NO OBLIGATION WITH RETROSPECTIVE EFFECT: SC

  IN THE SUPREME COURT OF INDIA  

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.8750 OF 2014

(arising out of SLP (C) No. 540 of 2009)

COMMISSIONER OF INCOME TAX (CENTRAL)-I, NEW DELHI             …..APPELLANT(S)

VERSUS

VATIKA TOWNSHIP PRIVATE LIMITED                 ..................…..RESPONDENT(S)

                                   W I T H

                        CIVIL APPEAL NO.8764 OF 2014 (arising out of SLP (C) No. 1362 of 2009)

                        CIVIL APPEAL NO.8762 OF 2014 (arising out of SLP (C) No. 1339 of 2009)        

                        CIVIL APPEAL NO.8773 OF 2014 (arising out of SLP (C) No. 19319 of 2008)

                        CIVIL APPEAL NO.8763 OF 2014 (arising out of SLP (C) No. 1342 of 2009)

                        CIVIL APPEAL NO.8755 OF 2014 (arising out of SLP (C) No. 31528 of 2008)

                        CIVIL APPEAL NO.8775 OF 2014 (arising out of SLP (C) No. 22444 of 2008)

                        CIVIL APPEAL NO.8779 OF 2014 (arising out of SLP (C) No. 27162 of 2008)

                        CIVIL APPEAL NO.8780 OF 2014 (arising out of SLP (C) No. 27413 of 2008)

                        CIVIL APPEAL NO.8774 OF 2014 (arising out of SLP (C) No. 20855 of 2008)

                        CIVIL APPEAL NO.8765 OF 2014 (arising out of SLP (C) No. 4769 of 2009)

                        CIVIL APPEAL NO.8760 OF 2014 (arising out of SLP (C) No. 1257 of 2009)

                        CIVIL APPEAL NO.8756 OF 2014 (arising out of SLP (C) No. 31537 of 2008)

                        CIVIL APPEAL NO.8759 OF 2014 (arising out of SLP (C) No. 767 of 2009)

                        CIVIL APPEAL NO.8772 OF 2014 (arising out of SLP (C) No. 14204 of 2008)

                        CIVIL APPEAL NO.8777 OF 2014 (arising out of SLP (C) No. 26473 of 2008)

                        CIVIL APPEAL NO.8770 OF 2014 (arising out of SLP (C) No. 13886 of 2008)

               CIVIL APPEAL NOS.8752-8753 OF 2014 (arising out of SLP (C) Nos. 4842-4843 of 2008)

                        CIVIL APPEAL NO.8754 OF 2014 (arising out of SLP (C) No. 5704 of 2008)

                        CIVIL APPEAL NO.8768 OF 2014 (arising out of SLP (C) No. 6897 of 2008)

                        CIVIL APPEAL NO.8758 OF 2014 (arising out of SLP (C) No. 745 of 2009)

                        CIVIL APPEAL NO.8776 OF 2014 (arising out of SLP (C) No. 24602 of 2008)

                        CIVIL APPEAL NO.8769 OF 2014 (arising out of SLP (C) No. 8901 of 2008)

               CIVIL APPEAL NO. 1160 OF 2007 CIVIL APPEAL NOS.      8766-8767   OF 2014

               (arising out of SLP (C) Nos. 6767-6768 of 2014)

                               J U D G M E N T

A.K. SIKRI, J.

Delay condoned.

2.    Leave granted in all these matters.

3.    In these batch  of  appeals,  most  of  which  are  preferred  by  the Commissioner(s)  of  Income   Tax   (hereinafter   referred   to   as   'the Department'), with the exception of few appeals filed by the assessees,  the question of law which has fallen for consideration  is  as  to  whether  the  proviso appended to Section 113 of the Income Tax Act (hereinafter  referred to as 'the Act') which was inserted in that  Section  by  the  Finance  Act, 2002 is to operate prospectively or is clarificatory and curative in  nature and, therefore, has retrospective operation.  The Background Facts:

4.    This question has been referred  to  the  Constitution  Bench  in  the  Civil Appeal arising out of S.L.P.  No.540/2009  and,  therefore,  to  start with, we would be justified in referring to facts of  that  case.   In  fact the answer to the aforesaid question would lead to the sealing of  the  fate of all these appeals one way or the other.  The facts in this appeal,  which need recapitulation, are that there  was  a  search  and  seizure  operation under Section 132 of the Act on the premises of the assessee on  10.02.2001. Notice under Section 158BC of  the  Act  was  issued  to  the  assessee  on  18.06.2001 requiring him to file his return of income for the  block  period ending 10.02.2000.  In compliance, the assessee filed its return  of  income for the block period from 01.04.1989 to 10.02.2000.   The  Block  Assessment  in this case was completed under Section 158BA  on  28.02.2002  at  a  total undisclosed  income  of  Rs.85,18,819/-.   After  sometime,  the   Assessing Officer, on verification of working of calculation  of  tax,  observed  that surcharge had not been levied on the tax imposed upon  the  assessee. This was treated as a mistake apparent on record by  the  Assessing  Officer  and accordingly a rectification order was passed under Section 154  of  the  Act on 30.06.2003.  This order under Section 154 of the Act, by which  surcharge was levied by the  Assessing  Officer,  was  challenged  in  appeal  by  the assessee.  The said order was cancelled by the CIT  (Appeals)-I,  New  Delhi  vide order dated 10.12.2003 on the ground that the levy of  surcharge  is  a debatable issue and therefore such an  order  could  not  be  passed  taking umbrage under Section 154 of the Act.  The undisclosed  income  was  revised under  Section  250BC/158BC  by  the  Assessing  Officer  vide  order  dated 09.09.2003 to Rs.10,90,000/- to give effect to the above order  of  the  CIT (Appeals), and thereby removing the component of the surcharge.  

5.    As the Department wanted the surcharge to be levied, the  Commissioner of Income Tax (Central-I), New Delhi issued a notice under  Section  263  of the Act to the assessee and sought to  revise  the  order  dated  09.09.2003 passed by the Assessing Officer by which he had given effect  to  the  order of the CIT (Appeals) and in the process did not charge  any  surcharge.   In the opinion of CIT, this  led  to  income  having  escaped  the  assessment.  According to the CIT, in view of the provisions of Section 113  of  the  Act as inserted by the Finance Act, 1995 and clarified  by  the  Board  Circular No.717 dated 14.08.1995, surcharge was  leviable  on  the  income  assessed. According to the CIT the charging provision was Section 4 of the  Act  which was to be read with Section 113 of the Act that prescribes the rate and  tax  for search and seizure cases and rate  of  surcharge  as  specified  in  the Finance Act of the relevant year was to  be  applied.   In  this  particular case the search and seizure operation took place on 14.07.1999 and  treating this date as relevant, the Finance Act 1999 was to be applied.  

