Director of Income Tax vs Prudential Assurance Co. Ltd.

This appeal filed by the Revenue u/s 260A of the income tax Act, 1961 ("the Act"), challenges the order dated March 26, 2012, of the income tax Appellate Tribunal ("the Tribunal" for short) relating to the assessment year 2003-04. The appellant has raised the following questions of law for consideration of this court.

(a) Whether, on the facts and in the circumstances of the case and in law, the Tribunal is correct in quashing the initiation of reassessment and also setting aside the impugned order on the merits, when the Assessing Officer has clearly recorded his reason for reopening of the case and has categorically mentioned that complete facts related to investment activity in India and the SEBI guidelines have not been disclosed by the assessee?

(b) Whether, on the facts and circumstances of the case and in law, the Tribunal is correct in holding that the Assessing Officer was not justified in taxing the income from other sources amounting to Rs. 12.57 crores without allowing its set off against the business loss of Rs. 48.80 crores ignoring the fact that the assessee''s income from business is not liable to tax in India in the absence of a permanent establishment in India and thus once the business income is not assessable as per the Act, the loss arising from the same cannot be set off with income from other sources?

The respondent-assessee is a foreign company having residential status of non-resident. The respondent-assessee had approached the Authority for Advance Rulings. On April 30, 2001, the Authority for Advance Rulings held that profits arising to the respondent-assessee from realization of portfolio investments in India will be treated as part of its business profits.

For the assessment year 2003-04, the respondent-assessee had claimed loss on sale of shares to the extent of Rs. 48.80 crores under the head "Profits and gains of business or profession". This was accepted by the Assessing Officer by an order dated February 20, 2000, u/s 143(3) of the Act.

On March 31, 2010, a notice to reopen the assessment for the assessment year 2003-04 under sections 147 and 148 of the Act was issued to the respondent-assessee. The assessment was sought to be reopened on the ground that the ruling of the Authority for Advance Rulings dated April 30, 2001, rendered in the assessee''s own case is not correct in view of the subsequent ruling of the Authority for Advance Rulings in the case of (2007) 288 ITR 641 . In view of the subsequent ruling, the notice for reopening states that the earnings on purchase and sale of shares would be taxable not under the head "Profits and gains of business or profession" but taxable under the head "Capital gains". Thus, resulting in the escapement of income to tax.

Consequent to the above, the Assessing Officer on September 16, 2011, passed a reassessment order, wherein it was held that the income on sale of shares is chargeable to tax under the head "Capital gains" and not "Business income". On appeal, the Tribunal set aside the order of the Assessing Officer, inter alia, on the ground that in the assessee''s own case for the assessment years 2004-05 and 2005-06, the Director of income tax had initiated proceedings u/s 263 of the Act on the identical grounds and that decision u/s 263 of the Act had been set aside by this court by order dated April 29, 2010, in Writ Petition No. 866 of 2010 ( The Prudential Assurance Company Ltd. Vs. The Director of Income Tax (International Taxation) and The Union of India (UOI), ).

We note that the notice for reopening was issued on March 31, 2010, which is beyond a period of four years from the end of the relevant assessment year 2003-04 and the reasons recorded for reopening the assessment does not allege that there has been any failure on the part of the respondent-assessee to disclose fully and truly all material facts necessary for the purpose of assessment. Therefore, on the above basis itself, the notice is not sustainable. Further, even on the merits we find that this court in Writ Petition No. 866 of 2010 filed by the assessee The Prudential Assurance Company Ltd. Vs. The Director of Income Tax (International Taxation) and The Union of India (UOI), , held by order dated April 29, 2010, that the ruling of Authority for Advance Rulings in the respondent-assessee''s case would not be overruled by subsequent decision of the Authority for Advance Rulings in the case of another assessee. Consequently, initiation of action u/s 263 of the Act for the assessment years 2004-05 and 2005-06 was quashed on the ground that the assessment order could not be said to be prejudicial to the Revenue or erroneous as the Assessing Officer was merely following a binding ruling of the Authority for Advance Rulings. The income tax Appellate Tribunal relies upon the aforesaid facts and holds that the reopening of assessment is not justified, as the finding of the Authority for Advance Rulings in the assessee''s own case will continue to govern the assessee''s assessments. This is particularly so as there has been no change in the law.

In our opinion, the decision of this court in Writ Petition No. 866 of 2010 rendered on April 29, 2010 The Prudential Assurance Company Ltd. Vs. The Director of Income Tax (International Taxation) and The Union of India (UOI), , in the respondent-assessee''s own case is wholly applicable to the facts of the present case as held by the Tribunal. In view of the above, we find no fault with the order of the Tribunal which would warrant entertaining the appeal filed by the Revenue. Accordingly, the appeal is dismissed with no order as to costs.