Section 50C of Income Tax Act (India) - comprehensive analysis of its provisions

Section 50C : A comprehensive analysis

by 

Mr.Dhiraj Raman,

Ms.B.Mala

M/s Subbaraya Aiyar, Padmanabhan & Ramamani Advocates

TDS on commission agent payments

Whether tax should be withheld on the export commission payments to non-resident agents made by an Indian company (especially in light of withdrawal of Circular 23 of 1969) ?

by

Mr.Vikram Vijayaraghavan, 

Ms.Bhavya Rangarajan

M/s Subbaraya Aiyar, Padmnabhan & Ramamani (SAPR) Advocates

Answer:

Firstly, let us assume that the Indian company pays export commission to non-residents for procuring export orders as per commission Agreements drawn up with each of them. The non-residents merely perform standard activities of a general commission agent and do not have any right to negotiate or conclude any contract with clients which vests solely with the Indian company (assessee/payer).

We have to consider two propositions when it comes to withholding taxes on the foreign commission payments to the non-residents made by the Indian company:

Proposition #1: Whether commission paid to foreign agents on exports by an Indian firm will be liable to provisions of TDS under the Indian Income Tax Act 1961?

Section 195 of the Income-Tax Act, 1961 reads as follows:

“Section 195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

----- ……..

------…….

Explanation.—For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. …..”

In other words, Section 195 requires that any person responsible for paying to a non-resident “any sum chargeable to tax “  shall deduct tax thereon at the rates in force at the time of credit of such sum to the account of the payee or at the time of actual payment thereof, whichever is earlier.  Thus the fundamental question to be considered is whether commission payment to the non-resident is chargeable to tax in India or not.  

Section 4(1) defines the income chargeable to tax as the ‘Total income’ and Section 4(2) provides that tax shall be deducted from income chargeable to tax.

Section 5 of the Income Tax Act, states that:

“(1)   ……

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which

(a) is received  or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.”

Whether commission income of the non-resident agents will come within the meaning of- received, deemed to be received, arises/accrues, deemed to arise/accrue in India:

1.    Income received in India: the non-resident agents do not receive the commission  in India, so their income do not fall under this category.

2.    Income deemed to be received in India:  Section 7 of the Income Tax Act lists the income which are deemed to be received in India and this does not include commission income

3.    Income accrues or arises in India: the non-resident agents are situated outside India and carry on their business activity outside India and market for customers abroad.  There is no business operation or rendering of marketing related services for the Indian company in India by the non-resident agents. the commission  income therefore, does not accrue or arise in India

4.    Income deemed to accrue or arise in India:  the provisions of Sec 9(1)(i)/9(1)(vi)/9(1)(vii) provides for certain deeming fiction wherein certain specified income or payments are deemed to accrue or arise in India.

Now, Section 9(1)(i) states that

“ Section 9(1) The following incomes shall be deemed to accrue or arise in

            India –

(i)            all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through …….

[Explanation 1].—For the purposes of this clause—

(a)   in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ;

.....

.....

…..”

a)    The concept of “business connection” was dealt with in the landmark case of CIT vs R.D.Aggarwal & Co. & ANR. (1965 56 ITR 20 SC) where the Apex Court held that a business connection “””involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories.”””. Given the above definition, there can be a case made out by the tax authorities that there does exist a business connection between the Indian company and the non-resident agent.

b)    However, it is clear from reading of Explanation 1 to Section 9(1)(i) that the income of the business to accrue or arise in such a scenario is only such part that can reasonably be attributed to operations carried out in India .

c)    Since the non-resident agents do not have a PE in India, no part of the commission income of the agents can be said to accrue or arise in India.