6.    The  CIT,  accordingly,  cancelled  the  order  dated  09.09.2003  not levying surcharge upon the assessee, as being erroneous and  prejudicial  to the interests of the revenue.  The Assessing Officer  was  directed  by  the CIT to levy surcharge @ 10% and the amount of income tax computed and  issue revised notice of demand.  The order  covered  block  period  01.04.1989  to 10.02.2000.   This order of the CIT under Section 263 of the Act was  passed on 23.03.2004.   The  assessee  filed  the appeal  before  the  Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal')  against  the said order of the  CIT.   The  Tribunal  vide  its  order  dated  23.06.2006 allowed the appeal of the assessee.  The Tribunal held  that  the  insertion of the proviso to Section 113 of the Income Tax Act cannot  be  held  to  be  declaratory  or  clarificatory  in  nature  and  was  prospective   in its operation.  Against the order of the Tribunal dated 23.06.2006  the  revenue approached the High Court of Delhi by way of an appeal filed  under  Section 260 A of the Act for  the  block  period  01.04.1989  to  10.02.2000.   This  appeal has been dismissed vide order dated 17.04.2007  by  the  High  Court.

It is this order of the High Court  which  is the  subject matter of the appeal in question.  

7.    It is clear from the aforesaid  narration  that  the  High  Court  has  taken the view that proviso inserted in  Section  113  of  the  Act  by  the Finance Act, 2002 was prospective in nature and the  surcharge  as  leviable under the aforesaid proviso could  not  be  made  applicable  to  the  block assessment in question of an earlier period i.e. the period from  01.04.1989 to 10.02.2000 in the instant case.

      The Reference Order

8.    It so happened that this very issue about the said proviso to  Section  113,  viz.,  whether  it  is  clarificatory  and  curative  in  nature  and, therefore, can be applied retrospectively or it is to take effect  from  the date i.e. 01.06.2002  when  it  was  inserted  by  the  Finance  Act,  2002, attracted the attention of this Court and was  considered  by  the  Division Bench in the case of Commissioner of Income Tax, Central  II  v.  Suresh  N. Gupta[1].  The Division Bench held that the said  proviso  is  clarificatory in nature.  When the instant appeal came up before  another  Division  Bench on 06.01.2009 for hearing, the said  Division  Bench  expressed  its  doubts about the correctness of the view taken in Suresh N. Gupta and directed  the Registry to place the matter before Hon'ble the Chief Justice of  India  for  constitution of a larger Bench.  We reproduce order dated 06.01.2009 in  its  entirety as under:

      “Delay condoned.

      The question which fell for consideration before the  High  Court  was as to whether the proviso appended to Section 113 of the Income Tax  Act  is clarificatory and/or curative in nature.  The said provision had  come  into force with effect from 01.06.2002.  It reads as under:

      “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 132-A.

      In this case, the search and seizure took  place  on  06.10.2001.   An  order of block assessment in terms of Section 158BC was made in  respect  of the assessment years 1984 to 2003.  The surcharge was levied on 30.06.2003.

      In support of its contention that the said proviso  was  retrospective  in nature, the learned Additional Solicitor General relies upon  a  Division Bench decision of this Court in Commissioner of Income Tax,  Central  II  v. Suresh N. Gupta, (2008) 4 SCC 362 wherein it has been held:

      “37.  According to the assessee, prior  to  01.06.2002,  the  position was ambiguous as it was not clear even to the Department as to which  year's FA  would be applicable.  To clear this  doubt  precisely,  the  proviso  has been inserted in Section 113 by which it is indicated that 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.  

38.   There is one more reason for rejecting the  above  submission.   Prior to 01.06.2002, in the 1961 Act and sometimes in 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 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 FA would be the year in which the  search  stood  initiated under Section 158-BC.”

      As the said proviso was introduced with effect from  01.06.2002,  i.e.  with prospective effect and by reason thereof, tax chargeable under  Section 135 of the Income Tax Act is to  be  increased  by  surcharge  levied  by  a Central Act, we are of the opinion that keeping in view  the  principles  of law that the taxing statute should be  construed  strictly  and  a  statute, ordinarily, should not be held to  have  any  retrospective  effect,  it  is necessary that the matter be considered by a larger Bench.

      We, while issuing notice, direct the  Registry  to  place  the  matter  before Hon'ble the Chief Justice for constitution of a larger Bench.”

 9.    A three Member Bench was constituted before which the matter  came  up for hearing on  08.04.2010.   On  that  date,  the  said  Bench  passed  the following order :

“Vide order dated 06.01.2009 the lead  matter  was  referred  to  be  listed before a larger Bench and consequently  the  matter,  along  with  connected matters, were listed before a three Judge Bench. After having heard learned counsel on both sides at length, looking  to  the important questions of law involved having wide ramifications  and  pendency of several matters  on  the  same  issue  before  several  High  Courts  and Tribunals, we deem it appropriate to refer  the  matters  for  being  placed before Five Judges Bench.  Matter be placed accordingly.”  

10.   This is precisely raison d'etre for hearing the matter by the  present Constitution  Bench.   We  may  observe  here  that  after   the   aforesaid reference, other connected appeals raising the  identical  issue  have  been tagged with direction to be heard along with this appeal.

      The Statutory Provisions  

11.   Before adverting to the submissions of the Department,  as  argued  by Mr.  P.S.  Narsimha,  learned  Additional  Solicitor  General  and  rebuttal  thereto given by various counsel appearing for the  assessees,  we  deem  it apposite to take note of the relevant statutory provisions,  having  bearing over the matter, along with proviso to Section 113, which  is  the  bone  of contention and subject mater of interpretation.  As is well  known,  Section

4 of the Act is the charging Section in the Act.  It reads as under:

“S.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 in advance, where it is so  deductible  or payable under any provision of this Act.”  

12.   Though, Section 4 of the Act is  the  charging  Section,  it  is  well  known that rate or rates at which  the  income  tax  is  to  be  charged  is specified each year by enacting a Finance Act at the  time  of  presentation of the annual Budget.

 13.   While Section 4 of the Act deals with the charge of  income  tax,  the Parliament also has the power to levy surcharge on  income  tax.   Power  to levy a surcharge is contained in Article 271 of the  Constitution  of  India which read as under:

“271. Surcharge on certain duties  and  taxes  for  purposes  of  the  Union Notwithstanding anything in Articles 269 and  270,  Parliament  may  at  any time increase any of the duties or taxes referred in  those  articles  by  a surcharge for purposes of the Union and  the  whole  proceeds  of  any  such surcharge shall form part the Consolidated Fund of India.”

 14.   The surcharge on the income tax was introduced for the first  time  by the Finance Act, 1995, in Section 2 (3) thereof.  However,  initially,  this surcharge was  levied  only  on  the  income  of  companies  i.e.  corporate entities incorporated under the Indian Companies Act by specified  surcharge at the rate of 15% in the Finance Act, 1996, which was reduced to  7.50%  in the Finance Act, 1997.  In the next two Finance Acts  i.e.  1998  and  1999, there was no surcharge levied even in the cases of companies.   However,  by Finance Act, 2000, surcharge at a flat rate of 10%  came  to  be  levied  in respect of individuals, HUF, BOI, AOP as  well  as  co-operative  societies,

partnership firms, local authorities and also the companies.  In  subsequent years, the rates at which the surcharge is levied on the aforesaid  entities are of varying nature.  A tabulated form showing  surcharge  in  respect  of different category of assessees in different assessment years, levied  under each Finance Act, shall be reproduced at the relevant stage.

 15.   In the present case, since we are concerned with the surcharge on  the block assessment, it also becomes imperative to take note  of  the  relevant provisions pertaining to the block  assessment.    These  provisions  are  contained in Chapter XIV-B.  The purpose of this Chapter is to  lay  down  a special procedure for assessment of search cases with a view to  combat  tax  evasion and also to expedite and simplify assessments in search  cases.   We reproduce hereinbelow the provisions of Section 158B,  158BA,  158BB,  158BC and 158BH of that Chapter, which have bearing on the issue at hand:

“158B.  In this Chapter, unless the context otherwise 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 "six assessment years" the words "ten  assessment years" had been substituted.  

