Advance ruling principle underIncome Tax Act 1961

GENERAL FRAMEWORK

• The Authority for Advance Rulings (AAR) is a body set up under the Actspecifically to give rulings to non-residents on the tax implications of theiroperations in India.

• �• The prime objective for setting up the AAR was to avoid

needless litigationand for promoting better relations with the tax-payers.

• �• During the year 1993, a scheme for giving advance rulings

in respect of the transactions involving non-residents was worked out and the samewas put into operation.

MEANING OF ADVANCE RULING• • A determination by the Authority in relation to a transactionwhich has

been undertaken or is proposed to be undertaken by anon-resident applicant .

• �• Notified Resident applicants (Currently only Public SectorUndertakings)

can also seek a ruling at the stage of assessmentwhen the matter regarding computation is pending before theAssessing Officer (AO) or the Commissioner of Income-tax (Appeals)[CIT(A)] or before the Income-tax Appellate Tribunal (ITAT).

• �• As per Finance Act No.2 of 2009 Advance Ruling Authority createdunder

section 245-O of Income Tax Act, 1961 will also beconsidered as Advance Ruling Authority for Central Excise & CustomAuthority.

CONSTITUTION OF AAR

• The AAR consists of the following memberswho are appointed by the Indian Government:

• �• A Chairman who is a retired judge of the Supreme Court;• �• An officer of the Indian Revenue Service (IRS) who is

qualifiedto be a member of the Central Board of Direct Taxes;

• �• An officer of the Indian Legal Service who is, or is qualified

tobe, an Additional Secretary to the Government of India.

APPLICATION FOR ADVANCE RULING 245Q

• An applicant desirous of obtaining an advance ruling underthis Chapter may make an application in such form and insuch manner as may be prescribed, stating the question onwhich the advance ruling is sought.

• �• The application shall be made in quadruplicate and

beaccompanied by a fee of two thousand five hundred rupees.

• �• An applicant may withdraw an application within thirty

daysfrom the date of the application

PROCEDURE FOR OBTAINING AN ADVANCE RULING

• In case a non-resident desires to obtain an Advance Ruling , an application has to befiled with the AAR in Form 34C.

• �• A resident seeking an Advance Ruling to determine the tax

liability of a non-residentin connection with a transaction which the resident has entered into or is proposingto enter into with such non-resident, has to make an application to the AAR in Form34D.

• �• Other resident applicants (Public Sector Undertakings notified by

the CentralGovernment) have to make an application to the AAR in Form 34E.

• The applicant should submit the application, in person or through an AuthorisedRepresentative (AR) to the Secretary of the AAR or to any Officer that the Secretarymay notify in writing or must be sent by registered post to the Secretary of the AAR.The application should be submitted in quadruplicate. A fee of Rs. 2,500 (RupeesTwo Thousand Five Hundred only) should accompany each application.

• �• An applicant has an option to withdraw the application within a period of thirty

daysfrom the date of filing the application.• �• On receipt of the application, AAR forwards a copy of the same to the

Commissionerof Income-tax (CIT) and calls upon the CIT, if necessary, to furnish the relevantrecords. The AAR may, after examining the application and records called for, eitherallow or reject the application. The AAR, however, cannot reject the applicationunless an opportunity has been granted to the applicant of being heard, either inperson or through an authorized representative

APPLICABILITY OF ADVANCE RULING 245S

• (1) The advance ruling pronounced by the Authority under section 245R shall bebinding only (a)On the applicant who had sought it;(b)In respect of the transaction in relation to which the ruling had beensought;(c)On the Commissioner, and the income-tax authorities subordinate tohim, in respect of the applicant and the said transaction.

• (2) The advance ruling referred to in sub-section (1) shall be binding asaforesaid unless there is a change in law or facts on the basis of which theadvance ruling has been pronounced.

ADVANCE RULING TO BE VOID IN CERTAIN CIRCUMSTANCES

• Where the Authority finds, on a representation made to it bythe Commissioner or otherwise, that an advance rulingpronounced by it under sub-section (6) of section 245R hasbeen obtained by the applicant by fraud or misrepresentationof facts, it may, by order, declare such ruling to be void abinitio and thereupon all the provisions of this Act shall apply(after excluding the period beginning with the date of suchadvance ruling and ending with the date of order under thissub-section) to the applicant as if such advance ruling hadnever been made.

• �• A copy of the order made under sub-section (1) shall be sentto

the applicant and the Commissioner

BENEFITS OF OBTAINING ADVANCE RULING

• Helps non-residents in planning their income taxaffairs well in advance;

• �• Brings certainty in determination of the tax liability;• �• Helps in avoiding long drawn litigation; and• �• It is relatively inexpensive, expeditious and binding.

