Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 15
CASE NO.:
Appeal (civil) 32 of 2008
PETITIONER:
Commissioner of Income Central II
RESPONDENT:
Suresh N. Gupta
DATE OF JUDGMENT: 07/01/2008
BENCH:
S.H. Kapadia & B. Sudershan Reddy
JUDGMENT:
J U D G M E N T
(Arising out of S.L.P. (C) No.4617 of 2007)
KAPADIA, J.
Leave granted.
2. Whether the AO had erred in imposing surcharge at 17% on
the tax amount of Rs. 97,456/- under Section 113 of the Income-
tax Act, 1961 (\0231961 Act\024) for the \023block period\024 comprising of
previous years relevant to 10 assessment years, i.e., 1991-92 to
2000-01, including the period from 1.4.2000 to 17.1.2001.
FACTS
2. On 17.1.2001 a search under Section 132 of the 1961 Act
was carried out at the premises of the respondent-assessee, an
individual. The search unearthed an unexplained investment of
Rs. 65,000/- being the value of household valuables and
Rs. 97,427/- on account of unexplained marriage expenses
(undisclosed income). Accordingly, in the block assessment, the
A.O. determined the assessee\022s undisclosed income at Rs.
1,62,427/-. He computed tax thereon at 60% in terms of Section
113 of the 1961 Act amounting to Rs. 97,456/- on which
surcharge was levied at 17%, i.e., Rs.16,504/-. The levy of
surcharge was challenged by the assessee in appeal before the
CIT(A). The said appeal was allowed. The decision of CIT(A) has
been confirmed by the Tribunal and the High Court. Hence, this
civil appeal.
Points for determination:
3. Two points arise for determination: Whether on the facts
and circumstances of this case, the Finance Act, 2001 (\023FA\024 for
short) was applicable to \023block assessment\024 under Chapter XIV-B
in respect of the search carried out on 17.1.2001; secondly,
whether the proviso inserted in Section 113 by the Finance Act,
2002 is clarificatory?
Whether Finance Act, 2001 was applicable to block
assessment under Chapter XIV-B up to 1.06.2002:
4. Chapter XIV-B was inserted by the Finance Act, 1995, w.e.f.
1.7.1995. According to the assessee, the said Chapter is a self-
contained chapter as it lays down a special procedure for
assessment of \023undisclosed income\024 found during search for the
\023block period\024, containing a charging section (158BA), a
computation section (158BB), a procedural section for block
assessment (158BC), limitation provision for completion of block
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 15
assessment (158BE) and the provisions for imposition of interest
and penalty (158BFA).
5. According to the assessee, the scheme of assessment of
\023undisclosed income\024 under Chapter XIV B is different from
scheme of assessment of \023total income\024 of any person in terms of
Section 4(1) of the 1961 Act inasmuch as under Chapter XIV-B
assessment is made of \023undisclosed income\024 as against
assessment of \023total income\024 under Section 4(1) of the Act; that,
assessment under Chapter XIV-B is made for the \021block period\024
as against assessment of income of the \023previous year\024 under
Section 4(1) of the Act; that, under Chapter XIV-B \023undisclosed
income\024 is assessed at 60% in terms of Section 158BA(2) read
with Section 113 as against taxation of normal income at the
rates prescribed in the relevant Finance Act; that, the provisions
of the Finance Act are not found in the block assessment scheme
under Chapter XIV-B up to 1.06.2002 and, therefore, according
to the assessee, Finance Act, 2001 was not applicable to Chapter
XIV-B. According to the assessee, proviso to Section 4(1) of the
1961 Act carves out an exception to the normal rule in Section
4(1) and provides that, where under any provision of the 1961
Act, tax is to be charged in respect of income of a period other
than \023the previous year\024, such tax shall be levied as may be
specifically provided under special provision of the 1961 Act.
According to the assessee, Chapter XIV-B is such special
provision as it concerns assessment of undisclosed income for
the \023block period\024 which is the period other than the previous
year referred to in Section 4(1). Therefore, according to the
assessee, block assessment falls not in Section 4(1) but it falls
under the aforesaid proviso to Section 4(1) of the 1961 Act.
Consequently, it is urged that since there is no reference to the
Finance Act under Chapter XIV-B (Section 158BA), which only
looks at a fixed rate of 60% stipulated under Section 113, it was
not open to the AO to impose surcharge at 17% prior to
1.06.2002.
6. We find no merit in the above arguments. We quote
hereinbelow Article 271 of the Constitution of India and Section 4
of the 1961 Act, which read as follows:
\023271. Surcharge on certain duties and taxes for
purposes of the Union.\027 Notwithstanding anything in
articles 269 and 270, Parliament may at any time
increase any of the duties or taxes referred to in those
articles by a surcharge for purposes of the Union and the
whole proceeds of any such surcharge shall form part of
the Consolidated Fund of India.\024
\023Charge of income-tax.