Section 9(1)(vi): Royalty: Our view is that commission payments cannot be construed as royalty payments going by the definition of ‘royalty’ under the I.T. Act  as given in Explanation 2 of Section 9(i)(vi)

Section 9(i)(vii): Fees for technical services: From a reading of the Agreements entered into with the foreign agents by the Indian company, it would not be possible to construe by any possible means that mere order procurement, sales promotion and no right to conclude contracts by the agents will be a managerial, technical or consultancy service.  Hence, in our view, commission payments to non-resident agents cannot be as regarded ‘fees for technical services’ as defined in Explanation 2 of Section 9(vii), as the commission payment is not for the rendering of any managerial, technical or consultancy services

Another aspect to be considered with respect to Royalty & Fees for technical services is that normally the payment in the nature of Royalty or fees for technical services, made to a non resident is not taxable in India except for the operation of these deeming provisions. However under Clause (b) of these two provisions, Royalty or fees for technical services would not accrue in India if it is for the purpose of making or earning any income from any source outside India. A stand can thus be taken that as the fees are paid to non-residents for the purpose of procuring export orders outside India, it is for the purpose of earning from a source outside India. This stand has been upheld by the Tribunals in CIT vs. KKK West Germany (262 ITR 513 Mad.), Titan Industries vs. ITO (11 SOT 206 Bang.) and Lufthansa Cargo India (P) Ltd. Vs. DCIT (91 ITD 133 Del.). Therefore the fact is even if the commission is considered as Royalty or fees for technical Services, it does not accrue in India.

Case laws: There are a number of decisions about the payment of commission to foreign agents which uphold the non-taxability of such payments under the Indian Income Tax Act, 1961:

1.    CIT v Toshoku Ltd (125 ITR 525, SC) the Hon’ble Supreme Court held that when a non-resident, with no operation of business in India,  rendered services outside India to an Indian concern , then provisions of Section 9 of the I.T Act 1961 are  not attracted.

2.    CIT vs. Eon Technology P. Ltd. (ITA No. 1167 dated 8th November 2011, Delhi HC) wherein the Delhi High Court held that Indian taxpayer is not liable to deduct tax under Section 195 of the Act from commission and other related charges payable to non-resident who has rendered services outside India

3.    CIT vs. Sheraton International Inc ((2009) 313 ITR 267) where the Delhi High Court has reversed the order of Tribunal by holding that the main service rendered by the U.S Company to Indian company was advertisement, publicity and sales promotion and these would neither fall under the category of ‘Royalty’ nor ‘Fees for Technical Service’

4.    CIT vs Indopel Garments (P) Ltd. Vs DCIT (2001 72 TTJ Mad 702) where the ITAT Chennai held that no disallowance under s. 40(a)(i) could be made for commission payment, without deducting tax, to foreign concern without acting as a selling agent of the assessee for canvassing orders outside India as income will be deemed to accrue or arise in India only if any part of the income is reasonably attributable to the operations carried out in India and if no operations are carried out in India, there would be no income deemed to accrue or arise in India and no tax was to be deducted under s. 195 out of remittances made to foreign concern.

5.    Spahi Projects (P) Ltd., IN RE (315 ITR 374 AAR) where the AAR held that commission for services rendered in connection with arranging sales abroad (in South Africa) cannot be brought within the net of income-tax in India as there was no fixed place of business in India for the South African entity nor does the SA entity enter into any contracts in India.

6.    Ind Telesoft P. Ltd, IN RE (543 of 2001) where the AAR held that for payment of commission thereon to non-resident companies for securing business outside India there is no liability to deduct tax at source under the Indian Income Tax 1961

7.    DCIT vs. Ardeshi B. Cursetjee & Sons Ltd (2008 115 TTJ Mumbai 916) where the ITAT Mumbai held that commission payment made to non-resident for services rendered outside India not being chargeable to tax in India could not be disallowed under Section 40(a)(i)

8.    JCIT vs. George Williamson (Assam) Ltd. (2009 116 ITD 328) where in the ITAT Guwahati Bench held that with respect to payment of selling commission, brokerage and other related charges to non-resident agents in respect of sale of tea outside India, no income had accrued or arisen in India either under Section 5(2) or under Section 9 and therefore no tax was deductible under Section 195.

