As per the case facts, a search was conducted, and the appellant filed a return for a block period that included undisclosed income. The tax authorities then levied interest and ...
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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 3704 OF 2012
K.L. Swamy ...Appellant(s)
Versus
The Commissioner of Income Tax & Anr. …Respondent(s)
WITH
CIVIL APPEAL NO. 3706 OF 2012
CIVIL APPEAL NO. 3705 OF 2012
CIVIL APPEAL NO. 3707 OF 2012
CIVIL APPEAL NO. 3708 OF 2012
CIVIL APPEAL NO. 3709 OF 2012
J U D G M E N T
: 1 :
M.R. SHAH, J.
1.As common question of law and facts arise in this group of
appeals, all these appeals are decided and disposed of
together by this common judgment and order.
2.In all these appeals, the dispute is with respect to levy of
interest under Section 158BFA(1) of the Income Tax Act in
respect of assessment completed under Section 158BD of the
Act for belatedly filing the return of income for the block
period and also the levy of surcharge under Section 113 of
the Income Tax Act.
3.For the sake of convenience Civil Appeal No.3706 of 2012
arising out of the impugned judgment and order passed by
the High Court in ITA No.277 of 2004, is being treated and
considered as a lead matter.
4.The facts leading to the present appeal in nutshell are as
under :
4.1That the appellant is an individual and Director Partner in
Khoday Group of Company concerns. A search under Section
132 was conducted in the residential premises of the family
: 2 :
members of Khoday Group and the warrant was issued in
the name of M/s. Khoday India Limited. The appellant was
served with the notice under Section 158BD to file the return
of income for the block period of 01.04.1986 to 13.02.1997.
The appellant filed return for the block period in response to
notice under Section 158BD by including the undisclosed
income of Rs.45,00,000/ for the block period. The Assessing
Officer levied interest under Section 158BFA(1) for the period
from 18.01.1998 to 19.01.1999 at the rate of 2% per month
for 13 months and levied interest of Rs.7,12,296/ on the tax
amount of Rs.27,49,600/.
4.2The appellant being aggrieved by the order of the Assessing
Officer filed an appeal before the learned CIT (A). It was the
case on behalf of assessee that levy of interest under Section
158BFA(1) was not justified. The learned CIT (A) held that
Section 158BFA provides for levy of interest for late filing of
return of block assessment in response to the notice under
Section 158BC similar to the provisions of Section 234A. The
CIT(A) also held that levy of interest under Section 234A is
compensatory in nature and is attracted the moment there is
: 3 :
a default. The appellant – assessee being aggrieved by the
order of CIT(A) filed an appeal before the ITAT, Bangalore.
Before the ITAT, it was contended on behalf of assessee that
provisions of Section 158BFA(1), the levy of interest would be
attracted only in a case where there was a failure or delay in
filing the return in response to notice under Section 158BC.
It was contended that in absence of any notice under Section
158BC, the Assessing Officer was not justified in levying
interest. It was also contended that in Section 158BD after
the words “that Assessing Officer shall proceed” the words
“under Section 158BC” was inserted w.e.f. 01.06.2002 by the
Finance Act, 2002. It was contended that the amendment
was specifically brought to cure the anomaly and the fact
that it has been made prospective w.e.f. 01.06.2002 and
therefore, the interest cannot be validly levied under Section
158BFA(1) in a case where notice under Section 158BD was
issued prior to 31.05.2002 and in the present case the notice
was issued on 28.11.1997. The learned ITAT allowed the
appeal preferred by the assessee by observing that Section
158BFA(1) inserted w.e.f. 01.01.1997, prescribes levy of
: 4 :
interest and never require to pay the selfassessment tax due
along with the return of income. Interest is leviable on
undisclosed income determined with the assessment. It was
observed that 140A requiring to pay selfassessment tax
along with the return of income filed under Section 158BC(a)
was amended w.e.f. 01.06.1999 only. It was observed that in
the present case the return was filed on 19.01.1999 and at
the relevant point of time there was no provision to pay self
assessment tax along with the return of income and
therefore no interest was leviable under Section 158BFA(1).