(b) "undisclosed income" 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.

                    158BA. Assessment  of  undisclosed  income  as  a  result  of  search.- 

(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 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.

 

158BB. Computation of undisclosed income  of  the  block  period.- 

(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  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.

 

158BC. Procedure for block assessment.- 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 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'.

 

158BH. Application of other provisions  of  this  Act.-  Save  as  otherwise

provided in this Chapter, all other provisions of this Act  shall  apply  to

assessment made under this Chapter.”

 

 

16.   It would be of some significance to point out at this  stage  that  in so far as rates of tax chargeable in case of block assessment is  concerned, that is not provided in the Finance  Act.   Pertinently,  the  provision  to this effect has been made in the Income Tax Act itself and is  contained  in Section 113 of the Act.  This Section, before insertion of proviso  thereto, read as under:

“113.  Tax in the case of block assessment of  search  cases.  -  The  total undisclosed income of the block  period,  determined  under  section  158BC,  shall be chargeable to tax at the rate of sixty per cent.”  

17.   The proviso to Section 113 was inserted  by  Finance  Act,  2002  with effect from June, 2002 and is to the following effect:

“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.”

 

18.   From the reading of the aforesaid statutory  provisions  in  abstract,  particularly relating to surcharge, it is clear that  though  provision  for surcharge under the Finance Act has been in existence since 1995, in so  far as levy of surcharge for block assessment is concerned, it is introduced  by insertion of aforesaid proviso of Section 113.  It is  in  this  background, the question has arisen as to whether this  surcharge  on  block  assessment has been levied for the first time by  the  aforesaid  proviso  coming  into effect from 01.06.2002 or it is only clarificatory in nature because of  the reason that the provision for surcharge was made in the Finance Act  in  the year 1995 and that covered surcharge on block assessment as well.

      Judgment in Suresh N. Gupta  

19.   As already noticed above, this very proviso to Section 113 of the  Act  came up for interpretation in Suresh N. Gupta  and  the  Division  Bench  of  this Court took the view that this proviso is clarificatory in nature as  it  simply clarifies the date with reference to which the rate of  surcharge  is payable, namely, the surcharge levied by the Central Act and  applicable  in the assessment year relevant to the previous year in  which  the  search  is  initiated.  It would  be  advisable  to  take  note  of  the  reasons  which prevailed with the Bench to come to the aforesaid  conclusion,  inasmuch  as it is the ratio of this judgment which was doubted by the Bench  making  the reference to the larger Bench.

 

20.   The Court in Suresh N. Gupta formulated two points for  consideration, viz.;

“1.   Whether on the facts and circumstances of this case, the Finance  Act,

2001 was applicable to “block assessment” under Chapter XIVB in  respect  of

search carried out on January 17, 2001?  

2.    Whether the proviso inserted in Section 113 by the Finance Act,  2002,

is clarificatory?”  

Dealing with the first question, the  Court  noted  the  contention  of  the assessee that Chapter XIVB, which was inserted  by  the  Finance  Act,  1995 with effect from July 1, 1995 was a self-contained chapter as it  lays  down a special procedure  for  assessment  of  undisclosed  income  found  during search for the “block period”.  It was argued  by  the  assessee  that  this Chapter contains a charging section (158BA), a computation section  (158BB),  a procedural section for block assessment (158BC), limitation provision  for completion of block assessment (158BE) and the provisions for imposition  of interest and penalty (158BFA).  It  was  also  argued  that  the  scheme  of assessment of “undisclosed income” under Chapter  XIV-B  is  different  from the scheme of assessment of  “total  income”  of  any  person  in  terms  of  Section 4(1) of the Act.  In support of  this  argument,  it  was  submitted that whereas Chapter XIV-B deals with assessment  of  “undisclosed  income”,

Section  4  of  the  Act  relates  to  the  assessment  of  “total  income”. Moreover, “block period” mentioned in Chapter XIV-B was different  from  the assessment of income of the “previous year” under Section 4(1) of  the  Act. Even the rate of tax at  which  the  “undisclosed  income”  is  assessed  is different inasmuch as it is 60% as specified in Section 158BA(2)  read  with section 113 of the Act, in  contradistinction  to  the  taxation  of  normal income which is at the rates specified in  the  relevant  Finance  Act.   In nutshell, it was argued that block assessment falls  in  Chapter  XIV-B  for which charging section  was  section  158BA  and  for  assessment  of  block period, charging section was not section 4(1) of the Act.   On  that  basis,  the assessee wanted the Court to hold that it was not open to the  Assessing Officer to levy surcharge prior to June 1, 2002, i.e. before  the  insertion of proviso to Section 113 of the Act. 

21.   This argument was rejected by the  Court.   The  Bench  took  note  of  Article 271 of the Constitution along  with  Entry  82  of  List  1  of  the Seventh Schedule to the Constitution of India  and  Section  4  of  the  Act  which is the charging section.  It held that the power to levy surcharge  on income tax is traceable to Article  271  read  with  Entry  82  and  not  to  Section 4 of the Act.  The rate at which the charge on total income  on  the

previous year is imposed is not laid down in the Income Tax Act but  in  the  Finance Act indicated every year by the Parliament to  give  effect  to  the financial proposals of the Central Government.  It further held  that  since Income Tax Act deals with tax on income and nothing else,  nor  with  charge should be a legal charge under Section 4, it must be a tax on the income  of  the assessee.  Therefore, Section 4(1) of the Act was the  charging  section and the rate of tax is prescribed under that very Act i.e. Section 113.   As long as the charge is on the “total income” of  the  previous  year  and  so long as the rate relates to the subject matter of the tax, there is  nothing  to prevent the Parliament from fixing the date.  What is to be seen is  that the rate is applied to the “total income” and the  tax  which  the  assessee has to pay must be at the rate  in  respect  of  the  total  income  of  the previous year.

 22.   The Bench was of the view that the concepts  of  “previous  years”  as  well as “total income” in Chapter XIV-B were  retained.   Therefore  Section 158BB was to be read with  Section  4  of  the  Act  implying  thereby  that Section 4 remains the charging section.  The procedure contained in  Section 4 was not ruled out from block assessment procedure  even  in  the  case  of assessment of block period.  It was,  nevertheless,  an  assessment  on  the total  income  of  the  previous  years  falling  within  the  block  period including returned/assessed incomes  as  per  regular  returns  and  regular assessment.  As a fortiori, the provisions of the relevant Finance Act  have got to be read into the block assessment scheme under  Chapter  XIV-B,  even prior to June 1, 2002.   As  a  sequential,  even  without  the  proviso  to  section 113, which was inserted by the Finance Act, 2002  with  effect  from  June 1, 2002, the Finance Act  2001,  was  applicable  to  block  assessment under Chapter XIV-B and accordingly surcharge was leviable. 