Assessment Procedure of Returns

139(3)-Return of Loss

• This return has to be filed in time specified u/s 139(1) to carry forward losses from the following heads -Profit & Gain from Business or Profession, Speculation loss, Capital Gains & horse race loss.

• Not necessary for Unabsorbed Depreciation and Loss from House Property. Ref. Circular 8/2001 – it has power to condone (be lenient with) delay.

139(4)-Belated Return

• Can be filed before one year from end of relevant assessment year. (Eg. For march 08 - 31/3/10) to be filed if return not submitted with due date of 139(1) or 142(1)

• Impact of late filing of Income tax return

– Interest u/s 234A– Loss of Interest on refund– Audit Report– Revised return– Not able to carry forward the losses– some of the deduction u/s 80 are not available• Speculation loss• Business loss excluding loss due to unabsorbed depreciation and house

property• Short term capital loss• Long term capital loss

139(5)- Revised Return

• If a person discovers any omission or wrong statement in the return. He must file a Revised return as per sec 139(1) or sec 142(1) [not 139(4)] can be filed before one year from end of relevant assessment year or before the completion of the assessment, whichever is earlier.

139(9)- Defective Return

• When a return is considered so ? AO may intimate the defect to the assesses and give him an opportunity to rectify the defect within a period of 15 days from the date of such intimation or within such further period

• And when an application by Assesses is made in this behalf, the AO may, in his discretion, allow; and if the defect is not rectified within fifteen days or, as the case may be, the further period so allowed, then, irrespective of anything contained in any other provision , the return shall be treated as invalid return and the provisions of this Act shall apply as if the assesses had failed to furnish the return may intimate the defect to the assesses and give him an opportunity to rectify the defect, or even, AO may condone the delay for rectification and treat the return as a valid return.

142(1)(I) Notice for filing return

(II) Power to call for information

• Can be issued only after time limit u/s 139(1) expires • AO shall not require the production of any Books and documents

relating to period not more than 3 years prior to P.Y. • For AO to ask for Assets & Liability statement – prior approval of

Joint Commissioner required.

142(2)-Inquiry by AO

• For the purpose of obtaining full information in respect of the income or loss of any person & getting other information, AO makes necessary inquiry.

142(2A)- Direction for Special Audit

• AO having regard to nature and complexity of accounts & in the interest of revenue, the accounts should be audited. Prior approval of Chief Commissioner is necessary.

142(3)- Opportunity of being heard

• Assesses shall be given opportunity except when assessments is to be completed u/s 144 be given an opportunity of being herd n respect of any material gathered on the basis of any inquiry and proposed to be utilised

for the purposes of the assessment.

Misc.- Consequences of non compliance to 142(1) or 142(2A)

• Best Judgement u/s144• Penalty u/s271(b)• Prosecution u/s 276D• Order u/s132 for search & seizure

142A- Estimate by Valuation Officer

• For making an assessment or reassessment under this Act, where an estimate of the value of any investment referred to in sec69 or sec 69B or the value of any bullion, jewellery or other valuable article referred to in sec69A or sec 69B is required to be made, the AO may require the Valuation Officer to make an estimate of such value and report the same to him.

143(1)- Summary Assessment

• Acknowledgement is intimation if no tax payable or refund due. Time limit for Issue (not serving) of intimation - One year from end of relevant A.Y. (Eg. For A.Y.2008-09 - 31/3/10)

143(2)-Notice for Scrutiny Assessment

• To ensure that assesses has not– (a) understated income– (b) Computed excess loss or– (c) Underpaid tax.

• A.O. shall Serve (not issue) notice to attend office and/or produce evidence on which assesses had relied while filing return.

• Time Limit : No notice shall be served after expiry of 12 months from the end of month in which the return is filed.

143(3)-Scrutiny/Regular Assessment

• A.O. Shall make assessment of income from material gathered and evidence produced. Than determine tax payable or refund.

• Time Limit : Within 21 months from the end of relevant A.Y. (For A.Y.2008-09 till 31/12/2010)

144-Best Judgement Assessment

• A.O. Can resort in four cases ;– 1) Person fails to file return u/s139– 2) Fails to comply all terms of notice u/s142(1)– 3) Fails to comply with directon of sec 142(2A) - audit of

accounts– 4) Fails to comply all terms of notice u/s143(2) show cause notice

must be issued. Not required if notice already given u/s 142.• Time Limit : within 21 months from the end of relevant A.Y. (For A.Y.2008-

09 till 31/12/2010)

144A-JC to issue directons

• Joint Commissioner can call for and examine records of any proceeding in which assessment is pending either : 1) Suo Moto (2) on ref. by AO or (3) on application by Assesses.

• JC will issue directions to AO for completing Assessment. This directions is binding on A.O. if directions which are prejudicial to interest of assesses, than opportunity of being heard is to be given.