4.3The revenue being aggrieved by the order passed by the ITAT,
filed an appeal before the High Court being ITA No.277 of
2004. By the impugned judgment and order, the High Court
has reversed the decision of the ITAT. The High Court has
observed that the amendment to Section 140A is of no
consequence so far as determination of interest under
Section 158BFA(1) is concerned. The High Court negatived
the submission on behalf of the assessee that in absence of
any specific notice under Section 158BC, there shall not be
any levy of interest under Section 158BFA(1) on the
: 5 :
submission that prior to the amendment by including
Section 158BC within the scope of Section 158BD by
Finance Act, 2002 w.e.f. 01.06.2002. So far as a notice under
Section 158BD, provision of Section 158BFA(1) was not
attracted. The High Court has observed and held that levy of
provisions of Section 158BD prior to the amendment in
terms of Finance Act, 2002 i.e. before adding the words
“under Section 158BC”, section itself indicates the procedure
that was required to be followed by the Assessing Officer, is
only in terms of the very provisions of Chapter XIVB of the
Act and therefore Section 158BC as well as 158BFA(1) are
even otherwise attracted and just because the Legislature
thought it fit to add or to mention Section 158BC by way of
amendment through Finance Act, 2002, it would not make
any difference to the earlier provision of Section 158BD
which even otherwise envisages within itself the provisions
and applicability of Section 158BD and 158BFA(1).
Consequently, the High Court has answered the questions of
law in favour of the revenue and against the assessee and
consequently allowed the said appeal.
: 6 :
4.4Now so far as the levy of surcharge under Section 113 of the
Income Tax Act, the High Court has held the said question
also in favour of the revenue relying upon the decision of this
Court in the case of Commissioner of Income Tax vs.
Suresh N. Gupta – (2008) 297 ITR 322 (SC).
4.5Being aggrieved and dissatisfied with the impugned
judgment and order passed by the High Court, the assessee
has preferred the present appeals.
5.Shri Preetesh Kapur, learned Senior Advocate has appeared
on behalf of the assessee – appellant and Shri Balbir Singh,
learned ASG has appeared on behalf of the Revenue.
6.Now, so far as the liability to pay the interest – applicability
of Section 158BFA to persons who have not been issued
notice under Section 158BC prior to the amendment in
Section 158BD by Finance Act, 2002, it is vehemently
submitted by Shri Kapoor, learned Senior Counsel appearing
on behalf of assessee that in the present case admittedly the
present assessee was never issued notice under Section
158BC, but was issued notice only under Section 158BD. It
: 7 :
is submitted that in fact prior to amendment in Section
158BD by Finance Act, 2002, there was no requirement to
issue notice to the “other person” under Section 158BC. It is
submitted that in view of the above factual position, Section
158BFA applies only where a return “as required by notice
under Clause (a) of Section 158BC” has not been furnished
within time. It is further submitted that in absence of such
notice under Clause (a) of Section 158BC, the fundamental
prerequisite of the section is not fulfilled.
6.1It is submitted that if on its plain words a section does not
apply then liability under that section cannot be imposed. It
is submitted that as consistently being held by this Hon’ble
Court that for liability to be fastened upon the assessee, it
must be shown that he unambiguously falls within the letter
of the section. Reliance is placed on the decision of this
Court in the case of Mathuram Agrawal Vs. State of
Madhya Pradesh, (1999) 8 SCC 667 (Paras 13 and 14).
6.2It is submitted that therefore since Section 158BFA does not
cover a situation where notice has been issued under Section
158BD, no interest under that section can be recovered from
: 8 :
the present assessee.
6.3It is further submitted that the department’s argument
before the High Court was that amendment in Section
158BD vide Finance Act, 2002, introducing the requirement
of issuing notice under Section 158BC to the “other person”,
applied even to pending proceedings is erroneous and
against the Constitution Bench decision of this Court in the
case of Commissioner of Income Tax (Central)I, New
Delhi Vs. Vatika Township Private Limited – 2015 (1) SCC
1 (Para 28), wherein the Constitution Bench has clearly laid
down that the presumption is that every amendment is
prospective and the amendment applies from the assessment
year in which it is introduced.
6.4It is further submitted that in any event, consequence of the
said argument will be that the entire block assessment (not
just levy of interest) would be rendered nonest inasmuch as
this Court in the aforesaid decision has laid down that where
a section requires issuance of notice such notice is a
jurisdictional prerequisite and in the absence of such notice,
the entire proceedings are liable to be quashed. Reliance is
: 9 :
placed on the decision of this Court in the case of Assistant
Commissioner of Income Tax and Anr. Vs. Hotel Blue
Moon, (2010) 3 SCC 259 (Para 22). It is submitted that in
other words if the amendment applied retrospectively, then
issuance of notice under Section 158BC was mandatory even
to the “other person” (being the assessee herein) and in the
absence thereof the entire block assessment would fail.
6.5It is submitted that even the submission on behalf of
department that issuance of notice under Section 158BC is a
mere formality and that no notice under Section 158BC is
required to be issued to “other person” even after the
amendment to Section 158BD vide Finance Act, 2002, is
concerned, it is submitted that the said submission is also
erroneous for the following reasons :
“(i)The said argument goes against the specific
mandatory language of section 158BD as it stands
now namely. “…..and that Assessing Officer shall
proceed [under section 158BC] against such other
person …….”