9.    DCIT vs. Sanjiv Gupta (2011 135 TTJ Lucknow 641) where the ITAT Lucknow had held that disallowance under Section 40(a)(i) for the A.Y 2007-08 on the commission payments made to non-residents was not called for as the withdrawal of Circulars 23 of 1969 and 786 of 2000 by Circular 7 of 2009 dated 22-10-2009 was only operative from the date of issue of Circular 7 and did not have retrospective effect

10.  TVS Motor Company vs. ACIT (ITA Nos.697 &757/Mds/2009) where the ITAT Chennai in an order dated 22^nd December 2010, amongst other issues, has affirmed that export commission payments made to non-resident agents will not be liable to tax deduction at source and disallowance u/s 40(a)(i) is to be deleted

In conclusion, it is clear from the reading of the provisions of Section 9 as well as a number of case laws that none of the Section 9 tests will succeed (specifically, Section 9(1)(i), 9(1)(vi) and 9(1)(vii)) and therefore the income of foreign agents from commission payments made by the Indian company is not deemed to accrue or arise in India and hence is not taxable in India under the Indian Income Tax Act, 1961

Proposition #2: Whether commission paid to the foreign agents will be income taxable in India under the provisions of Double Tax Avoidance Agreements (DTAAs) India has with various countries?

·         Section 90 of the Indian Income Tax Act provides that if a non-resident taxpayer is a tax resident of a foreign country with which India has a Double Taxation Avoidance Agreement (DTAA), then such non-resident taxpayer can apply either the provisions of the Income Tax Act or the provisions of the applicable tax treat, whichever is more beneficial to it.

·         Let us take the India-UK DTAA for example; let us assume one of the payments Is made to a UK commission agent (Note that many other treaties including the USA have similar FTS clauses like UK; if not always the Act may be relied upon as being more beneficial).

·         Now coming to the India-UK DTAA, the only contention of the Department can be to construe the payments as Fees for Technical Services (FTS) which is covered by Article 13(4) which reads:

“””(4) For the purposes of paragraph (2) of this Article, and subject to paragraph (5), of this Article, the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provisions of services of technical or other personnel) which:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph (3)(a) of this Article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph (3)(b) of this Article is received; or

(c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design

…..”

It is seen that the DTAA adopts the more narrow definition of fees for technical services given that it talks about only technical or consultancy (and not managerial) services made available to the recipient of said service.

The concept of “make available” is discussed in detail in the India-USA DTAA and its annexed Memorandum of Understanding (MOU). The India-UK and India-USA DTAA have similar wording when it comes to Fees for Technical Services (called “Fees for Included Services” in the USA Treaty) and hence the India-USA can be looked at as a source for understanding and derived import from. The MOU to the India-USA DTAA treaty has this to say about its “make available” clause:

“””

Paragraph 4(b)

Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.) This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service.

Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se he considered to make the technology available. Typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described in paragraph 4(b), include:

1. engineering services (including the subcategories of bioengineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering);

2. architectural services; and

3. computer software development.

Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following areas:

1. bio-technical services;

2. food processing;

3. environmental and ecological services;

4. communication through satellite or otherwise;

5. energy conservation;

6. exploration or exploitation of mineral oil or natural gas;

7. geological surveys;

8. scientific services; and

9. technical training.“””

The key takeaway from the reading of the MOU is that the service recipient must acquire the service he/she paid for as well as the knowhow & technical skill which will enable the service recipient to independently perform the service thenceforth.