23.   Adverting to the second question  formulated  by  the  Bench,  namely, whether insertion of the proviso in section 113 by  the  Finance  Act,  2002 was applicable to search of the earlier period as well  i.e.  upto  May  31, 2002, the Court pointed out  that  in  view  of  its  answer  to  the  first question, second  question  did  not  even  require  any  examination.   It, however, proceeded to answer this question as  well  having  regard  to  the submission  of  the  assessee  that  before  the  said  proviso,  there  was  inconsistency with  regard  to  levy  of  surcharge  and  the  position  was  ambiguous as it was not clear even to the  Department  as  to  which  year's Finance Act would be applicable.  Brushing aside this  argument,  the  Court  held that to clear this very doubt precisely, the proviso had been  inserted in section 113 and therefore it  was  only  clarificatory  in  nature.   The Court specifically noted that before the proviso  was  inserted,  there  was some doubts in the mind of the Department and the taxpayers about  the  date with reference to which  the  rate  at  which  surcharge  is  payable.   The  confusion was as to whether surcharge was leviable  with  reference  to  the rates provided for in the Finance Act of the year in which  the  search  was  initiated or the year in which the search  was  concluded  or  the  year  in which block assessment proceedings under Section  158BC  were  initiated  or the year in which block assessment order was passed.  The Court opined  that proviso only clarifies that out of the aforesaid  4  dates,  the  Parliament has opted for the date  in which  the  search  is  initiated,  as  the  date relevant for applicability of a particular Finance Act.  

24.   Aforesaid were the reasons to arrive at a conclusion that the  proviso was clarificatory and/or curative in nature.  

25.   It would be our duty to point out at this stage that another  Division Bench in the case of CIT v. Sanjiv Bhatara[2], has  followed  the  aforesaid judgment by giving same reasons in support.  

26.   It is not necessary to take note of  the  arguments  advanced  by  the learned ASG for the Department and various  counsel  who  appeared  for  the assessees in these appeals, in detail.  The reason for making these  remarks by us is that Mr. Narasimha, learned ASG,  had  argued  on  the  same  lines which formed the basis of rendering the decision of the  Division  Bench  in  Suresh N. Gupta that have already been summarised above. Of course,  it  was his incessant effort with all  effervescence,  to  persuade  this  Court  to accept the conclusion arrived at in the said judgment. Learned  counsel  for the assessees also emphasised those very submissions advanced in  that  case which did not find favour with  the  Division  Bench.   In  addition,  these counsel articulated some more arguments with all  enthusiasm  and  temerity, reference to which would be made while giving our analysis  to  the  various provisions leading up to the answer to the issue involved.

Scheme of Chapter XIVB

27.   Before we proceed to answer the question, it  would  be  necessary  to keep in mind the scheme of block assessment introduced in  Chapter  XIVB  to Finance Act, 1995 w.e.f. 1st July, 1995.  As already mentioned in  brief  by us, Chapter XIVB of the Act which deals with block assessment  lays  down  a special procedure for search  cases.   The  main  reason  for  adding  these provisions in the Act was to curb  tax  evasion  and  expedite  as  well  as simplify the assessments in such 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  “block  period”  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.,  form  April  1,  2000, to  January  17,  2001,  in  this  case.   The  essence  of  this  new procedure, therefore, is a separate single assessment  of  the  “undisclosed income”, 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,  the Explanation is inserted in section 158BB, which is the computation  section,  explaining the method of computation of “undisclosed income”  of  the  block period.  It is now well accepted that this Chapter is  a  complete  code  in  itself providing for self-contained machinery for assessment of  undisclosed income for the block period of 10 years or 6 years, as the case may be.   In case of regular assessments for which returns are  filed  on  yearly  basis, Section 4 of the Act is the charging section.  However,  at  what  rate  the income is to be taxed is specified every  year  by  the  Parliament  in  the Finance Act.  In contradistinction, when it comes to payment of tax  on  the undisclosed income relating to  the  block  period,  rate  is  specified  in Section 113 of the Act.  It remains static at 60% of the undisclosed  income which is the  categorical  stipulation  in  the  Section  113  of  the  Act.

Section 158BA(2) of the  Act  clearly  states  that  the  total  undisclosed  income relating to the block period “shall be charged to tax” at  the  rates specified under Section 113 as income of the block  period  irrespective  of previous year or years.  Under Section  113  of  the  Act,  the  undisclosed income is chargeable to tax at the rate of 60%.  

28.   From the above, it becomes manifest that Chapter XIVB  comprehensively takes care of all the aspects relating to the block assessment  relating  to undisclosed income, which includes Section 156BA(2) as the charging  section and even the rate at which such income  is  to  be  taxed  is  mentioned  in Section 113 of the Act.  No doubt, Section 4 of the Act is also  a  charging section which is made applicable on 'total income  of  previous  year'.   As per Section 2  (45),  'total  income'  means  the  total  amount  of  income referred to in Section 5, computed in the  manner  laid  down  in  the  Act. Section 5 of the Act enumerates the scope of total  income  and  prescribes, inter alia, that it would include all income which is received or is  deemed  to receive in India in any previous year by or on behalf of a person who  is a Resident.  No doubt, undisclosed income referred to  in  Chapter  XIVB  is also an income which was received  but  not  disclosed,  therefore,  in  the first blush, argument of the Department that undisclosed income referred  to  in Chapter XIVB is also a part of total income and  consequently  Section  4 becomes the charging section in respect thereof as well.  However, a  little closer scrutiny leads us to conclude that that is not the  position  as  per the scheme of Chapter XIVB.  In the  first  place,  income  referred  to  in Section 5 talks of total income of any 'previous year'.  As  per  Section  2

(34) of the Act, 'previous year' means previous year as defined  in  Section 3.  Section 3 lays  down  that  previous  year  means  'the  financial  year immediately preceding the assessment year'.  Undisclosed income referred  to in Chapter XIVB is not relateable to the previous year.   On  the  contrary, it is for the block period which may be 6 years or 10  years,  as  the  case may be.  Consequently, as already mentioned, while analyzing the  scheme  of Chapter XIVB, such Chapter is a complete code in respect of  assessments  of 'undisclosed income'.  Not only it defines what is  undisclosed  income,  it  also lays down the block period for which undisclosed income can  be  taxed. Further, it also lays down the procedure for  taxing  that  income.   It  is  very pertinent to note  at  this  stage  that  for  this  purpose,  specific provision in the form of Section 158BA(2) is inserted making it  a  charging section.   Thus,  a  diagnostic  of  Chapter  XIVB  of  the  Act  leads   to  irresistible conclusion that it contains all the  provisions  starting  from

charging section till the completion of assessment, by  prescribing  special procedure in  relation  thereto,  making  it  a  complete  Code  by  itself. Looking it from  this  angle,  the  character  and  nature  of  'undisclosed income' referred to in Chapter  XIVB  becomes  quite  distinct  from  'total income' referred to in Section 5.  It is of  some  significance  to  observe that when a separate charging section is introduced specifically, to  assess  the undisclosed  income,  notwithstanding  a  provision  in  the  nature  of Section 4 already on the statute book, this move of the legislature  has  to be assigned some reason,  otherwise,  there  was  no  necessity  to  make  a provision in the form of Section  158BA(2).   It  could  only  be  that  for assessing  undisclosed  income,  charging  provision  is   Section  158BA(2) alone.  

29.   Notwithstanding the aforesaid position clarified with us,  we  are  of  the opinion that dehors this discussion, in any case on the  application  of  general principles concerning retrospectivity, the proviso  to  Section  113 of the Act cannot be treated as  clarificatory  in  nature,  thereby  having retrospective effect.  To make it clear, we need to understand  the  general principles concerning retrospectivity.