{As submitted above, in view of the judgment of
this Hon’ble Court in Hotel Blue Moon, the issuance
of a notice under the specified section, would be a
jurisdictional prerequisite, and hence the entire
: 10 :
block assessments would be rendered nonest.}
(ii)Furthermore, the argument renders otiose the
specific amendment in section 158BD adding the
words “under Section 158BC” vide Finance Act,
2002. If the Department’s contention is correct then
this amendment was unnecessary.
(iii)In any event, this argument does not answer
the contention of the assessee that section 158BFA
on a plain reading, applies only where a return “as
required by a notice under clause (a) of section
158BC” has not been furnished within time. In the
present case we are concerned with the limited
issue of levy of interest under section 158BFA.
Even if {for the sake of argument} notice under
section 158BC is not mandatory, that does not
change the specific words of section 159BFA and
cannot bring within its net a person who has not
been issued a notice under section 158BC. On the
other hand, the argument being raised by the
assessee ensures that post 2002 even the “other
person” comes within the purview of section
158BFA.
(iv)This argument of the Department also goes
against the specific pari materia provision namely
section 153C. as rightly pointed out by the learned
ASG, post 31
st
May, 2003, in case of a search, the
provisions of 153A to 153C apply and that section
153C is pari materia with 158BD.”
6.6Making above submissions, it is prayed to hold that in
absence of the notice under Section 158BC, served upon the
assessee – “other person”, the Assessing Officer was not
: 11 :
justified in levying the interest under Section 158BFA.
6.7Now, so far as the levy of surcharge under proviso to Section
113 of Income Tax Act is concerned, it is vehemently
submitted that as such the said question is now covered in
favour of the assessee by the Constitution Bench decision of
this Court in the case of Vatika Township Private Limited
(supra) (Para 37 to 40). It is submitted that the decision of
this Court in the case of Suresh N. Gupta (supra) that has
been relied upon by the High Court in the impugned
judgment has been specifically overruled by the Constitution
Bench in Vatika Township Private Limited (supra).
6.8Now, so far as chargeability of interest under Section
158BFA prior to 01.06.1999 in the case of persons issued
notice under Section 158BC is concerned, it is submitted
that interest only follows the principal. In this case the
principal being the tax payable. It is submitted that in other
words the liability to pay interest cannot arise if there was no
liability to pay the tax itself along with the return, at the
relevant point of time. It is submitted that interest only being
: 12 :
an element to compensate the revenue for having been
deprived of the tax, interest can start running only once a
liability to deposit tax arises.
6.9It is submitted that in the present case it is clear that neither
Section 158BC nor Section 158BFA require the assessee to
pay tax along with the return. It is submitted that this
liability to deposit the tax along with return arises only
under Section 140A. However, at the relevant point of time
Section 140A did not apply to Section 158BC and hence
there was no liability to deposit tax along with the return. It
is submitted that this lacuna was noticed by Parliament and
by the Finance Act, 1999, the words “Section 158BC” have
been inserted in Section 140A w.e.f. 01.06.1999. It is
submitted that for the period prior to 01.06.1999 the
submission on behalf of the department that Section 158BFA
is to be seen independently from Section 140A may not be
accepted. It is submitted that therefore at the relevant point
of time there being no liability to deposit tax along with the
return, there can be no levy of interest” on that tax for mere
failure to file return.
: 13 :
6.10Making above submissions, it is prayed to allow the present
appeals and answer the issues / questions of law in favour of
the assessee and against the revenue.
7.All these appeals are vehemently opposed by Shri Balbir
Singh, learned ASG appearing on behalf of the revenue.
7.1It is submitted that the present appeals arise out of search
conducted on 13.02.1997 in the Khoday Group of
companies. All appeals raised one common question
regarding the levy of interest under Section 158BFA on the
undisclosed income of the assessee. It is submitted that
pursuant to the search conducted on 13.02.1997, Section
158BD notice was issued to the assessee (“other person”) to
file return for the block period 198788 to 199798,
whereafter the Assessing Officer passed the order of
assessment under Section 158BD and determined the
income. The Assessing Officer also levied interest under
Section 158BFA(1) for different periods, depending on the
date of filing of return in each case. It is submitted that
pursuant to the notice issued to file return, there was delay
: 14 :
in filing return and Section 158BFA(1) being mandatory in
nature as per which the interest became payable and was
liable to be paid by the assessee after the due date stipulated
in the notice and the date of actual filing of return.
7.2It is submitted that the interest under Section 158BFA(1) of
the Act is levied to compensate the government for delay in
filing or nonfiling of return by the assessee pursuant to
determination under Section 158BC / 158BD of the Act.