4.(1) Where any Central Act enacts that income-tax
shall be charged for any assessment year at any rate or
rates, income-tax at that rate or those rates shall be
charged for that year in accordance with, and subject to
the provisions (including provisions for the levy of
additional income-tax) of, this Act in respect of the total
income of the previous year of every person :
Provided that where by virtue of any provision of this
Act income-tax is to be charged in respect of the income
of a period other than the previous year, income-tax
shall be charged accordingly.
(2) In respect of income chargeable under sub-section
(1), income-tax shall be deducted at the source or paid
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 15
in advance, where it is so deductible or payable under
any provision of this Act.\024
7. The power to levy a surcharge on income-tax is traceable to
Article 271 read with Entry 82 of List I of Seventh Schedule to the
Constitution of India. That power is not traceable to Section 4 of
the 1961 Act. Every year the Finance Act is enacted by
Parliament to give effect to the financial proposals of the Central
Government. The rate at which a charge on the total income of
the previous year is imposed under Section 4(1) of 1961 Act is
not laid down in the Income-tax Act and, therefore, the said
section provides that the charge has to be fixed by the Central
Act. It is because of this, that income-tax is levied at different
rates under the Finance Act. It must be borne in mind that the
Income-tax Act deals with tax on income and nothing else.
Therefore, in order that the charge should be a legal charge
under Section 4, it must be a tax on the income of the assessee.
If the charge is the tax on anything else, then it would not be a
valid charge. This is the only limitation upon the power or
authority of Parliament to fix any rate it pleases. So long as the
charge is on \023total income\024 of the previous year, there is no
limitation upon the power or authority of Parliament to fix any
rate it pleases. However, if \023rate\024 is understood to mean the fixing
of the tax irrespective of \023total income\024 and unconnected with
\023total income\024, then, in our view, Parliament would be travelling
outside the ambit of Section 4(1). The Income-tax Act, therefore,
contains an elaborate machinery for ascertaining \023total income\024
of an assessee. If Parliament has power to fix tax at a rate which
has no connection with the \023total income\024, then the machinery
set up under the 1961 Act becomes infructuous. In our view,
Section 4(1) prescribes the subject matter of the tax and the rate
of that tax is prescribed by the Legislature, either under the Act
as in the case of Section 113 or vide the Finance Act. As long as
the charge is on \023total income\024 of the previous year and so long
as the rate relates to the subject matter of the tax, there is
nothing to prevent Parliament from fixing the rate. But the rate
must be applied to the \023total income\024 and the tax that an
assessee has to pay must be at the rate in respect of total income
of the previous year.
8. Having discussed the scope of Article 271 and Section 4 of
the 1961 Act, we have to look at some of the relevant provisions
of Chapter XIV-B. The purpose of this Chapter is to lay down a
special procedure for assessment of surcharge cases with a view
to combat tax evasion and also to expedite and simplify
assessments in search cases. Undisclosed incomes have to be
related in different years in which income was earned under
block assessment. This is because in such cases, the \023block
period\024 is for previous years relevant to 10/6 assessment years
and also the period of the current previous year up to the date of
the search, i.e., from 1.4.2000 to 17.01.2001, in this case. The
essence of this new procedure, therefore, is a separate single
assessment of the \023undisclosed income\024, detected as a result of
search and this separate assessment has to be in addition to the
normal assessment covering the same period. Therefore, a
separate return covering the years of the block period is a pre-
requisite for making block assessment. Under the said procedure,
Explanation is inserted in Section 158 BB, which is computation
section, explaining the method of computation of \023undisclosed
income\024 of the block period.
9. We quote hereinbelow Sections 158B, 158BA, 158BB,
158BC and 158BH, which read as follows:
\023158B. In this Chapter, unless the context otherwise
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 15
requires,
(a) block period means the period comprising previous
years relevant to six assessment years preceding the
previous year in which the search was conducted under
section 132 or any requisition was made under section
132A and also includes the period up to the date of the
commencement of such search or date of such requisition
in the previous year in which the said search
was conducted or requisition was made.
Provided that where the search is initiated or the
requisition is made before the 1st day of June, 2001, the
provisions of this clause shall have effect as if for the
words \023six assessment years\024 the words \023ten assessment
years\024 had been substituted.
(b) \023undisclosed income\024 includes any money, bullion,
jewellery or other valuable article or thing or any income
based on any entry in the books of account or other
documents or transactions, where such money, bullion,
jewellery, valuable article, thing, entry in the books of
account or other document or transaction represents
wholly or partly income or property which has not been
or would not have been disclosed for the purposes of this
Act.
Assessment of undisclosed income as a result of
search.