General Principles concerning retrospectivity  

30.   A legislation, be it  a  statutory  Act  or  a  statutory  Rule  or  a  statutory Notification, may physically consists of words printed on  papers.  However, conceptually it is a great  deal  more  than  an  ordinary  prose. There is a special peculiarity in the mode  of  verbal  communication  by  a  legislation.  A legislation is not just a series of statements, such as  one finds in a work of fiction/non fiction or even in a judgment of a  court  of  law.  There is a technique required to draft a legislation  as  well  as  to understand  a  legislation.   Former  technique  is  known  as   legislative drafting and latter one  is  to  be  found  in  the  various  principles  of ‘Interpretation of  Statutes’.   Vis-à-vis  ordinary  prose,  a  legislation  differs in its provenance, lay-out and features as also in  the  implication as to its meaning that arise by presumptions as to the intent of  the  maker thereof.  

31.   Of the various rules guiding how a legislation has to be  interpreted,  one established  rule  is  that  unless  a  contrary  intention  appears,  a legislation  is  presumed  not  to  be  intended  to  have  a  retrospective operation.  The idea behind the rule is that a  current  law  should  govern current activities.  Law passed today cannot apply  to  the  events  of  the  past.  If we do something today, we do it keeping in view the law  of  today and in force and not tomorrow’s backward adjustment of it.   Our  belief  in the nature of the law is founded on the bed rock that every human  being  is  entitled to arrange his affairs by relying on the existing  law  and  should not find that his plans have been retrospectively upset. This principle  of law is known  as  lex  prospicit  non  respicit  :  law  looks  forward  not  backward.  As  was  observed  in  Phillips  vs.  Eyre[3],  a  retrospective legislation is contrary to the general principle that legislation  by  which  the conduct of mankind is to be regulated  when  introduced  for  the  first  time to deal with future acts ought not to  change  the  character  of  past  transactions carried on upon the faith of the then existing law.  

32.   The obvious basis of the  principle  against  retrospectivity  is  the  principle of  'fairness’, which must be the basis of  every  legal  rule  as  was observed in the decision reported in L’Office Cherifien  des  Phosphates  v.  Yamashita-Shinnihon  Steamship  Co.Ltd[4].   Thus,  legislations   which  modified accrued rights or which impose obligations or impose new duties  or attach a new disability  have  to  be  treated  as  prospective  unless  the  legislative intent is clearly to give the enactment a retrospective  effect; unless the legislation is for purpose of supplying an obvious omission in  a  former legislation or to explain a former legislation.   We  need  not  note  the cornucopia of case law available on the subject because aforesaid  legal  position clearly emerges from the various decisions and this legal  position was conceded by the counsel for the parties.  In any case,  we  shall  refer to few judgments containing this dicta, a little later. 

33.   We would also like to point out, for the sake  of  completeness,  that  where  a  benefit  is  conferred  by  a  legislation,  the  rule  against  a retrospective  construction  is  different.   If  a  legislation  confers  a benefit on some persons but without inflicting a corresponding detriment  on some other person or on the public  generally,  and  where  to  confer  such  benefit appears to have been the legislators object,  then  the  presumption  would be that such a legislation, giving it a purposive construction,  would  warrant it to  be  given  a  retrospective  effect.   This  exactly  is  the justification  to  treat  procedural  provisions   as   retrospective.    In  Government of India & Ors. v. Indian Tobacco  Association[5],  the  doctrine  of  fairness  was  held  to  be   relevant  factor  to  construe  a  statute conferring a benefit, in the context of  it  to  be  given  a  retrospective  operation.  The same doctrine of  fairness,  to  hold  that  a  statute  was  retrospective in nature, was applied in the  case  of   Vijay  v.  State  of  Maharashtra & Ors.[6]  It was held that where  a  law  is  enacted  for  the benefit of community as a whole, even in the  absence  of  a  provision  the statute may be  held  to  be  retrospective  in  nature.   However,  we  are confronted with any such situation here.  

34.   In such cases, retrospectively is attached to benefit the  persons  in  contradistinction to the provision imposing some burden or  liability  where  the presumption attaches towards prospectivity.  In the  instant  case,  the proviso added to Section 113 of the Act is not beneficial to  the  assessee.  On the contrary, it is  a  provision  which  is  onerous  to  the  assessee.

Therefore, in a case like this, we have to proceed with the normal  rule  of  presumption  against  retrospective  operation.   Thus,  the  rule   against retrospective operation is a fundamental rule of law that no  statute  shall be construed to have a retrospective operation unless  such  a  construction  appears very clearly in the terms of the Act, or  arises  by  necessary  and distinct implication.  Dogmatically framed, the  rule  is  no  more  than  a  presumption, and thus could be displaced by out weighing factors.

 35.   Let us sharpen the discussion a little more.  We may note  that  under  certain  circumstances,  a  particular   amendment   can   be   treated   as clarificatory or declaratory  in  nature.   Such  statutory  provisions  are labeled  as  “declaratory  statutes”.   The  circumstances  under  which   a provision can be termed as “declaratory statutes” is  explained  by  Justice  G.P. Singh[7] in the following manner:

“Declaratory statutes

The  presumption  against  retrospective  operation  is  not  applicable  to  Declaratory  statutes.  As  stated in  CRAIES  and  approved  by  the  Supreme Court : “For modern purposes a declaratory Act may be defined as an  Act  to remove doubts existing as to the common law, or the  meaning  or  effect  of any statute.  Such Acts are usually held to  be  retrospective.   The  usual  reason for passing a declaratory Act is to set aside what  Parliament  deems  to have been a judicial error, whether in the statement of  the  common  law or in the interpretation of statutes.  Usually, if not invariably,  such  an  Act contains a preamble, and also the word 'declared' as well  as  the  word  'enacted'.  But the use of the words 'it  is  declared'  is  not  conclusive  that the Act is declaratory for these  words  may,  at  times,  be  used  to  introduced new rules of law and the Act in the  latter  case  will  only  be amending  the  law  and  will  not   necessarily   be   retrospective.    In determining, therefore, the nature of the Act, regard must  be  had  to  the substance rather than to the form.  If a new Act is 'to explain' an  earlier Act,  it  would  be  without  object  unless  construed  retrospective.   An explanatory Act is generally passed to supply  an  obvious  omission  or  to  clear up doubts as to the meaning of the previous Act.  It is  well  settled that if a statute is curative or merely  declaratory  of  the  previous  law  retrospective operation is  generally  intended.   The  language  'shall  be deemed always  to  have  meant'  is  declaratory,  and  is  in  plain  terms  retrospective.  In the absence of clear words indicating that  the  amending  Act is declaratory, it would  not  be  so  construed  when  the  pre-amended provision was  clear  and  unambiguous.   An  amending  Act  may  be  purely clarificatory to clear a meaning of a provision of the principal  Act  which was already implicit.  A clarificatory amendment of this  nature  will  have retrospective effect and, therefore, if the principal Act was  existing  law  which the Constitution came into force, the amending Act also will  be  part of the existing law.”

 The above summing up is factually based on the judgments of  this  Court  as well as English decisions.  