7.3It is further submitted that subsequently, Section 140A (1) of
the Income Tax Act was amended by the Finance Act, 1999,
w.e.f. 01.06.1999 incorporating Section 158BC making the
assessee liable to pay tax before furnishing return under
Section 158BC and also file the proof of payment along with
return. By insertion of Section 158BC in Section 140A, the
Legislature casts an additional onus on the assessee to pay
selfassessment tax under Section 140A (1) of the Income
Tax Act when the return of income was filed in response to
the notice under Section 158BC. It is submitted that
therefore it is very clear that when the return was filed by the
assessee for the block period under Section 158BC, there
: 15 :
was no requirement to pay tax under Section 140A (1) of the
Income Tax Act and the entire liability was limited to period
of delay and not be delayed in payment of tax.
7.4It is submitted that Chapter XIVB of the Income Tax is a
special provision with respect to “searched person” and
“other than searched person”. It is submitted that the scope
and intent behind introduction of Chapter XIVB has been
explained in detail by the Kerala High Court in the case of
P.P. Umerkutty Vs. ACIT – (2005) 279 ITR 213 Kerala . It
is submitted that as explained by the Kerala High Court in
the aforesaid decision, the provision relating to block
assessment under Chapter XIVB are selfcontained note,
providing for variation of the manner in which the liability for
payment of tax is determined and covering a situation where
undisclosed income relatable to the block period had not
suffered tax only due to nondisclosure coming to light in
course of certain search proceedings etc.
7.5It is submitted that the scheme of block assessment
introduced under Chapter XIVB has been explained and
considered by the Constitution Bench of this Court in the
: 16 :
case of Vatika Township Private Limited (supra). It is
submitted that as observed by this Court, Chapter XIVB of
the Act deals with block assessment which lays down a
special procedure for search cases. It is submitted that as
observed, the main reason for adding this provision in the
Act was to curb tax evasion and expedite as well as simplify
the assessment in such searched cases. It is submitted that
even as observed and held by this Court in the aforesaid
decision Chapter XIVB is a complete code in itself providing
for selfcontained machinery for assessment of undisclosed
income for the block period of ten years or six years as the
case may be.
7.6It is submitted that the levy of interest under Section
158BFA(1) is linked to the period of filing of return and that
period alone is to be taken into consideration particularly as
the levy of interest being only for delayed period of filing
return. It is submitted that delay of interest is not linked to
delay in payment of taxes but due to delay in filing the
return.
7.7Insofar as the submission on behalf of the assessee that in
: 17 :
absence of any notice under Section 158BC to the “other
person” prior to the amendment in Section 158BD vide
Finance Act, 2002 and thereby entire block assessment
would be rendered nonest and the submission on behalf of
the assessee that the amendment vide Finance Act, 2002 in
Section 158BD adding the words “under Section 158BC”
would become otiose it is vehemently submitted that the said
contentions are without any merit. Relying upon Notes of
Clauses appended to Clause 64 of the Finance Bill, 2002,
whereby said words “under Section 158BC” was inserted it is
submitted that the words “under Section 158BC” in Section
158BD has been inserted so as to clarify that Assessing
Officer shall proceed against such “other person” under
Section 158BC. It is further submitted that Chapter XIVB
prescribes a special procedure for computation of income for
the block period in search and seizure cases. Section 158BD
indicates the procedure that was required to be followed by
Assessing Officer when any person other than a person with
respect to whom search was made. It is submitted that even
bereft of clarificatory amendment brought in vide Finance
: 18 :
Act, 2002, Section 158BD provided that provision of
ChapterXIVB of the Act would apply accordingly and
therefore the provision of Section 158BC and 158BFA was
attracted. It is submitted that insertion of “under Section
158BC” only makes it clear what was always existing under
Section 158BD.
7.8It is submitted that if the contention of the assessee that
Section 158BFA would not be attracted unless notice under
Section 158BC is provided then for the period prior to the
clarificatory amendment brought in prior to Finance Act,
2002, is accepted, in that case, the provision of Section
158BD will be rendered nugatory qua Section 158BFA. It is
submitted that such an interpretation will result in absurdity
and the whole intention behind Section 158BD being on the
statute book will be lost.