158BA. (1) Notwithstanding anything contained in any
other provisions of this Act, where after the 30th day of
June, 1995 a search is initiated under section 132 or
books of account, other documents or any assets are
requisitioned under section 132A in the case of any
person, then, the Assessing Officer shall proceed to
assess the undisclosed income in accordance with the
provisions of this Chapter.
(2) The total undisclosed income relating to the block
period shall be charged to tax, at the rate specified in
section 113, as income of the block period irrespective of
the previous year or years to which such income relates
and irrespective of the fact whether regular assessment
for any one or more of the relevant assessment years is
pending or not.
Explanation. For the removal of doubts, it is hereby
declared that-
(a) the assessment made under this Chapter shall be in
addition to the regular assessment in respect of each
previous year included in the block period;
(b) the total undisclosed income relating to the block
period shall not include the income assessed in any
regular assessment as income of such block period;
(c) the income assessed in this Chapter shall not be
included in the regular assessment of any previous year
included in the block period.
(3) Where the assessee proves to the satisfaction of the
Assessing Officer that any part of income referred to in
sub-section (1) relates to an assessment year for which
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 15
the previous year has not ended or the date of filing the
return of income under sub-section (1) of section 139 for
any previous year has not expired, and such income or
the transactions relating to such income are recorded on
or before the date of the search or requisition in the books
of account or other documents maintained in the normal
course relating to such previous years, the said income
shall not be included in the block period.
Computation of undisclosed income of the block
period.
158BB. (1) The undisclosed income of the block period
shall be the aggregate of the total income of the previous
years falling within the block period computed, in
accordance with the provisions of Chapter IV, on the
basis of evidence found as a result of search or
requisition of books of account or documents and such
other materials or information as are available with the
Assessing Officer, as reduced by the aggregate of the
total income, or as the case may be, as increased by the
aggregate of the losses of such previous years,
determined,-
(a) where assessments under section 143 or section 144
or section 147 have been concluded, on the basis of such
assessments;
(b) where returns of income have been filed under section
139 or section 147 but assessments have not been made
till the date of search or requisition, on the basis of the
income disclosed in such returns;
(c) where the due date for filing a return of income has
expired but no return of income has been filed, as nil;
(d) where the previous year has not ended or the date of
filing the return of income under sub-section (1) of
section 139 has not expired, on the basis of entries
relating to such income or transactions as recorded in the
books of account and other documents maintained in the
normal course on or before the date of the search or
requisition relating to such previous years;
(e) where any order of settlement has been made under
sub-section (4) of section 245D, on the basis of such
order;
(f) where an assessment of undisclosed income had been
made earlier under clause (c) of section 158BC, on the
basis of such assessment.
Explanation.- For the purposes of determination of
undisclosed income,
(a) the total income or loss of each previous year shall,
for the purpose of aggregation, be taken as the total
income or loss computed in accordance with the
provisions of Chapter IV without giving effect to set off
of brought forward losses under Chapter VI or
unabsorbed depreciation under sub-section (2) of section
32;
(b) of a firm, returned income and total income assessed
for each of the previous years falling within the block
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 15
period shall be the income determined before allowing
deduction of salary, interest, commission, bonus or
remuneration by whatever name called to any partner not
being a working partner:
Provided that undisclosed income of the firm so
determined shall not be chargeable to tax in the hands of
the partners, whether on allocation or on account of
enhancement;
(c) assessment under section 143 includes determination
of income under sub-section (1) or sub-section (1B) of
section 143.
(2) In computing the undisclosed income of the block
period, the provisions of sections 68, 69, 69A, 69B and
69C shall, so far as may be, apply and references to
financial year in those sections shall be construed as
references to the relevant previous year falling in the
block period including the previous year ending with the
date of search or of the requisition.
(3) The burden of proving to the satisfaction of the
Assessing Officer that any undisclosed income had
already been disclosed in any return of income filed by
the assessee before the commencement of search or of
the requisition, as the case may be, shall be on the
assessee.
(4) For the purpose of assessment under this Chapter,
losses brought forward from the previous year under
Chapter VI or unabsorbed depreciation under sub-section
(2) of section 32 shall not be set off against the
undisclosed income determined in the block assessment
under this Chapter, but may be carried forward for being
set off in the regular assessments.
Procedure for block assessment.