One view could be that the said FTS clause is intended for specific knowledge/knowhow transfer and merely procuring orders and sales promotion will not result in any such specific knowledge transfer as envisaged under the FTS clause and hence the payments should be merely treated as business profits of the agent

·         Furthermore, the Courts have indeed decided previously on a number of ‘make available’ cases upholding (correctly) the principles outlined in the MOU and discussed above

o   CIT vs. Eon Technologies Ltd. [TS-661-HC-2011 (Del)]

o   Raymond Limited v DCIT [2003] 86 ITD 791 (Mum)

o   Diamond Services International Ltd vs UOI [2007] 304 ITR 201 (Mumbai High Court)

o   Mahindra & Mahindra vs DCIT [2009] 313 ITR 263 (AT) (Mum) (SB)

o   DDIT vs Scientific Atlanta Inc 2009-TIOL-585-ITAT-MUM

o   InterTek Testing Services India (Pvt) Ltd [2008] 307 ITR 418 (AAR)

o   Anapharm Inc [2008] 305 ITR 394 [AAR]

o   CESC Ltd. vs DCIT [2003] 80 TTJ 806 (Kol)

o   National Organic Chemical Industries Ltd vs DCIT [2005] 96 TTJ 765 (Mum)

o   NQA Quality System Ltd v DCIT [2004] 92 TTJ 946 (Del)

o   Mckinsey A Co. Inc. (Philippines) v Assistant Director of Income-tax
(International Taxation) 284 ITR (AT) 227 (Mum.)

o   ITO v M/s. Cepha Imaging P. Ltd.  (ITAT Bangalore) [2009-TIOL-558-ITAT-BANG]

o   ACIT vs. Modern Insulator Ltd. (2011 56 DTR 362 Trib.)

·         Therefore, in our view, such payments would NOT be fees for technical services under the India-UK Treaty but would be the business profits in the hands of the recipient (foreign agents) and in the absence of their business presence (i.e., permanent establishment) in India such payments would not be taxable in India under Article 5 (Permanent Establishment) read with Article 7 (Business Profits) of the India-UK DTAA.

Now, given that we have conclusively shown, via both Propositions above, that the payments made to the agents are not taxable in India under the Indian Income Tax Act and/or the DTAA, it is now settled law by the decisions of the Delhi High Court in Van Oord and the Hon’ble Supreme Court in G.E.Technology Center vs. CIT (327 ITR 256) wherein it has been held that that if there is no income taxable in India there is no TDS under the Income Tax Act, 1961.

Impact of CBDT circular No. 7 of 2009:

Let us now analyze the impact of the recent CBDT circular No. 7 of 2009 (which withdrew the earlier CBDT circulars (#23 of 1969, #163 of 1975, #786 of 2000)).

•       CBDT circulars  - a short overview of their powers

•       Section 119 of the I.T.Act empowers CBDT to issue orders, instructions and directions to subordinate authorities.

•       CBDT issues circulars which are binding effect on tax authorities so long as they are not in conflict with the provisions of the Act or interpretation provided by the Supreme Court.

•       Withdrawal does not necessarily mean that a non–resident automatically is taxable in India in the situations described in the circular. The taxability will be evaluated independent of the provisions of the circular.

•       In short, circulars issued under section 119 are in the nature of instructions/ guidelines and do not constitute law.

•       Thus the earlier CBDT circulars (23 of 1969, 163 of 1975, 786 of 2000) were useful in merely clarifying the issues related to non-resident payments and reinforced the existing provisions, nothing more nothing less.

•       This view has been upheld by various decisions of the Tribunal including the Lucknow Tribunal in DCIT vs. Sanjiv Gupta (2011 135 TTJ Lucknow 641). We also point out that in DDIT vs. M/s. Siemens Aktiengesellschaft (ITA No.6133/Mum/2002 & 7589/Mum/2003 said Circulars (23 of 1969, 163 of 1975 and 786 of 2000) have been held to apply only prospectively in any case.

Thus even after the recent CBDT circular (which purports to withdraw the earlier circulars) should not change the Indian company’s position that tax needed not be deducted at source for payments made to its non-resident agents.

Department’s Position:

Notwithstanding all the points discussed above, the Department seems to have recently taken a stand, especially with the withdrawal of the above mentioned CBDT Circular #23 of 1969, to tax all remittances to non-residents. The Department typically disallows the entire expenditure u/s 40(a)(i) of the Act and the assessee company has to prefer appeals to establish their case. In other words due to 40(a)(i) disallowance the assessee ends up paying 30% (i.e., normal company tax rate) and litigating the case rather than paying 10% (or whatever typically lower rate the applicable DTAA prescribes) via withholding taxes.