7.9Now so far as the chargeability of interest under Section
158BFA prior to 01.06.1999 in case of persons issued notice
under Section 158BC and the submission on behalf of
assessee that since the interest only follows principal, the
liability of payment of interest does not arise as there was no
: 19 :
liability to pay tax along with return, since at the relevant
point of time, Section 140A did not apply to Section 158BC ,
there was no liability to deposit tax along with return, hence,
there can be no levy of interest on that tax for mere failure to
file return, it is submitted that the said contention runs
contrary to the mandatory and compensatory language of
Section 158BFA(1). Reliance is placed on Notes on Clauses
and the memorandum explaining amendment to Section
140A of the Act more particularly Clause 63 by which it was
sought to amend Section 140A of the Income Tax Act. It is
submitted that a conjoint reading of the Note on Clauses and
the memorandum it is very clear that Legislature originally
intended to make assessee liable to pay taxes and interest
when the return was filed under Section 139 or under
Section 142 or under Section 148. It is submitted by virtue of
amendment the Legislature proposed to make those
assessees who are filing return under Section 158BC also
liable to pay tax and interest under Section 140A. It is
submitted that memorandum explaining the provisions of
Finance bill further makes it clear that the existing
: 20 :
provisions of Section 140A are not applicable to Chapter XIV
B relating to assessment of income of block period in search
and seizure cases. The said memorandum also recognizes
that the admitted tax declared in return cannot be collected
till the assessment is completed. Therefore, the Legislature
intended to amend Section 140A by incorporating Section
158BC so as to make liable those persons who are filing
return under Section 158BC also. Thus, by virtue of the
amendment, a new class of assessee was brought to the
statute book whose income are subject to the assessment
under Chapter XIVB, in Section 140A compelling them to
pay selfassessment tax. It is submitted that therefore if the
Legislature wanted to apply the provisions of Section 140A,
they would have expressly stated so. The very fact that there
is no provision in Chapter XIVB for applying provision of
Section 140A, clearly shows that Legislature never intended
to apply the provisions of Section 140A before 01.06.1999.
This was also made clear in the memorandum explaining the
Finance Bill, 1999, by saying that there is no corresponding
provision in Chapter XIVB for payment of selfassessment
: 21 :
tax at the time of filing the return. It is submitted that
therefore interest under Section 158BFA is leviable on stand
alone basis for nonfiling of return which ceases on the day
return is filed. It is submitted that said provision is similar to
Section 234A.
7.10It is submitted that in the impugned judgment and order the
High Court has explained the rationale behind introduction
of Section 158BC in Section 140A and has specifically held
that “the liability of payment of interest does not stop merely
on filing of return but it is attracted in terms of Section 140A
in payment of tax in terms of Section and even now the
provision of Section 158BFA(1) and 140A operate
independently”. It is submitted that in view of the same, the
submission on behalf of assessee to refute its liability to pay
interest under Section 158BFA deserves to be negatived.
7.11Now insofar as the levy of surcharge under proviso to Section
113 of the Income Tax Act is concerned Shri Balbir Singh,
learned ASG appearing for revenue has fairly conceded that
the said issue has been decided in favour of the assessee in
terms of the decision of this Court in the case of Vatika
: 22 :
Township Private Limited (supra).
8.Heard the learned counsels appearing on behalf of the
respective parties at length. The questions of law posed for
the consideration of this Court in the present appeals are: (i)
levy of interest under Section 158BFA(1) of the Income Tax
Act for late filing of the return for the block period in absence
of any notice under Section 158BC of the Act and for
the period prior to 01.06.1999? and (ii) the levy of the
surcharge under proviso to Section 113 of the Income Tax
Act.
9.Now insofar as the levy of the surcharge under proviso to
Section 113 of the Income Tax Act is concerned, the said
issue is now not res integra in view of the decision of this
Court in the case of Vatika Township Private Limited
(supra). In paragraphs 37 to 40, 44 and 45, it is observed
and held as under:
“Answer to the reference
: 23 :
37. When we examine the insertion of the 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.
38. There are various reasons for coming to this
conclusion which we enumerate hereinbelow.
Reasons in support
39. 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 [CIT v. Suresh N. Gupta, (2008) 4 SCC 362]
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 indeterminative 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.: (Suresh N.
: 24 :
Gupta case [CIT v. Suresh N. Gupta, (2008) 4 SCC
362], SCC p. 379, para 35)
(i) 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
(ii) the year in which the search was
concluded; or
(iii) the year in which the block assessment
proceedings under Section 158BC of the
Act were initiated; or
(iv) the year in which block assessment
order was passed.