158BC. Where any search has been conducted under
section 132 or books of account, other documents or
assets are requisitioned under section 132A, in the case
of any person, then,
(a) the Assessing Officer shall-
(i) in respect of search initiated or books of account or
other documents or any assets requisitioned after the 30th
day of June, 1995, but before the 1st day of January,
1997, serve a notice to such person requiring him to
furnish within such time not being less than fifteen days;
(ii) in respect of search initiated or books of account or
other documents or any assets requisitioned on or after
the 1st day of January, 1997, serve a notice to such
person requiring him to furnish within such time not
being less than fifteen days but not more than forty-five
days,
as may be specified in the notice a return in the
prescribed form and verified in the same manner as a
return under clause (i) of sub-section (1) of section 142,
setting forth his total income including the undisclosed
income for the block period :
Provided that no notice under section 148 is required to
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 15
be issued for the purpose of proceeding under this
Chapter :
Provided further that a person who has furnished a return
under this clause shall not be entitled to file a revised
return;
(b) the Assessing Officer shall proceed to determine
the undisclosed income of the block period in the manner
laid down in section 158BB and the provisions of section
142, sub-sections (2) and (3) of section 143 and section
144 shall, so far as may be, apply;
(c) the Assessing Officer, on determination of the
undisclosed income of the block period in accordance
with this Chapter, shall pass an order of assessment and
determine the tax payable by him on the basis of such
assessment;
(d) the assets seized under section 132 or requisitioned
under section 132A shall be retained to the extent
necessary and the provisions of section 132B shall apply
subject to such modifications as may be necessary and
the references to regular assessment or reassessment in
section 132B shall be construed as references to block
assessment.
xxx
Application of other provisions of this Act.
158BH. Save as otherwise provided in this Chapter, all
other provisions of this Act shall apply to assessment
made under this Chapter.\024
10. We also quote hereinbelow Section 113 with and without the
proviso inserted vide Finance Act, 2002 w.e.f. 1.6.2002, which
read as follows:
\023Tax in the case of block assessment of search cases.
113. The total undisclosed income of the block period,
determined under section 158BC, shall be chargeable to
tax at the rate of sixty per cent.
Proviso inserted vide Finance Act, 2002 w.e.f. 1.6.2002
reads as follows:
Provided that the tax chargeable under this section shall
be increased by a surcharge, if any, levied by any Central
Act and applicable in the assessment year relevant to the
previous year in which the search is initiated under
section 132 or the requisition is made under section
132A.\024
11. Reading of the relevant provisions of Chapter XIV-B one
finds that Section 158 BA deals with assessment of \023undisclosed
income\024 as a result of search whereas computation of such
income falls under Section 158BB. The procedure for block
assessment falls in Section 158 BC. Section 158 BA begins with
non obstante clause. It states that nothing contained in any other
provisions of the 1961 Act, where search is initiated after
30.6.1995 under Section 132 or in cases of requisition under
Section 132A after the cut off date, the AO shall proceed to
assess the undisclosed income in accordance with the provisions
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 15
of Chapter XIV-B.
12. Relying on Section 158BA(1) assessee claims that Chapter
XIV-B is a special procedure for assessment of cases; that it
constitutes a self contained mechanism and, hence, it falls
outside the scope of Section 4(1) of the 1961 Act, particularly
when Section 4(1) imposes a charge on the \023total income\024 and not
on the \023undisclosed income\024 and, particularly when Section 158
BA(2) is an independent charging section in contrast to Section
4(1) of the 1961 Act, which imposes a charge on the \023total
income\024 of the previous year. According to the assessee, the
charge under Section 158BA(2) is on the \023block period\024 and not
on the total income of the \023previous year\024. Therefore, according to
the assessee, Chapter XIV-B is a self-contained mechanism.
13. As stated above, these arguments advanced on behalf of the
assessee has no merit. Section 158B defines \023block period\024 to
mean the period comprising the previous years relevant to 10/6
assessment years preceding the previous year in which the
search was conducted under Section 132. It also includes the
period up to the date of commencement of such search or date of
requisition. Under Section 4, the subject of charge is the income
of the previous year and not the income of the assessment year.
Thus, tax is levied on the actual income of the previous year.
Each \023previous year\024 is a distinct unit of time for the purposes of
assessment. However, when we come to Section 158BA, we find
that Parliament has taken the block period to mean the period
comprising previous years relevant to 10/6 assessment years
preceding the previous year in which the search is conducted. In
other words, Parliament has in search cases expanded the unit of
time for block assessment purposes from 1 year to 10/6 previous
years. However, it is important to note that the unit of time
remains constant. It is open to Parliament to treat the unit of
time as one year in normal assessment cases and, at the same
time, it is also open to Parliament to treat 10/6 previous years as
a unit of time for block assessment period. The important thing
to be noted is that the block assessment computation in Section
158BB does not exclude the concept of \023previous years\024 as well
as the concept of \023total income\024. Those concepts are retained.
Further, we need to examine the scheme of Chapter XIV-B. The
said Chapter has three parts consisting of assessment,
computation and procedure for making block assessment.
