17(3)(ii) of the Act cannot be compared to the surrendering of tenancy right. It is relevant to point out that all the

judgments which have been relied upon by the learned senior Counsel for the petitioner are cases where adjudication process were completed

against which appeals filed and the Appellate Tribunals orders have been questioned.

Even though it is true as contended by the learned senior Counsel for the petitioner that the ruling given by the first respondent authority is binding

upon the party who has actually referred the same and invited such a ruling, it cannot be said that the said order is final and, therefore, the

jurisdiction of this court could be ousted. Certainly as decided by the Supreme Court in the case reported in Jyotendrasinhji Vs. S.I. Tripathi and

others, , in case of procedural irregularities in arriving at the process of decision making, this court can certainly interfere in the writ jurisdiction. On

the other hand, whether on the factual matrix by construction of two documents, namely, associated employment agreement and share purchase

agreement which cannot be said to be totally different as one document is interlinked with the other, by applying Section 17 of the Act it cannot be

construed that the first respondent has gone beyond the jurisdiction and beyond the scope of reference.

In fact question No. 3 which has been referred by the petitioner which is as follows:

If the gains arising from transfer of shares aforesaid is not to be charged as capital gains, either wholly or in part, under what head of income the

contingent payments made to/received by the applicant towards transfer of shares covered by the aforesaid share purchase agreement dated April

15, 2003, read with exhibit attached thereto, are taxable and in which year of assessment?

would be comprehensive enough to enable the first respondent authority to take into consideration the share purchase agreement with other

exhibits connected thereto since the associated employment agreement is exhibit B which form part of the agreement and, therefore, it cannot be

said that the first respondent has acted beyond the authority while deciding the reference.

In view of the same the writ petition fails and the same is dismissed.