39.1. 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 [CIT v. Suresh N. Gupta, (2008)
4 SCC 362] 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
: 25 :
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
Finan
ce Act
Relevant
section of
the
Finance
Act
Para
A
Para
B
Par
a C
Para
D
Para
E
IND,
HUF,
BOI,
AOP
Cooperati
ve society
Fir
m
Local
authori
ty
Companies
1995Section
2(3)
1996Section
2(3)
15%
1997Section
2(3)
7.50%
1998Section
2(3)
1999Section
2(3)
2000Section
2(3)
10% 10% 10
%
10% 10%
2001Section
2(3)
12%
or
17%
12% 12
%
12% 13%
2002Section
2(3)
2% 2% 2% 2% 2%
2003Section
2(3)
5% 5% 5% 5% 5%
39.2. The rate at which tax, or for that matter
surcharge is to be levied is an essential component
of the tax regime. In Govind Saran Ganga
: 26 :
Saran v. CST [1985 Supp SCC 205 : 1985 SCC
(Tax) 447 : (1985) 155 ITR 144], 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: (SCC pp. 20910, para 6)
“6. 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 CIT v. B.C. Srinivasa Setty [(1981) 2 SCC 460 :
1981 SCC (Tax) 119 : (1981) 128 ITR 294], in the
following manner: (SCC p. 465, para 10)
: 27 :
“10. … 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.”
39.3. 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.
40. 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
: 28 :
assessment. The foofaraw made in the Conference
by those who had to apply the provision, was not
without substance because of the garboil [Ed.:
From the French word g
érable: meaning a
confused disordered state; turmoil.] situation
which this provision had created and is amply
reflected in the proposals which were 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, 441996,
whether the rate of surcharge is to be
adopted as applicable to the assessment
year 19961997 or the assessment year
19971998, the rate of surcharge being
different for the two years? The provisions
: 29 :
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.
XXXXXXXXXXXX
44. The 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 the
second proviso to subsection (3) of Section 2 of
: 30 :
the 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 Paras 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 162002.
: 31 :
45. The aforesaid discursive of ours also makes
it obvious that the conclusion of the Division
Bench in Suresh N. Gupta [CIT v. Suresh N. Gupta,
(2008) 4 SCC 362] treating the proviso as
clarificatory and giving it retrospective effect is not
a correct conclusion. The said judgment is
accordingly overruled.”
9.1While passing the impugned judgment and order, the High
Court has relied upon earlier decision of this Court in the
case of Suresh N. Gupta (supra). However, the said decision
has been specifically overruled by this Court in the case of
Vatika Township Private Limited (supra).
9.2In view of the above, the question of law with respect to levy
of the surcharge under proviso to Section 113 of the Income
Tax is held in favour of the assessee and against the
revenue. It is observed and held that in the present case the
assessee is not liable to pay the surcharge under proviso to
Section 113 of the Income Tax Act. To that extent the
impugned judgment and order passed by the High Court and
the assessment order qua the surcharge under proviso to
Section 113 of the Income Tax Act deserves to be quashed
: 32 :
and set aside.
10.Now so far as levy of the interest under Section 158BFA(1) of
the Income Tax Act in absence of any notice served upon the
assessee under Section 158BC of the Act and the liability to
pay the interest under said provision for the period prior to
01.06.1999 is concerned, while considering the issue the
reason for adding Chapter XIVB for the block assessment is
required to be considered. The reason, object and purpose of
Chapter XIVB has been adequately dealt with and
considered by this Court in the case of Vatika Township
Private Limited (supra). It is observed and held that
Chapter XIVB which deals with block assessment lays down
a special procedure for searched cases. The main reason for
adding the said provisions in the Act was to curb tax evasion
and expedite as well as simplify the assessment in such
searched cases. It is observed and held that the essence of
the new procedure under Chapter XIVB is a separate single
assessment of the “undisclosed income”, detected as a result
of search and this separate assessment has to be in addition
: 33 :
to the normal assessment covering the said period.
Therefore, a separate return covering the years of the block
period is a prerequisite for making block assessment. It is
observed and held that Chapter XIVB is a complete code in
itself providing for selfcontained machinery for assessment
of undisclosed income for the block period of 10 years or 6
years as the case may be. In paragraphs 22 to 25, it is
observed and held as under:
“Scheme of Chapter XIVB
22. 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
the Finance Act, 1995 w.e.f. 171995.
23. 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:
23.1. 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
: 34 :
current previous year up to the date of the search
i.e. from 142000 to 1712001, 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 prerequisite 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
selfcontained machinery for assessment of
undisclosed income for the block period of 10
years or 6 years, as the case may be.
23.2. 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
Parliament in the Finance Act. In
contradistinction, when it comes to payment of tax
on the undisclosed income relating to the block
period, the rate is specified in Section 113 of the
Act. It remains static at 60% of the undisclosed
income which is the categorical stipulation in
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
: 35 :
irrespective of previous year or years. Under
Section 113 of the Act, the undisclosed income is
chargeable to tax at the rate of 60%.
24. 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 be received 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, the 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
: 36 :
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 relatable 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.
25. Consequently, as already mentioned, while
analysing 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 a
special procedure in relation thereto, making it a
complete code by itself. Looking at 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,
: 37 :
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, the
charging provision is Section 158BA(2) alone.”
