Restriction on application for advance ruling

Section 245R of Income-tax Act dealing with the procedure on receipt of application by the Authority for Advance Ruling (AAR) provides that the Authority shall not allow the application to be proceeded with where the question raised in the application is 'already pending' before any income-tax authority. The object of this provision is obviously to avoid duplication in judicial proceedings. As held by the AAR in Monte Harris v. CIT [218 ITR 413 (AAR)] 'having already availed himself of the remedies available under the Act, the Legislature understandably requires that an applicant should not be encouraged to have recourse to another remedy by way of an application before the Authority.'

The aforesaid principle which appears to be simple and logical has also led to several controversies which are briefly highlighted in this write-up.

In an interesting case of Monte Harris v. CIT (supra) the applicant after making an application to the AAR also filed his return of income. When the issue came up for consideration by the AAR, a question arose that since the issue is already raised in the return of income which is pending as on the date of hearing before AAR, is AAR precluded from dealing with the application. It was held that 'The words 'already pending' should, therefore, be interpreted to mean: 'already pending as on the date of the application' and not with reference to any future date. In the present case, since there was no return or claim before the authorities before the application was filed before this Authority, the application cannot be rejected by invoking clause (a) of the proviso to section 245R(2).'

In another case [Amir Zai Sangin 238 ITR 237 (AAR)] the applicant had filed application before the AAR in March, 1997. The applicant also filed his return of income in June, 1997. The Authority held 'By filing the present application on March 27, 1997, the applicant had exercised his choice to have recourse to the Authority for an advance ruling. But this did not give him immunity from his obligation to file the return of income under the Act on or before June 30, 1997.

However, in a recent case of SEPCO Electric Power Construction Corporation (AAR No. 1 of 2011) decided on 15.11.2011, an earlier order passed by the Authority was sought to be recalled as the applicant felt that the Authority had wrongly refused to entertain the application on the ground that the issue raised was already pending before the income-tax authorities. In the earlier order the Authority had held "that the applicant having filed a return of income for the relevant year even before filing the application under section 245Q of the Act, it must be taken that the question that is posed before us for a ruling was already pending before the Assessing Officer."

The above case is different on facts inasmuch as in earlier cases the question before the AAR was raised first and thereafter the return of income was filed. But in the instant case, the return of income had already been filed and thereafter the applicant raised the issue before the Authority.

The Authority held that it had not committed any mistake in refusing to entertain the application. In other words, the ruling is clear that if an assessee files his return of income and thereafter approaches the AAR for a ruling, his application will not be entertained by the Authority despite the fact that his return of income might not have been processed by the income-tax authority when the matter is taken up by the Authority for a ruling.

While the logic of the Authority for rejecting the application is technically sound but it is felt that the aforesaid interpretation of law will put serious restrictions on the non-residents desiring to obtain a ruling in advance. The Authority should take a liberal view in line with the objective of its creation and, therefore, should not put avoidable restrictions at the threshold.

HP Agrawal
(Author is a Sr. Partner in SS Kothari Mehta & Co)

hp.agrawal@sskmin.com