Assessment of undisclosed income as a result of search stands
covered by Section 158BA whereas computation of undisclosed
income of the block period falls in Section 158BB and procedure
for block assessment falls in Section 158BC. In this case, we are
mainly concerned with computation of undisclosed income under
Section 158BB(1). This section incorporates principle of
aggregation of total income of the previous years falling within
the block period computed in accordance with the provisions of
Chapter IV. The important thing to be noted is that the
computation has to be done even under Section 158BB of
\023undisclosed income\024 in the manner provided for in Chapter IV of
the 1961 Act which deals with \023computation of total income\024.
Chapter IV deals with computation in cases of normal
assessment. Chapter IV is not ruled out by provisions of Chapter
XIV-B. In this connection, we may also take note of Section
158BH which deals with application of other provisions of the
1961 Act to the block assessment procedure in Chapter XIV-B.
Section 158 BH makes it clear that save as otherwise provided in
Chapter XIV-B, all other provisions of the 1961 Act shall equally
apply to block assessment. Therefore, one has to read the non
obstante clause in Section 158BA in juxtaposition with Section
158BH. Keeping in mind the provisions of Section 158BB and
keeping in mind the retention of the concepts of \023previous years\024
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 15
and \023total income\024 in Chapter XIV-B, we are of the view that
Chapter IV is not ruled out from block assessment procedure
and, therefore, one has to read Section 158BB with Section 4 of
the 1961 Act.
14. There is one more fact which needs to be noted. A bare
reading of the provisions of Section 158BA and Section 158BB
indicates that the searches conducted by the Department are an
important means of unearthing black money. However,
undisclosed income has to be related to different years in which
the income was earned. The essence of the block assessment
procedure, therefore, is a separate single assessment of
undisclosed income, detected as a result of a search. This
separate assessment is in addition to normal or regular
assessment covering the same period. A separate return is a pre-
requisite for making a \023block assessment\024. However, in the
matter of computation, the principle of aggregation of total
incomes, is inbuilt into Section 158BB. We have to subtract one
aggregate from the other. Further, while applying the principle of
aggregation of the total income, computation is required to be
done in accordance with the provisions of Chapter IV. Therefore,
in our view, Section 4 has to be read with Section 158BB. That
section is not ruled out by Section 158BB. If Section 4 has to be
read with Section 158BB for computing undisclosed income then
the provisions of the relevant Finance Act have got to be read into
the block assessment scheme under Chapter XIV-B, even prior to
1.6.2002.
15. Under Section 158BB, there is the theory of \023block period\024.
It is based on \023the principle of aggregation of total incomes\024.
Under that section, the first aggregate to be computed is the total
income of the previous years falling within the block period
including returned/assessed incomes as per regular returns and
regular assessments. The second aggregate to be computed is the
aggregate of the total incomes/losses of the previous years
determined in terms of clauses (a) to (f) of Section 158BB(1). The
difference between first aggregate and the second aggregate is
described in Section 158B(b) as the \023undisclosed income\024 to be
taxed under the provisions of Section 113 of the 1961 Act at the
special rates prescribed. Further, clause (a) of Explanation to
Section 158BB clarifies that the total income/loss of each
previous years shall, for the purpose of aggregation, be taken as
the total income or loss computed in accordance with the
provisions of Chapter IV without giving effect to set off of brought
forward losses under Chapter VI or unabsorbed depreciation
under Section 32(2) of the 1961 Act. Hence, one has to read
Section 158BB with Section 4 of the 1961 Act. There is no
conflict between the computation machinery under Chapter XIV-
B and normal computation machinery under Chapter IV. This is
the importance behind enactment of Section 158BH which inter
alia states that if there is no conflict between the provisions of
Chapter XIV-B and any other provisions of the 1961 Act, then the
later will operate. There is a fallacy in the argument of the
assessee that the concepts of \023total income\024 and \023previous year\024
are given go by in Chapter XIV-B. The above analysis of Section
158BB indicates that both the concepts are retained in Chapter
XIV-B. The only difference is that Section 4 of the 1961 Act
charges the total income of a person of one single previous year
(unit of assessment) whereas Section 158BA(2) levies a charge on
the income of a person for the block period of previous years
relevant to 10/6 assessment years. In our view, the word \023block
period\024, as defined in Section 158B(a), comprises previous years
relevant to 10/6 assessment years as one unit of time for the
purposes of assessment. As stated above, the object behind
enactment of Chapter XIV-B is to assess and compute
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 15
\023undisclosed incomes\024 relatable to different accounting years in
which the income is earned. Therefore, if the block period
comprising of previous years relevant to 10/6 assessment years
is treated by Parliament as one unit of time for assessment
purposes, one has to correlate \023undisclosed income\024 to each of
the years in which income was earned by the assessee. It is true
that under Chapter XIV-B, computation of regular income and
computation of undisclosed income has to be worked out
separately. However, to arrive at the figure of Undisclosed
Income, the said parallel calculations have to converge in order to
work out the difference between the first and the second
aggregates of the total incomes/losses of the previous year, in
which undisclosed income is taxed under Section 113. Therefore,
in our view, the concept of a charge on the \023total income\024 of the
previous year under the 1961 Act is retained even under Chapter
XIV-B. Therefore, Section 158BB which deals with computation
of undisclosed income of the block period has to be read with
computation of total income under Chapter IV of the 1961 Act.