10.1Thus, with respect to assessment of undisclosed income for
the block period including the filing of the return etc., the
normal assessment proceedings including under Section 140
of the Income Tax Act shall not be applicable. Therefore, the
submission on behalf of the assessee that interest under
Section 158BFA for the period prior to 01.06.1999 in view of
insertion of the words “Section 158BC” in Section 140A w.e.f.
01.06.1999, shall not be chargeable, cannot be accepted. At
this stage, it is required to be noted that it is the case on
behalf of the assessee that the interest only follows the
principal and in this case the principal being the tax
payable, there was no liability to pay the tax along with the
return prior to 01.06.1999 which came to be introduced by
insertion of the words “Section 158BC” in Section 140A and
therefore the liability to pay interest cannot arise if there was
no liability to pay the tax itself along with the return at the
relevant time, has no substance. At this stage, it requires to
: 38 :
be noted that neither Section 158BC nor Section 158BFA
required the assessee to pay tax along with the return.
Liability to deposit the tax along with return arises only
under Section 140A. However, at the relevant point of time
Section 140A did not apply to Section 158BC and hence
there was no liability to deposit tax along with the return.
The said lacunae was noticed by the Parliament and by the
Finance Act, 1999, the words “Section 158BC” have been
inserted in Section 140A w.e.f. 01.06.1999. That does not
mean that interest under Section 158BFA would not be
leviable in case of late filing of return. The return under
Section 158BC was required to be filed as per Chapter XIVB
and on the delay in filing the return, there shall be liability to
pay interest leviable under Section 158BFA(1).
10.2At this stage, the Notes on Clauses and the memorandum
explaining the said provision which is reported in (1999)
236 ITR (St) 141 and 187 are required to be considered and
reproduced, which read as under:
“Clause 63 seeks to amend section 140A of the
Income Tax Act relating to selfassessment.
: 39 :
Under the existing provisions, if any tax is payable
on the basis of any return required to be furnished
under section 139 of section 142 or section 148, the
assessee shall be liable to pay such tax along with
interest payable under the Act before furnishing the
return and the return shall be accompanied by
proof of payment of such tax and interest.
It is proposed to provide that any person before
filing of the return under section 158BC shall also
be liable to pay tax and interest in accordance with
the provisions contained in subsection (1) of
section 140A.
It is further proposed to provide that after a block
assessment under section 158BC has been made,
any amount paid under subsection (1) of section
140A shall be deemed to have been paid towards
the block assessment under section 158BC.
These amendments will take effect from
01.06.1999.”
Further, the Memorandum Explaining the
Provisions reads as follows,
“Under section 140A of the Income Tax Act, the
assessee is required to pay tax on the basis of
income declared in the return and such tax is
required to be paid before the return is furnished
and the return is accompanied by the proof of such
payment. The existing provisions of section 140A
are not applicable to Chapter XIVB relating to the
assessment of the income of the block period in
search and seizure cases. There is also no
corresponding provision in Chapter XIVB for
payment of selfassessment tax at the time of filing
the return. Therefore, the tax on the admitted
income declared in the return cannot be collected
: 40 :
till the assessment is completed. In view of the
above, it is proposed to amend section 140A of
Income Tax Act to provide for the requirement of
payment of selfassessment tax at the time of filing
the return under section 158BC relating to block
assessment of search cases.”
10.3Thus, on conjoint reading of the above Notes on Clauses and
Memorandum, it is very clear that the Legislature originally
intended to make the assessee liable to pay taxes and
interest when the return was filed under Section 139 or
under Section 142 or Section 148. By virtue of the
amendment, the Legislature thus proposed to make those
assessees who are filing the return under Section 158BC
also liable to pay tax and interest under Section 140A. The
memorandum explaining the provisions of the Finance Bill
further makes it clear that the existing provisions of Section
140A were not applicable to Chapter XIVB relating to
assessment of income of the block period in search and
seizure cases. It further recognizes that the admitted tax
declared in the return cannot be collected till the assessment
is completed. Therefore, the Legislature intended to amend
Section 140A by incorporating Section 158BC so as to make
: 41 :
liable those persons who are filing return under Section
158BC also. Thus, by virtue of the amendment, a new class
of assessee was brought onto the statutebook whose income
are subject to be assessed under Chapter XIVB, in section
140A compelling them to pay selfassessment tax. Thus, the
interest under Section 158BFA is leviable on standalone
basis for late or nonfiling of return, which ceases on the day
return is filed. In the impugned judgment and order, the
High Court has elaborately and comprehensively explained
the rationale behind introduction of Section 158BC in
Section 140A and has specifically observed and held that the
liability of payment of interest does not stop merely on filing
of the return but is attracted in terms of Section 140A till
payment of tax in terms of the section and even now the
provisions of Section 158BFA(1) and Section 140A operate
independently. We are in complete agreement with the view
taken by the High Court.