Thus, it would be prudent for administrative purposes and to avoid litigation, for the Indian company to either gross-up the payment to the foreign agents (OR) withhold the tax on its payments to foreign agents (and have the foreign agents either claim a corresponding tax credit in their country of residence or have them file a return in India to claim refund)

Furthermore for completeness sake we would like to discuss two related issues:

-          In a very recent decision of the AAR in SKF Boilers & Driers Pvt. Ltd. (AAR No.983-984 of 2010) dated 22^nd February 2012 though the AAR did not go into the merits of the applicable DTAA it held that under the Act, after the aforesaid Circular withdrawal, tax has to be deducted on commission agent payments for supply of boilers to Pakistan by an Indian company. We believe this ruling underscores the current general trend that payments made to foreign entities are to be subject to tax withholding whatever be the circumstances.

-          We would also like to bring to your attention that the Department is now taking a view after the recent introduction of controversial S.206AA of the Act, that if that the non-resident does not have a PAN number, tax is to be deducted at a 20% flat-rate. This provision though needs to be legally contested as the total tax liability of the Non-Resident is only 10% under DTAA and hence the withholding taxes cannot be more than the total lax liability under the DTAA.  In any case, it is suggested that non-resident obtain a PAN in India.

Overall conclusion:

Our considered view is that:

1. Commission payments to non-resident agents for export by Indian firm does not represent income which is chargeable to tax under section 195 of the I.T Act 1961 when analyzed under the framework of provisions of the Indian I.T Act or under most Treaties. Hence, in our view, tax deduction at source is not required for said commission payments to non-resident agents for export of cotton by Indian company.
2. The CBDT circular 7 of 2009, which withdraws earlier CBDT circular(s) specific to the case, does not have an effect on the locus standi that the tax deduction at source is not required for commission payments to non-resident agents by the Indian company. In short, the position has not changed and status quo of Indian company payments can be maintained with the new circular
3. However, as a matter of abundant caution and in order to avoid litigation, it would be advisable for the Indian company to either gross-up the tax OR deduct the tax (and have the non-resident agent either claim tax credit or file its return in India to claim refund)

Reopening under IT Act: Effect of Explanation 3 to Section 147

Reassessment u/S. 147 - Effect of Explanation 3 to Section 147

by Ms.B.Mala

Associate, Subbaraya Aiyar Padmanabhan & Ramamani (SAPR) Advocates

Judicial pronouncements

The Punjab & Haryana High Court in Vipan Khanna vs, CIT (255 ITR 220), held that the jurisdiction of the ITO in proceedings under s. 147 is confined only to such income which has escaped tax or has been underassessed and does not extend to revising, reopening or reconsidering the whole assessment. In the present case, the assessee was required to furnish information on issues in respect of which there is no allegation of any escapement or underassessment of income either in the reasons recorded or during the course of proceedings under s. 147, and this was tantamount to reviewing the whole assessment. There is no gainsaying the fact that in proceedings under s. 147 it is only the escaped income which has to be assessed or reassessed. When proceedings under s. 147 are initiated, the proceedings are open only qua items of underassessment. The finality of assessment proceedings on other issues remains undisturbed. It makes no difference whether the assessment proceedings have become final on account of framing of an assessment under s. 143(3) or on account of non-issue of a notice under s. 143(2) within the stipulated period.

The High Court of Kerala in Travancore Cements Ltd.. vs. Asst CIT (305 ITR 170) held that AO gets jurisdiction under s. 148 to assess or reassess the income which has escaped assessment only after sub-s. (2) of s. 148 is complied with. If two items of income are unconnected and totally alien the assessing authority has to follow sub-s. (2) of s. 148 with regard to the other item of escaped income which comes to his knowledge during the course of the proceedings. The Expression "subject to the provisions of ss. 148 to 153" in s. 147 lent support to this view. The Assessing Officer could not make any fishing enquiry on concluded matters unconnected with the issue on the basis of which proceeding under s. 147 was initiated since the date of completing the regular assessment under s. 143(3) had already expired items unconnected with escapement for which notice is given.

