Page 1 REPORTABLE

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.________ of 2014 & connected matters Page 1 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 2 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.________ of 2014 & connected matters Page 2 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 3 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.

Civil Appeal No.________ of 2014 & connected matters Page 3 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 4 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

Civil Appeal No.________ of 2014 & connected matters Page 4 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 5 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

Civil Appeal No.________ of 2014 & connected matters Page 5 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 6 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.

Civil Appeal No.________ of 2014 & connected matters Page 6 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 7 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

Civil Appeal No.________ of 2014 & connected matters Page 7 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 8 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

1(2008) 4 SCC 362

Civil Appeal No.________ of 2014 & connected matters Page 8 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 9 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,

Civil Appeal No.________ of 2014 & connected matters Page 9 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 10 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

Civil Appeal No.________ of 2014 & connected matters Page 10 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 11 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 :

Civil Appeal No.________ of 2014 & connected matters Page 11 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 12 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

Civil Appeal No.________ of 2014 & connected matters Page 12 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 13 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

Civil Appeal No.________ of 2014 & connected matters Page 13 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 14 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

Civil Appeal No.________ of 2014 & connected matters Page 14 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 15 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 1 13, 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

Civil Appeal No.________ of 2014 & connected matters Page 15 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 16 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

Civil Appeal No.________ of 2014 & connected matters Page 16 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 17 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.

Civil Appeal No.________ of 2014 & connected matters Page 17 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 18 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

Civil Appeal No.________ of 2014 & connected matters Page 18 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 19 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

Civil Appeal No.________ of 2014 & connected matters Page 19 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 20 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

Civil Appeal No.________ of 2014 & connected matters Page 20 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 21 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

Civil Appeal No.________ of 2014 & connected matters Page 21 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 22 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

Civil Appeal No.________ of 2014 & connected matters Page 22 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 23 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

Civil Appeal No.________ of 2014 & connected matters Page 23 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 24 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

Civil Appeal No.________ of 2014 & connected matters Page 24 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 25 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

Civil Appeal No.________ of 2014 & connected matters Page 25 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 26 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.

Civil Appeal No.________ of 2014 & connected matters Page 26 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 27 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.

2(2009) 310 ITR 105 (SC)

Civil Appeal No.________ of 2014 & connected matters Page 27 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 28 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. 1

st

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

Civil Appeal No.________ of 2014 & connected matters Page 28 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 29 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

Civil Appeal No.________ of 2014 & connected matters Page 29 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 30 “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

Civil Appeal No.________ of 2014 & connected matters Page 30 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 31 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

Civil Appeal No.________ of 2014 & connected matters Page 31 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 32 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

Civil Appeal No.________ of 2014 & connected matters Page 32 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 33 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

Civil Appeal No.________ of 2014 & connected matters Page 33 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 34 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

Civil Appeal No.________ of 2014 & connected matters Page 34 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 35 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

3(1870) LR 6 QB 1

4(1994) 1 AC 486

Civil Appeal No.________ of 2014 & connected matters Page 35 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 36 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,

5(2005) 7 SCC 396

Civil Appeal No.________ of 2014 & connected matters Page 36 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 37 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

6(2006) 6 SCC 286

Civil Appeal No.________ of 2014 & connected matters Page 37 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 38 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

7Principles of Statutory Interpretation, 13

th

Edition 2012 published by LexisNexis Butterworths

Wadhwa, Nagpur

Civil Appeal No.________ of 2014 & connected matters Page 38 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 39 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

8(1968) 3 SCR 623

Civil Appeal No.________ of 2014 & connected matters Page 39 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 40 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 1

st

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,

91989 Supp (1) SCC 499

10(1976) 1 SCC 906

Civil Appeal No.________ of 2014 & connected matters Page 40 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 41 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 (3

rd

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

111962 (1) SCR 788

Civil Appeal No.________ of 2014 & connected matters Page 41 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 42 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

Civil Appeal No.________ of 2014 & connected matters Page 42 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 43 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

Civil Appeal No.________ of 2014 & connected matters Page 43 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 44 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 Act

Relevant

Section of

Finance ActPara - A Para – B Para – CPara – DPara - E

IND, HUF,

BOI, AOP

Co-operative

Society Firm

Local

AuthorityCompanies

1995 Section 2 (3) - - - -

1996 Section 2 (3) - - - - 15%

1997 Section 2 (3) - - - - 7.50%

1998 Section 2 (3) - - - - -

1999 Section 2 (3) - - - - -

2000 Section 2 (3)10% 10% 10% 10% 10%

2001 Section 2 (3)12% or 17% 12% 12% 12% 13%

2002 Section 2 (3) 2% 2% 2% 2% 2%

Civil Appeal No.________ of 2014 & connected matters Page 44 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 45 2003 Section 2 (3) 5% 5% 5% 5% 5%

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

12155 ITR 144

Civil Appeal No.________ of 2014 & connected matters Page 45 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 46 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

13125 ITR 294

Civil Appeal No.________ of 2014 & connected matters Page 46 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 47 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

Civil Appeal No.________ of 2014 & connected matters Page 47 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 48 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

Civil Appeal No.________ of 2014 & connected matters Page 48 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 49 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

Civil Appeal No.________ of 2014 & connected matters Page 49 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 50 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:

14232 U.S. 261, at p.265, 34 S.Ct. 421 (1914)

Civil Appeal No.________ of 2014 & connected matters Page 50 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 51 “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

15263 U.S. 179, 44 S.Ct. 69 (1923)

16(1869) LR 4 HL 100

Civil Appeal No.________ of 2014 & connected matters Page 51 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 52 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 1

st

June, 2002”.

These become epigraphic words, when seen in

Civil Appeal No.________ of 2014 & connected matters Page 52 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 53 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

Civil Appeal No.________ of 2014 & connected matters Page 53 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 54 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 1

st

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 27

th

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

Civil Appeal No.________ of 2014 & connected matters Page 54 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 55 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 1

st

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 1

st

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

Civil Appeal No.________ of 2014 & connected matters Page 55 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 56 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

Civil Appeal No.________ of 2014 & connected matters Page 56 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)

Page 57 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 1

st

June, 2002.

…......................................CJI.

(R.M. Lodha)

…......................................J.

(Jagdish Singh Khehar)

…......................................J.

(J. Chelameswar)

…......................................J.

(A.K. Sikri)

…......................................J.

(Rohinton Fali Nariman)

New Delhi;

September 15, 2014.

Civil Appeal No.________ of 2014 & connected matters Page 57 of 57

(arising out of S.L.P. (C) Nos. 540 of 2009)