10.4Now so far as the main submission on behalf of the assessee
that in absence of any notice under Section 158BC served
upon the concerned assessee and in view of insertion of the
: 42 :
words “Section 158BC” in Section 158BD inserted vide
Finance Act, 2002, there shall not be any liability to pay
interest under Section 158BFA is concerned, the aforesaid
submission is absolutely erroneous and has no substance.
It is required to be noted that prior to amendment in Section
158BD vide Finance Act, 2002 and even thereafter, the
provisions of Section 158BC would be applicable in case of
“searched persons”. Section 158BD would be applicable in
case of persons “other than searched persons”. Therefore, in
case of a person “other than searched person”, no notice
under Section 158BC which is required to be issued in case
of “searched persons” was required to be issued. For a
person “other than searched person”, notice under Section
158BD is sufficient.
10.5Now so far as the submission on behalf of the assessee that
the words “under Section 158BC” has been inserted in
Section 158BD vide Finance Act, 2002 and therefore, in
absence of any notice under Section 158BC prior to the
amendment, there shall not be any liability to pay interest
: 43 :
under Section 158BFA is concerned, a perusal of the Notes
on Clauses appended to Clause 64 of the Finance Bill, 2002,
it appears that the same is clarificatory in nature.
Clause 64 of the Finance Bill 2002, provides that:
“In section 158BD of the Incometax Act, after the
words “that Assessing Officer shall proceed”, the
words, figures and letters “under Section 158BC”
shall be inserted with effect from the 1
st
day of
June, 2002.”
The Notes on Clauses appended to Clause 64 of the Finance
Bill 2002 states the following:
“It is proposed to insert the words “under section
158BC” after the words “that Assessing Officer
shall proceed” so as to clarify that the Assessing
Officer shall proceed against such other person
under section 158BC”.
10.6At this stage, it is required to be noted that as observed by
this Court in the case of Vatika Township Private Limited
(supra), Chapter XIVB prescribes a special procedure for
computation of income for the block period in search and
seizure cases. Section 158BD shall be applicable in case of
any person other than a person with respect to whom search
: 44 :
was made. As observed Chapter XIVB is a complete code in
itself providing for selfcontained machinery for assessment
of undisclosed income for the block period. Therefore, in case
of the person other than searched person the notice under
Section 158BD would be required/sufficient and in case of
late filing of the return under Section 158BC, the interest
will be leviable under Section 158BFA. Any other
interpretation would lead to Section 158BD nugatory. It can
be seen that by inserting the words “under Section 158BC”
in Section 158BD, the Parliament intended to clarify that the
assessment for the block period in case of the persons other
than searched persons would also be as per the procedure
under Section 158BC of the Income Tax Act. At this stage, it
is required to be noted that in the present case as such M/s.
Khoday India Limited, and M/s. Khoday Breweries Limited –
the persons searched were issued notice under Section
158BC and in case of K.L. Swamy, who is the “other person”,
the notice under Section 158BD has been issued.
10.7Therefore, the submission on behalf of the assessee that in
absence of any notice under Section 158BC served upon the
: 45 :
assessee – persons other than searched persons for the
period prior to the amendment in Section 158BD vide
Finance Act, 2002, there shall not be any liability to pay
interest under Section 158BFA, has no substance and the
same is required to be rejected and the said question is
required to be answered in favour of the revenue and against
the assessee.
11In view of the above and for the reasons stated above, the
present appeals succeed in part. It is observed and held that
the respective assessees are not liable to pay the surcharge
under proviso to Section 113 of the Income Tax Act. The
impugned judgment and order passed by the High Court is
required to be modified to the aforesaid extent. So far as the
liability to pay the interest under Section 158BFA of the
Income Tax Act for late filing of the return under Section
158BC of the Income Tax Act, in absence of any notice under
Section 158BC upon the assessee – persons other than
searched persons, the said question is held in favour of the
revenue and against the assessee. The impugned judgment
and order passed by the High Court is hereby confirmed and
: 46 :
it is observed and held that the assessee – persons other than
searched persons shall be liable to pay the interest on late
filing of the return under Section 158BC even in absence of a
notice under Section 158BC of the Income Tax Act and even
for the period prior to 01.06.1999. To that extent, the
impugned judgment and order passed by the High Court is
hereby confirmed. Present appeals are accordingly disposed of
in terms of the above. There shall be no orders as to costs.
………………………………….J.
[M.R. SHAH]
NEW DELHI; ………………………………….J.
JANUARY 13, 2023. [C.T. RAVIKUMAR]
: 47 :
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