16. Once Section 158BB is required to be read with Section 4 of
the 1961 Act, then the relevant FA of the concerned year would
automatically stands attracted to the computation under Chapter
XIV-B. Section 158BB looks at Section 113. That section fixes
the rate of tax at 60%. In the present case, e.g., the AO assigned
the value of Rs. 2,70,000/- to Unaccounted Investment in
household valuables. That amount was distributed between three
brothers including the assessee after deducting Rs. 75,000/- and
that is how a sum of Rs. 65,000/- has been added as undisclosed
income for assessment year 2001-02 in the hands of the
assessee.
17. In the case of Govind Saran Ganga Saran v.
Commissioner of Sales Tax and Ors. [(1985) 155 ITR 144 (SC)]
this Court held that, there are four components of tax, namely,
character of the imposition, person on whom the incidence of tax
falls, the rate at which tax is imposed and lastly, the value to
which the rate is applied for computing tax liability.
Applicability of the Finance Act, 2001:
18. Applying the law as discussed hereinabove, we find that in
the present case, the AO has imposed surcharge of 17% on the
tax calculated at 60% on the total undisclosed income of
Rs. 1,62,427/-, which tax comes to Rs.97456/-. The AO imposed
surcharge of 17% on Rs.97,456/- amounting to Rs. 16,504/- by
placing reliance on the FA of 2001.
19. We quote hereinbelow Section 2(1) r/w Para A of Part I of
the First Schedule, which read as follows:
\023Income-tax.
2.(1) Subject to the provisions of sub-sections (2)
and (3), for the assessment year commencing on the
1st day of April, 2001, income-tax shall be charged
at the rates specified in Part I of the First Schedule
and such tax as reduced by the rebate of income-
tax calculated under Chapter VIII-A of the Income-
tax Act, 1961, (43 of 1961) (hereinafter referred to
as the Income-tax Act) shall be increased, -
(a) in cases to which Paragraphs A, B, C and D of
that Part apply, by a surcharge for purposes of
the Union; and
(b) in the cases to which Paragraph E of that Part
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 15
applies, by a surcharge, calculated in each case
in the manner provided therein.
(2) ...
(3) In cases to which the provisions of Chapter XII
or Chapter XII-A or sub-section (1A) of section 161
or section 164 or section 164A or section 167B of
the Income-tax Act apply, the tax chargeable shall
be determined as provided in that Chapter or that
section and with reference to the rates imposed by
sub-section (1) or the rates as specified in that
Chapter or section, as the case may be:
Provided that the amount of income-tax computed
in accordance with the provisions of sections 112
and 113 shall be increased by a surcharge for
purposes of the Union or surcharge as provided in
Paragraph A, B, C, D or E, as the case may be, of
Part I of the First Schedule:
Provided further that in respect of any income
chargeable to tax under sections 115A, 115AB,
115AC, 115ACA, 115AD, 115B, 115BB, 115BBA,
115E and 115JB of the Income-tax Act, the amount
of income-tax computed under this sub-section
shall be increased, -
(a) by a surcharge for purposes of the Union,
calculated, -
(i) in the case of a co-operative society, a first
and a local ;authority, at the rate of twelve per
cent of such income-tax;
(ii) in the case of a person other than a
company, a co-operative society, a firm and a
local authority, -
(A) at the rate of twelve per cent of such
income-tax where the total income
exceeds sixty thousand rupees but does
not exceed one lakh fifty thousand
rupees; or
(B) at the rate of seventeen per cent of
such income-tax where the total income
exceeds one lakh fifty thousand rupees;
and
(b) by a surcharge calculated at the rate of thirteen
per cent of such income-tax in the case of a
domestic company.\024
20. Para A of Part I of the First Schedule reads as follows:
\023THE FIRST SCHEDULE
[See section 2]
PART I
INCOME-TAX
Paragraph A
In the case of every individual or Hindu
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 15
undivided family or association of persons or
body of individuals, whether incorporated or
not, or every artificial juridical person referred
to in sub-clause (vii) of clause (31) of section 2
of the Income-tax Act, not being a case to
which any other Paragraph of this Part
applies,-
Rates of income-tax
(1)
Where the total income
does not exceed Rs.
50,000
Nil;
(2)
Where the total income
exceeds Rs. 50,000 but
does not exceed Rs.