A Constitution Bench of this Court in Keshavlal Jethalal  Shah  v.  Mohanlal  Bhagwandas & Anr.[8], while considering the nature of amendment  to  Section 29(2) of the Bombay Rents, Hotel and Lodging  House  Rates  Control  Act  as amended by Gujarat Act 18 of 1965, observed as follows:  

“The amending clause does not seek to explain any  pre-existing  legislation  which was ambiguous or defective.  The power of the High Court to  entertain a petition for exercising revisional juris-diction was before the  amendment derived from s. 115, Code of Civil Procedure, and  the  legislature  has  by the amending Act attempted to explain the meaning  of  that  provision.   An  explanatory Act is generally passed to supply  an  obvious  omission  or  to  clear up doubts as to the meaning of the previous Act.”

 36.   It would also be  pertinent  to  mention  that  assessment  creates  a  vested right and an assessee cannot be subjected to  reassessment  unless  a provision to that effect inserted by amendment is  either  expressly  or  by necessary  implication  retrospective.   (See  Controller  of  Estate   Duty Gujarat-I v. M.A. Merchant[9].  We would also like  to  reproduce  hereunder the following observations made by this Court in the case  of  Govinddas  v.  Income-tax Officer[10],  while holding Section 171 (6) of  the  Income-  Tax Act to be prospective and inapplicable for any assessment year prior to  1st April, 1962, the date on which the Income Tax Act came into force:  

“11. Now it is a well settled rule of interpretation hallowed  by  time  and  sanctified by judicial  decisions  that,  unless  the  terms  of  a  statute expressly so provide or  necessarily  require  it,  retrospective  operation should not be given to a statute so as to take away or  impair  an  existing  right or create a new obligation or impose a new  liability  otherwise  than  as regards matters of procedure.  The general rule as stated by Halsbury  in Vol. 36 of the  Laws  of  England  (3rd  Edn.)  and  reiterated  in  several decisions of this Court as well as  English  courts  is  that  all  statutes other than those which are  merely  declaratory  or  which  relate  only  to matters of procedure or  of  evidence  are  prima  facie  prospectively  and  retrospective operation should not be given to a statute so  as  to  affect,  alter or destroy an existing right or create a new liability  or  obligation unless that effect cannot be avoided without doing violence to the  language of the enactment.  If the  enactment  is  expressed  in  language  which  is fairly capable  of  either  interpretation,  it  ought  to  be  constued  as prospective only.”  

37.   In the  case  of  C.I.T.,  Bombay  v.  Scindia  Steam  Navigation  Co.  Ltd.[11], this Court held that as the  liability  to  pay  tax  is  computed according to the law in force at  the  beginning  of  the  assessment  year, i.e., the first day of April, any change  in  law  affecting  tax  liability after that date though made during the  currency  of  the  assessment  year, unless specifically made retrospective, does not  apply  to  the  assessment for that year. 

      Anwer to the Reference  

38.   When we examine the insertion of proviso in Section 113  of  the  Act,  keeping in view the aforesaid principles,  our  irresistible  conclusion  is that the intention of the legislature was to make it prospective in  nature.  This proviso cannot be treated  as  declaratory/statutory  or  curative  in  nature.  There are various reasons for coming to this  conclusion  which  we enumerate hereinbelow:

       Reasons in Support

 39. (a) The first and foremost poser is as to whether it  was  possible to  make  the  block  assessment  with  the  addition  of  levy  of surcharge, in the absence of proviso to Section  113?  In  Suresh  N.  Gupta itself, it was acknowledged and admitted that  the  position  prior  to  the amendment of Section 113 of the Act whereby the proviso was  added,  whether surcharge was payable in respect of block assessment  or  not,  was  totally  ambiguous and unclear.  The Court pointed out that some  assessing  officers had taken the view that no surcharge is leviable.  Others were at a loss  to apply a particular rate of surcharge as they were  not  clear  as  to  which Finance Act, prescribing such rates, was applicable.   It  is  a  matter  of common knowledge and is also pointed out  that  the  surcharge  varies  from  year to year.  However, the assessing officers were  in-determinative  about the date with reference to which rates provided for in the Finance Act  were to be made applicable.  They had four dates before them viz.:  

(i)  Whether surcharge was leviable with reference  to  the  rates  provided  for in the Finance Act of the year in which the search was inititated; or

(ii) the year in which the search was concluded; or

(iii)  the year in which the block  assessment  proceedings  under   Section

158 BC of the Act were initiated; or

(iv)  the year in which block assessment order was passed.

       The position which prevailed before amending Section 113  of  the  Act  was that some Assessing Officers were not levying any surcharge  and  others who had a view that surcharge is payable were adopting different  dates  for the application of a particular Finance Act,  which  resulted  in  different rates of surcharge in the assessment orders.  In the absence of a  specified  date, it was not possible to levy surcharge and there could  not  have  been  an assessment without a particular rate of surcharge.  As stated  above,  in Suresh N. Gupta itself, the Court  has  pointed  out  four  different  dates which were bothering the assessees as well as the  Department.   The  choice of a  particular  date  would  have  material  bearing  on  the  payment  of  surcharge.  Not only the surcharge is  different  for  different  years,  it varies according to the category of assessees and for some years,  there  is  no surcharge at all.  This can be seen from the following table  prescribing surcharge for different assessment years:

 |          |         |PART – I                                       |

|Finance   |Relevant |Para - A |Para – B  |Para – |Para – D|Para - E |

|Act       |Section  |         |          |C      |        |         |

|          |of       |         |          |       |        |         |

|          |Finance  |         |          |       |        |         |

|          |Act      |         |          |       |        |         |

|          |         |IND, HUF,|Co-operati|Firm   |Local   |Companies|

|          |         |BOI, AOP |ve Society|       |Authorit|         |

|          |         |         |          |       |y       |         |

|          |         |         |          |       |        |         |

|1995      |Section 2|-        |-         |-      |-       |         |

|          |(3)      |         |          |       |        |         |

|1996      |Section 2|-        |-         |-      |-       |15%      |

|          |(3)      |         |          |       |        |         |

|1997      |Section 2|-        |-         |-      |-       |7.50%    |

|          |(3)      |         |          |       |        |         |

|1998      |Section 2|-        |-         |-      |-       |-        |

|          |(3)      |         |          |       |        |         |

|1999      |Section 2|-        |-         |-      |-       |-        |

|          |(3)      |         |          |       |        |         |

|2000      |Section 2|10%      |10%       |10%    |10%     |10%      |

|          |(3)      |         |          |       |        |         |

|2001      |Section 2|12% or   |12%       |12%    |12%     |13%      |

|          |(3)      |17%      |          |       |        |         |

|2002      |Section 2|2%       |2%        |2%     |2%      |2%       |

|          |(3)      |         |          |       |        |         |

|2003      |Section 2|5%       |5%        |5%     |5%      |5%       |

|          |(3)      |         |          |       |        |         |

 Rate at which tax, or for that matter  surcharge  is  to  be  levied  is  an  essential  component  of  the  tax  regime  in  Govindasaran  Gangasaran  v. Commissioner of Income Tax[12], this Court, while explaining the  conceptual meaning of a tax, delineated four components therein, as is clear  from  the following passage from the said judgment :  

“The components which enter into the concept of a tax are well  known.   The  first is  the  character  of  the  imposition  known  by  its  nature  which prescribes the taxable event attracting the levy,  the  second  is  a  clear indication of the person on whom the levy is imposed and who is  obliged  to pay the tax, the third is the rate at which the  tax  is  imposed,  and  the fourth is the measure or value  to  which  the  rate  will  be  applied  for computing the tax liability.   If  those  components  are  not  clearly  and definitely ascertainable, it is difficult to say that  the  levy  exists  in point of law.  Any  uncertainty  or  vagueness  in  the  legislative  scheme defining any  of  those  components  of  the  levy  will  be  fatal  to  its validity.”