145-Best Judgement Assessment

• A.O. Can resort in three cases ; 1) A.O. not satisfied with correctness & completeness of accounts. 2)Method of accounting is not regularly followed. 3) Where AS notified by Central Govt. are not followed (i.e. AS 1 & AS 2) (Sec 145A) Show cause notice must be issued. Not required if notice already given u/s 142.

• Time Limit : Within 21 months from the end of relevant A.Y. (For A.Y.2008-09 till 31/12/2010)

147-Income Escaping Assessment

• A.O. has reason to believe that income has escaped assessment. On reopening - if any other income comes to the notice of A.O., than, the same can also be included for assessment.

• Proceeding u/s 147 cannot be initiated unless Valid notice u/s 148 is issued (not served).

• Time Limit : Within 9 months from the end of financial year in which notice is served

148-Notice for income escaping assessment

• AO should issue notice , requiring assessment the assesses to furnish return within time specified. Before issuing he should record the reasons for such issuance of notice.

• Notice should be issued within time limit specified u/s 149.• Notice should be issued only by authority specified in Sec.149

149-Time Limit for issue of notice u/s148 and who is authorised to issue such notice

• Most important. Refer detailed note given with this summary sheet

Discussion on S: 149.

Time limit for issue of notice for income escaping assessment.

* Note : - Very Important for point No. 3 & 4 above :Except for the conditions mentioned above for reassessment, the following additional conditions should also be satisfied for taking up proceedings after the expiry of four years from the end of relevant assessment year. (This is a part of Section 150)

(1) Assessment has not been completed under section 143(3)/147(2) Assesses has not filed return under section 139 or in response to notice under section 142(1) & 148 & (3) (This is most important) Assesses has not disclosed fully & truly - all material facts , which were necessary for assessment.

Additional Point : - Relating to Non Resident (This is a part of Section 150)

(1) No notice can be issued to the agent of a non resident after the expiry of 2 years from the end of relevant assessment year(2) In case of a non resident, however, notice an directly be issued to non resident within the aforesaid time frame (above table)

Annexure to Principal Sheet

150-Exceptions to time limit for issuance of notice u/s 149

• (1) Notice u/s 148 can be issued at any time to give effect to any finding or direction contained in an order passed by any authority under the Act or by the court under any law

• However, notice cannot be issued, if at the time when the order which was subject matter of appeal, reference, revision was passed, the time limit for the issue of such notice has expired Point (2) & (3) included in detailed note of Sec : 149.

Time limit for completion of assessment u/s 143(3) & 144

• Within 21 months form the end of relevant Assessment Year

153(2)-Time limit for completion of assessment u/s 147

• Within 9 months from the end of financial year in which notice is served

153(2A)-Time limit for completion of Fresh Assessment

Preconditions : 1) Assessement order is set aside u/s 250 CIT (A) or 254 Tribunal or 263

& 264 by order of Commissioner 2) A Fresh order is directed

Time Limit : (a) Order U/s 250 & 254 - 9 months from the end of financial year in

which this order is received by commissioner (b) Order U/s 263 & 264 - 9 months from the end of financial year in

which this order is passed by commissioner

154-Rectification of Mistake - by IT Authority of any order or intimation

Mistake should be apparent on record

It should not be disputed mistake

May be mistake of fact or law. IT authority can rectify either (a) Suo Moto (b) on an application made by the assesses. Opportunity to be given to assesses if rectification is prejudicial to his/her interest

Time Limit : (a) Within 4 years from the end of financial year in which order sought to be

rectified is passed (b) when application made by assesses - within 6months from the end of the

month in which application is made.

• Note : If a valid application is made for rectification within statutory time limit, but it is not disposed by IT authority, than also they can rectify order after the above said time limit.

155-Time Limit for Rectification of Mistakes - under special cases.

• Its 4 years from the end of financial year in which order is passed. • Its 4 years from the end of FY

156-Notice of Demand

• Served by A.O. when any tax, interest, penalty or any other sum is payable by assessee. Its in specified form.

• This is important for further litigation

157-Initimation of Loss

• If during assessment, it is established that assessee is entitled to carry forward loss, than same shall be intimated by AO in writing

158A-Provision for avoiding Repetitive Appeals

• Case must be pending in HC or SC for any other assessement year.• It must be a question of law• Similar case arises before A.O. or any other appleate authority.• Than, An application can be made to A.O. or appelate authority in form 8.

He agrees to apply the final decision. He shall not raise such question of law once again. When application is made to appelate authority, a report from A.O. shall be called for on the correctness of claim.

• Consequences : - Order admitting or rejecting assessee's form is passed. This order is not appealable.

• If assessee's contention is accepted, than : his case is disposed off without awaiting final decision. The assessee shall not be entitled to appeal on the same question of law & when final decision is given by court, the above order shall be amended if necessary