60,000
10 per cent of the
amount by which the
total income exceeds Rs.
50,000;
(3)
Where the total income
exceeds Rs. 60,000 but
does not exceed Rs.
1,50,000
Rs. 1,000 plus 20 per
cent of the amount by
which the total income
exceeds Rs. 60,000;
(4)
Where the total income
exceeds Rs. 1,50,000
Rs. 19,000 plus 30 per
cent of the amount by
which the total income
exceeds Rs. 1,50,000.
Surcharge on income-tax
The amount of income-tax computed in accordance
with the preceding provisions of this Paragraph or
in section 112 or section 113 shall,-
(i) in the case of every individual or Hindu
undivided family, or association of
persons or body of individuals having a
total income exceeding sixty thousand
rupees, be reduced by the amount of
rebate of income-tax calculated under
Chapter VIII-A, and the income-tax as so
reduced, be increased by a surcharge for
purposes of the Union calculated-
(A) at the rate of twelve per cent of
such income-tax where the total
income exceeds sixty thousand
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 15
rupees but does not exceed one
lakh fifty thousand rupees; or
(B) at the rate of seventeen per cent of
such income-tax where the total
income exceeds one lakh fifty
thousand rupees;
(ii) in the case of every person other than
those mentioned in item (i), be increased
by a surcharge for purposes of the Union
calculated at the rate of twelve per cent
of such income-tax:
Provided that in case of persons mentioned in sub-
item (A) of item (i) above having a total income
exceeding sixty thousand rupees, the total amount
payable as income-tax and surcharge on such
income shall not exceed the total amount payable as
income-tax on a total income of sixty thousand
rupees by more than the amount of income that
exceeds sixty thousand rupees:
Provided further that in case of persons mentioned
in sub-item (B) of item (i) above having a total
income exceeding one lakh fifty thousand rupees,
the total amount payable as income-tax and
surcharge on such income shall not exceed the total
amount payable as income-tax and surcharge on a
total income of one lakh fifty thousand rupees by
more than the amount of income that exceeds one
lakh fifty thousand rupees.\024
(emphasis supplied)
21. The Finance Act, 2001 stood enacted by Parliament to give
effect to the financial proposals of the Central Government for the
financial year 2001-02. It is important to note that every FA
prescribes a graduated scale for payment of tax, i.e., different
rates for different slabs of income. As a general concept, income-
tax includes surcharge. Under Section 4 of the 1961 Act, income-
tax is assessed and paid in the next succeeding year upon the
results of the year before. Section 2(1) of the Finance Act, 2001
inter alia stated that, subject to the provisions of sub-sections (2)
and (3), for the assessment year commencing on 1.4.2001,
income-tax shall be charged at the rates specified in Part I of the
First Schedule and such tax shall be increased in cases to which
paragraphs A, B, C and D of that part applied, by a surcharge
for purposes of the Union. Under sub-section (3), it was expressly
stated that in cases falling under Chapter XII (which includes
Section 113) the tax chargeable shall be determined as provided
in that Chapter. By way of proviso to sub-section (3), it was
further stipulated that the amount of income-tax computed in
accordance with Section 113 shall be increased by a surcharge as
provided in Paragraphs A, B, C, D or E, as the case may be of
Part I to the First Schedule. In this case, it is not in dispute that
Para A was applicable at the given point of time. Reading Section
2(1) of the Finance Act, 2001, it is clear that the term \023income-
tax\024 as used in Section 2(1) and as used in the proviso to sub-
section (3) of Section 2 of the Finance Act, 2001 did not include
the amount of surcharge. Surcharge was a separate item of
taxation, different from income-tax. This was made clear vide
section 2(1)(a), proviso to section 2(3) and Paragraph A of Part I to
the First Schedule, which stated that the amount of income-tax
computed in accordance with the provisions of Section 112 or
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 15
Section 113 shall be increased by a surcharge calculated at the
rate of 17% of such income-tax. Under the provisions of Section
2(1) of the Finance Act, 2001, which is made subject to sub-
section (3) of that section, the assessee is entitled to claim that
income-tax on his undisclosed income to be calculated by
applying the rate or rates as prescribed in the Finance Act, 2001,
but he cannot claim that the amount of income-tax so
determined should not be increased by addition of the surcharge.
Therefore, in our opinion, the AO has rightly imposed surcharge
at 17% on the undisclosed income of the assessee in this case,
particularly when the search was carried out on 17.1.2001.