It is clear from the above that the rate at which the tax is to  be  imposed  is an essential component of tax and where the rate is not stipulated or  it cannot be applied with precision, it would be difficult  to  tax  a  person. This very conceptualisation of tax was rephrased  in  C.I.T., Bangalore v. B.C. Srinivasa Shetty[13], in the following manner:

“The  character  of  computation  of  provisions  in  each  case   bears   a  relationship to the nature of the charge.  Thus, the  charging  section  and  the computation provisions together constitute  an  integrated  code.   When there is a case to which the computation provisions cannot apply at all,  it is evident that such a case was not intended to  fall  within  the  charging section.”

In absence of certainty about the rate  because  of  uncertainty  about  the  date with reference to which the rate is to be applied, it  cannot  be  said that  surcharge  as  per  the  existing  provision  was  leviable  on  block assessment qua undisclosed income.  Therefore, it cannot be  said  that  the proviso added to Section 113 defining the said date was  only  clarificatory  in nature.   From  the  aforesaid  table  showing  the  different  rates  of surcharge in different years, it would be clear that choice of date  has  to be formed as in some of the years, there would not be any surcharge at  all.  

(b)   Pertinently, the Department  itself  acknowledged  and  admitted  this  fact which is clear from the manner the issue was debated  in  a  Conference of Chief Commissioners which was held sometime in the year  2001.   In  this Conference, some proposals relating to  simplification  and  rationalisation of procedures and provisions were noted  in  respect  of  block  assessment.  The foofaraw  made  in  the  Conference  by  those  who  had  to  apply  the provision, was not without substance because of the garboil situation  which this provision had created and in amply reflected  in  the  proposals  which was submitted in the following terms:

 “In the case of a block assessment, there are two problems  in  relation  to the levy of surcharge.  The first is that Section 113  does  not  mention  a  Central Act.  In the absence of a reference to another Central  Act  in  the charging section, it becomes difficult to justify levy of  surcharge.   Even  if it is assumed that reference in the Finance  Act  to  section  113  is  a  sufficient authority to levy surcharge,  the  second  problem  is  that  the Finance Act levies surcharge on the amount of income-tax on the income of  a particular assessment year whereas in the block assessment tax is levied  on the  undisclosed  income  of  the  block  period.   Absence  of  a  specific assessment year in the block assessment may render the  levy  suspect.   Yet  another problem is the rate of surcharge applicable.  To illustrate, if  the search took place on, say, April 4, 1996, whether the rate of  surcharge  is to  be  adopted  as  applicable  to  the  assessment  year  1996-97  or  the  assessment year 1997-98, the rate of surcharge being different for  the  two  years? The provisions of section 113 or the provisions of  the  Finance  Act  do not offer any guidance on the issue.

 Suggestions :

 The foregoing problem  indicates  that  levy  of  surcharge  on  undisclosed  income is a matter of uncertainty  and  is  prone  to  litigation.   In  the circumstances,  it  is  suggested  that   section   113   may   be   amended retrospectively in order to provide  for  levy  of  surcharge  at  the  rate applicable to the assessment year relevant to the financial  year  in  which  the search was concluded.”

 The Chief Commissioners accepted the position, in no uncertain  terms,  that as per the language of Section 113, as  it  existed,  it  was  difficult  to justify levy of surcharge.  It was also acknowledged that  even  if  Section 113 empowered to levy surcharge, since block assessment  tax  is  levied  on the undisclosed income of the block period, absence of  specific  assessment year in the block assessment would render the levy suspect.

(c)   We would like to embark on a discussion on some basic and  fundamental  concepts, which would shed further light on the subject matter.   No  doubt, there is no scope for accepting  the  Libertarian  theory  which  postulates among others, no taxation by  the  State  as  it  amounts  to  violation  of individual liberty and advocates minimal interference  by  the  State.   The  Libertarianism  propounded  by  the  Australian-born  economist  philosopher Friedrich  A.  Hayek  and  American   economist   Milton   Friedman   stands  emphatically rejected by all civilised and democratically  governed  States,  in favour of strongly conceptualised “welfare  state”.   To  attain  welfare state is our constitutional goal as well, enshrined  as  one  of  its  basic feature, which runs through  our  Constitution.   It  is  for  this  reason,  specific  provisions  are  made  in   the   Constitution,   empowering   the  legislature to make laws for levy of taxes, including the  income-tax.   The rationale behind collection of taxes is  that  revenue  generated  therefrom  shall be spent by the  governments  on  various  developmental  and  welfare schemes, among others.

      At the same time, it is also mandated that there cannot be  imposition  of any tax without the authority of law.  Such a law has to  be  unambiguous and should prescribe the liability to pay taxes  in  clear  terms.   If  the concerned provision of the taxing statute is  ambiguous  and  vague  and  is  susceptible to two interpretations, the  interpretation  which  favours  the subjects, as against there the revenue, has to  be  preferred.   This  is  a  well established principle of statutory interpretation, to help finding  out as to whether particular category of assessee are to pay  a  particular  tax  or not.  No doubt, with the  application  of  this  principle,  Courts  make endeavour to find out the intention of the legislature.  At the  same  time,  this very principle is based on “fairness” doctrine as it lays down that  if it is not very clear from the provisions  of  the  Act  as  to  whether  the particular tax is to be levied to a particular class of persons or not,  the subject should not  be  fastened  with  any  liability  to  pay  tax.   This  principle also acts as a balancing factor between  the  two  jurisprudential theories of justice – Libertarian theory on the one hand and Kantian  theory  along with Egalitarian theory propounded by John Rawls on the other hand.

      Tax laws are clearly in derogation of  personal  rights  and  property  interests and are,  therefore,  subject  to  strict  construction,  and  any ambiguity must be resolved against imposition of the tax.   In  Billings  v.  U.S.[14], the Supreme  Court  clearly  acknowledged  this  basic  and  long-standing rule of statutory construction:

 “Tax Statutes . should be strictly construed, and, if  any  ambiguity  be found to exist, it must be resolved in favor of the citizen.   Eidman  v. Martinez, 184 U.S. 578, 583; United States v. Wigglesworth,  2  Story,  369, 374; Mutual Benefit Life Ins. Co. v. Herold, 198 F. 199, 201, aff'd  201  F. 918; Parkview Bldg. Assn. v. Herold, 203 F. 876, 880; Mutual  Trust  Co.  v. Miller, 177 N.Y. 51, 57.”

       Again, in United States v.  Merriam[15],  the  Supreme  Court  clearly  stated at pp. 187-88:

      “On behalf of the Government it is urged that taxation is a  practical  matter and concerns itself with the substance of the thing  upon  which  the  tax is imposed  rather  than  with  legal  forms  or  expressions.   But  in statutes levying taxes the literal meaning of the  words  employed  is  most  important, for such statutes are not to be extended  by  implication  beyond the clear import of the language used.   If  the  words  are  doubtful,  the doubt must be resolved against the Government and in favor of the  taxpayer. Gould v. Gould, 245 U.S. 151, 153”

      As Lord  Cairns  said  many  years  ago  in  Partington  v.  Attorney-General[16]: “As I understand the principle of all fiscal legislation it  is  this : If the person sought to be taxed comes within the letter of  the  law  he must be taxed, however great the hardship  may  appear  to  the  judicial mind to be.  On the other hand, if the Crown, seeking to  recover  the  tax,  cannot bring the subject within the letter of the law, the subject is  free, however apparently within the spirit of the law  the  case  might  otherwise appear to be.