Introduction of Explanation 3

The Government did not wait too long to react to these decisions, and responded by introducing an Explanation to Section 147 by Finance (No. 2)Act 2009 with retrospective effect from 1-4-1989

The Explanation reads as under

“Explanation 3.—For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.”.

The reasons for the insertion of Explanation 3 are to be found in the Memorandum Explaining the Provisions of Finance (No. 2) Bill of 2009. The Memorandum treats the amendment to be clarificatory and contains the following explanation:

"Some Courts have held that the AO has to restrict the reassessment proceedings only to issues in respect of which the reasons have been recorded for reopening the assessment. He is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent.

With a view to further clarifying the legislative intent, it is proposed to insert an Explanation in s 147 to provide that the AO may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub-s. (2) of s148."

The Parliament, when it enacted the Expln. (3) to s147 by the Finance (No. 2) Act, 2009 clearly had before it both the lines of precedent on the subject. The precedent dealt with two separate questions.

1) When it effected the amendment by bringing in Expln. 3 to s 147, Parliament stepped in to correct what it regarded as an interpretational error in the view which was taken by certain Courts that the AO has to restrict the assessment or reassessment proceedings only to the issues in respect of which reasons were recorded for reopening the assessment. The corrective exercise in the form of Expln. 3 consequently provides that the AO may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue were not included in the notice under s148(2). Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under s. 148 setting out the reasons for the belief that income had escaped assessment. The decisions of the Kerala High Court in Travancore Cements Ltd.'s case (305 ITR 170 ) and of the Punjab & Haryana High Court in Vipan Khanna's case (255 ITR 220) would, therefore, no longer hold good.

2)   However, insofar as the second line of authority is concerned, which is reflected in the judgment of the Rajasthan High Court in Shri Ram Singh's case (306 ITR 343), the Expln. 3 as inserted by Parliament would not take away the basis of that decision. It is only when, in proceedings under s. 147 the AO, assesses or reassesses any income chargeable to tax, which has escaped assessment for any assessment year, with respect to which he had 'reason to believe' to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under s. 147. The AO does not have jurisdiction to proceed with the reassessment, once he finds that the grounds mentioned in the notice under s 148 were incorrect or non-existent. The view which was taken by the Rajasthan High Court was also taken in another judgment of the Punjab & Haryana High Court in CIT vs. Atlas Cycle Industries (180 ITR 319).

The Explanation 3 cannot override the necessity of fulfilling the conditions set out in the substantive part of s147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. S 147 has this effect that the AO has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under s 148, he accepts the contention of the assessee and holds that the income which he has initially believed had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him to independently assess some other income. If he intends to do so, a fresh notice under s 148 would be necessary.

This view has been confirmed by the Bombay High Court in CIT v Jet Airways (I) Ltd. (331 ITR 236)

Conclusion

The effect of s. 147 as it now stands after the amendment of 2009 can be summarised as follows : (i) The AO must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year; (ii) Upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the AO has to serve on the assessee a notice under sub-s. (1) of s. 148; (iii) The AO may assess or reassess such income, which he has reason to believe, has escaped assessment and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section; and (iv) though the notice under s. 148(2) does not include a particular issue with respect to which income has escaped assessment, he may nonetheless, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section

The insertion of Explanation 3 gives the assessing Officer the jurisdiction to assess or reassess the income which escaped assessment and which was the basis of the issue of notice, and if he does so, he can also assess or reassess any other income which has escaped assessment which, comes to his notice during the course of the proceedings. However, if after issuing a notice under s 148, he accepts the contention of the assessee that the income which he had believed had escaped assessment, had as a matter of fact not escaped assessment, it is not open to him to independently assess some other income.

The reassessment would, in such a case not be valid.