22. As stated above, Section 158BA(2) read with Section 4 of the
1961 Act looks at Section 113 for the imposition rate at which tax
has to be imposed in the case of block assessment. That rate is
60%. That rate is fixed by the 1961 Act itself. That rate has been
stipulated by Parliament not with a view to oust the levy of
surcharge but to make the levy cost-effective and easy. Therefore,
a flat rate is prescribed. The difficulty in block assessment is that
one has to correlate the undisclosed income to different years in
which income is earned, hence, Parliament has fixed a flat rate of
tax in Section 113 [See: (1995) 212 ITR (St.) 69]. On the contrary,
a bare perusal of various Finance Acts starting from 1999
indicates that Parliament was aware of rate of tax prescribed by
Section 113 and yet in the various Finance Acts, Parliament has
sought to levy surcharge on the tax in the case of block
assessment. In the present case, the AO has applied the rate of
surcharge at 17% which rate finds place in Para A of Part I of the
First Schedule to the said FA of 2001, therefore, surcharge
leviable under the FA was a distinct charge, not dependant for its
leviability on the assessee\022s liability to pay income-tax but on
assessed tax.
23. For the aforestated reasons, we hold that even without the
proviso to Section 113 (inserted vide FA 2002 w.e.f. 1.6.2002),
the FA 2001 was applicable to block assessment under Chapter
XIV-B in relation to the search initiated on 17.1.2001 and
accordingly surcharge was leviable on the tax amounting to
Rs. 97,456/- at 17% amounting to Rs. 16504/-. We accordingly
answer the above question in favour of the revenue and against
the assessee.
Whether insertion of the proviso in Section 113 by the
Finance Act, 2002 was applicable to search up to 31.5.2002:
24. In view of our findings on the first point, strictly speaking,
we are not required to examine this question. However, it has
been vehemently urged on behalf of the assessee that the said
proviso cannot operate retrospectively. This argument is founded
on the basis that until the amendment in Section 113 w.e.f.
1.6.2002, there was inconsistency with regard to levy of
surcharge. According to the assessee, the question which usually
bothered both the assessee and the Department was whether
surcharge was leviable with reference to the rates provided for in
the FA of the year in which the search was initiated or the year in
which the search was concluded or the year in which the block
assessment proceedings under Section 158BC were initiated or
the year in which block assessment order was passed. According
to the assessee, there was a conference of Chief Commissioners
which had suggested to the Central Government to amend
Section 113 with retrospective effect. However, despite such
recommendations, the Central Government inserted the proviso
in Section 113 only with effect from 1.6.2002. Therefore,
according to the assessee, the proviso cannot be interpreted as
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 15
retrospective.
25. We find no merit in the above arguments. Both, the Finance
Acts of 2000 and 2001, indicated that a substantive charge was
created in respect of the income-tax to be levied. Both these Acts
prescribed the rates of surcharge. The said surcharge did not
depend for its leviability on the assessee\022s liability to pay income-
tax but on the assessed tax. The assessee has relied upon the
above anomalies in support of their contention that such
anomalies made the charge ineffective. In our view, such
submission amounts to begging the question. According to the
assessee, prior to 1.6.2002, the position was ambiguous as it was
not clear even to the Department as to which year\022s FA would be
applicable. To clear this doubt precisely, the proviso has been
inserted in Section 113 by which it is indicated that the FA of the
year in which the search was initiated would apply. Therefore, in
our view, the said proviso was clarificatory in nature. In taxation,
the Legislation of the type indicated by the proviso has to be read
strictly. There is no question of retrospective effect. The proviso
only clarifies that out of the four dates, Parliament has opted for
the date, namely the year in which the search is initiated, which
date would be relevant for applicability of a particular FA.
Therefore, we have to read the proviso as it stands.
26. There is one more reason for rejecting the above
submission. Prior to 1.6.2002, in several cases, tax was
prescribed sometimes in the 1961 Act and sometimes in the FA
and often in both. This made liability uncertain. In the present
case, however, the rate of tax in case of block assessment at 60%
was prescribed by Section 113 but the year of the FA imposing
surcharge was not stipulated. This resulted in the above four
ambiguities. Therefore, clarification was needed. The proviso was
curative in nature. Hence, the proviso inserted in Section 113
merely clarifies that out of the above four dates, the relevant date
for applicability of the FA would be the year in which the search
stood initiated under Section 158BC.
27. In the case of Allied Motors (P) Ltd. v. Commissioner of
Income-tax [(1997) 224 ITR 677 (SC)] this Court observed as
follows:
\023A proviso which is inserted to remedy
unintended consequences and to make the
provision workable, a proviso which supplies
an obvious omission in the section and is
required to be read into the section to give the
section a reasonable interpretation, requires to
be treated as retrospective in operation, so that
a reasonable interpretation can be given to the
section as a whole.\024
28. For the aforestated reasons, we set aside the impugned
judgment of the High Court dated 13.2.2006 in Tax Appeal No.
1042 of 2005 and, accordingly, we allow the Department\022s civil
appeal with no order as to costs.