(d)   There are some  other  circumstances  which  reflect  the  legislative intent.  The problem which  was  highlighted  in  the  Conference  of  Chief Commissioners on the rate of surcharge applicable is noted above.   In  view  of the aforesaid difficulties pointed out  by  the  Chief  Commissioners  in their  Conference,  it  becomes  clear  that  as  per  the  provisions  then  enforced, levy of surcharge in  the  block  assessment  on  the  undisclosed income was a difficult proposition.  It is  for  this  reason  retrospective  amendment to Section 113  was  suggested.   Notwithstanding  the  same,  the legislature  chose  not  to  do  so,  as  is  clear  from   the   discussion hereinafter.

      “Notes on Clauses” appended to  Finance  Bill,  2002  while  proposing  insertion of proviso categorically states that  “this  amendment  will  take  effect from 1st June, 2002”.  These become epigraphic words,  when  seen  in contradistinction to other  amendments  specifically  stating  those  to  be clarificatory  or  retrospectively  depicting   clear   intention   of   the legislature.  It can be seen from the same notes that few  other  amendments

in the Income Tax Act were made by the same Finance Act specifically  making those amendments retrospectively.  For example, clause  40  seeks  to  amend  S.92F.  Clause iii (a) of S.92F is  amended  “so  as  to  clarify  that  the activities mentioned in the said clause include  the  carrying  out  of  any work  in  pursuance  of  a   contract.”    This   amendment   takes   effect  retrospectively from 01.04.2002.  Various other amendments also  take  place retrospectively.  The Notes on Clauses show that the  legislature  is  fully  aware of 3 concepts:

(i)   prospective amendment with effect from a fixed date; 

(ii)  retrospective amendment with effect from a fixed anterior date; and

(iii) clarificatory amendments which are retrospective in nature.

      Thus, it was a conscious decision of the legislature,  even  when  the  legislature knew the implication thereof and took note of the reasons  which led to the insertion of the  proviso,  that  the  amendment  is  to  operate prospectively.  Learned counsel  appearing  for  the  assessees  sagaciously  contrasted the aforesaid stipulation while effecting  amendment  in  Section  113 of the Act, with various other provisions not only in the  same  Finance  Act but Finance  Acts  pertaining  to  other  years  where  the  legislature  specifically  provided  such  amendment  to  be  either   retrospective   or clarificatory.  In so far as amendment to Section 113  is  concerned,  there is no such language used and on the contrary, specific stipulation is  added making the provision effective from 1st June, 2002.

 (e)    There  is  yet  another  very  interesting  piece  of  evidence  that  clarifies the provision beyond any pale  of  doubt,  viz.  understanding  of CBDT itself regarding this provision.  It  is  contained  in  CBDT  circular No.8 of 2002 dated  27th August, 2002, with the subject “Finance  Act,  2002 – Explanatory Notes on provision relating to Direct Taxes”.   This  circular has been issued after the  passing  of  the  Finance  Act,  2002,  by  which  amendment to Section 113 was made.  In this circular, various amendments  to the Income Tax Act are discussed amply demonstrating as to which  amendments are  clarificatory/retrospective  in  operation  and  which  amendments  are prospective.  For example, explanation to Section  158BB  is  stated  to  be  clarificatory in nature.  Likewise,  it  is  mentioned  that  amendments  in Section 145 whereby provisions of that section are made applicable to  block  assessments is made clarificatory  and  would  take  effect  retrospectively  from 1st day of July, 1995.  When it comes to amendment to  Section  113  of  the Act, this very circular provides that  the  said  amendment  along  with  amendments in Section 158BE, would be prospective i.e. it will  take  effect  from 1st June, 2002.

(f)   Finance Act, 2003, again makes the position clear  that  surcharge  in  respect of block assessment of  undisclosed  income  was  made  prospective. Such a stipulation is contained in second  proviso  to  sub-section  (3)  of Section 2 of Finance Act, 2003.  This proviso reads as under:

“Provided further that the amount of income-tax computed in accordance  with  the provisions of  section  113  shall  be  increased  by  a  surcharge  for purposes of the Union as provided in Paragraph A, B, C, D or E, as the  case may be, of Part III of the First Schedule of the Finance Act of the year  in which the search is initiated under  section  132  or  requisition  is  made  under section 132A of the income-tax Act.”

Addition of this proviso in the Finance Act, 2003  further  makes  it  clear  that such a provision was necessary to provide for surcharge  in  the  cases of block assessments and thereby  making  it  prospective  in  nature.   The  charge in respect of the surcharge, having been created for the  first  time  by the insertion of the proviso to Section 113,  is  clearly  a  substantive provision and hence is  to  be  construed  prospective  in  operation.   The amendment neither purports to be  merely  clarificatory  nor  is  there  any material to suggest that it was intended  by  Parliament.   Furthermore,  an  amendment made to a taxing statute can be said  to  be  intended  to  remove 'hardships' only of the assessee, not of the Department.  On  the  contrary, imposing a retrospective levy  on  the  assessee  would  have  caused  undue  hardship and for that reason  Parliament  specifically  chose  to  make  the proviso effective from 1.6.2002.

 40.   The aforesaid discursive of  ours  also  makes  it  obvious  that  the  conclusion of the Division Bench in Suresh N. Gupta treating the proviso  as clarificatory  and  giving  it  retrospective  effect  is  not   a   correct conclusion.  Said judgment is accordingly overruled.

 41.   As a result of the aforesaid discussion,  the  appeals  filed  by  the  Income Tax Department are hereby dismissed.  Appeals of  the  assessees  are allowed deleting the surcharge levied by  the  assessing  officer  for  this block assessment pertaining to the period prior to 1st June, 2002.

                              

             (R.M. Lodha) ….......................................................CJI.

             (Jagdish Singh Khehar)   …......................................J

             (J. Chelameswar) …....................................................J

             (A.K. Sikri)…................................................................J.

             (Rohinton Fali Nariman) ….........................................J.

                                                    

 

New Delhi;

September 15, 2014.

-----------------------

[1]   (2008) 4 SCC 362

[2]   (2009) 310 ITR 105 (SC)

[3]   (1870) LR 6 QB 1

[4]   (1994) 1 AC 486

[5]   (2005) 7 SCC 396

[6]   (2006) 6 SCC 286

[7]   Principles of Statutory Interpretation, 13th Edition 2012 published

by LexisNexis Butterworths Wadhwa, Nagpur

[8]   (1968) 3 SCR 623

[9]   1989 Supp (1) SCC 499

[10]  (1976) 1 SCC 906

[11]  1962 (1) SCR 788

[12]  155 ITR 144

[13]  125 ITR 294

[14]  232 U.S. 261, at p.265, 34 S.Ct. 421 (1914)

[15]  263 U.S. 179, 44 S.Ct. 69 (1923)

[16]  (1869) LR 4 HL 100

 

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