REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.   1121           OF 2009

(Arising out of SLP (C) No. 16862 of 2008)

Commnr. of Income Tax, ….. Appellant Jalandhar-I

Versus

Shri Rajiv Bhatara ….Respondent

J U D G M E N T

Dr. ARIJIT PASAYAT, J

1. Leave granted.

2. Challenge in this appeal is to the judgment of a Division Bench of the

Punjab and Haryana High Court dismissing the appeal filed under Section

260(A) of Income Tax Act, 1961 (in short the ‘Act’). In the said appeal,

challenge  was  to  the  order  dated  01.7.2006  passed  by  the  Income  Tax

Appellate Tribunal Amritsar Bench, Amritsar (in short the ‘Tribunal’).  The

dispute  related  to  the  block  period  1.4.1990  to  3.7.2000.   The  question

which arose for consideration is as follows:

“Whether, on the facts and in the circumstances of the

case, the ITAT was right in law in confirming the CIT

(A)’s  order  directing  not  to  levy surcharge  on  the  tax

worked  out  on  the  undisclosed  income  as  the  case

pertains to a search conducted period to 1.6.2002?”.

3. Factual position in a nutshell reads as follows:

Search  was  conducted  on  6.4.2000.  The  Assessing  Officer  in  his

order dated 22.5.2002 imposed surcharge and an application under Section

154 of  the Act filed by the assessee for  rectification was dismissed vide

order dated 17.9.2003 with the observation that the surcharge was levied as

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per the provisions of Part I of the Ist  Schedule appended to Finance Act,

2000.  On the ground that there was no mistake apparent on the record, the

application  under  Section  154  of  the  Act  was  rejected.   However,  the

Commissioner  of  Income Tax  (Appeals),  Ludhiana,  (for  brevity  the  CIT

(A)’) reversed the order passed by the Assessing Officer and took the view

that surcharge was not leviable in cases where the search has taken place

prior to 1.6.2002. In that regard, reliance was placed on a Division Bench

judgment of this Court in the case of CIT v. Ram Lal Bahu Lal (148 CTR

643).

On further appeal by the Revenue the Tribunal upheld the order dated

12.9.2005 passed by the CIT (A) holding that the search in the present case

took place on 6.4.2000 which was much prior  to the date of amendment

made  in  Section  113.  The  amendment  was  incorporated  on  1.6.2002  by

inserting  proviso  to  Section  113  by  Finance  Act,  2002.  It  was  by  the

amendment that levy of surcharge on the disclosed income was specifically

provided w.e.f.  1.6.2002. The provision has  not  been given retrospective

effect, and therefore, the Tribunal held that it applied only to cases where

searches were carried out after 1.6.2002.

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The High Court dismissed the appeal relying on its decision in the

case of CIT v. Roshan Singh Makkar (2006) 287 ITR 160 and also referred

to  two  other  decisions  of  the  Madras  High  Court  in  CIT v.  Neotech

Company [(2007) 291 ITR 27] and CIT v. S. Palanivel [(2007) 291 ITR 33].

4. Learned counsel for the appellant submitted that the case at hand is

squarely covered by a decision of this court  in  Commissioner of  Income

Tax, Central II v. Suresh N. Gupta [2008(4) SCC 362].

5. The power to levy a surcharge on income tax is traceable to Article

271 read with  Entry 82  of  List  I  of  Schedule  VII  to  the  Constitution of

India,  1950  (in  short  the  ‘Constitution’).  That  power  is  not  traceable  to

Section 4 of the Act. Every year the Finance Act is enacted by Parliament to

give effect to the financial proposals of the Central Government. The rate at

which a charge on the total income of the previous year is imposed under

Section  4(1)  of  the  Act  is  not  laid  down  in  the  Income  Tax  Act  and,

therefore, the said Section provides that the charge has to be fixed by the

Central Act. It is because of this, that income tax is levied at different rates

under the Finance Act.  

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6. In order that the charge should be a legal charge under Section 4, it

must be a tax on the income of the assessee.  If the charge is the tax on

anything  else,  then  it  would  not  be  a  valid  charge.   That  is  the  only

limitation  upon  the  power  or  authority  of  Parliament  to  fix  any  rate  it

pleases.  So long as the charge is on ‘total income’ of the previous year,

there is no limitation upon the power or authority of Parliament to fix any

rate  if  pleases.   The  Income  Tax  Act,  therefore,  contains  an  elaborate

machinery  for  ascertaining  “total  income”  of  an  assessee.   Section  4(1)

prescribes the subject matter of the tax and the rate of that tax is prescribed

by the legislature, either under the Act as in the case of Section 113 or vide

the Finance Act.

7. The purpose of Chapter XIV is to lay down a special procedure for

assessment of surcharge cases with a view to combat tax evasion and also to

expedite  and  simplify  assessments  in  search  cases.  Undisclosed  incomes

have  to  be  related  in  different  years  in  which  income was  earned  under

block assessment. This is because in such cases, the “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. The essence of this new

procedure,  therefore,  is  a  separate  single  assessment  of  the  “undisclosed

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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,

Explanation is inserted in Section 158-BB, which is computation Section,

explaining the method of computation of “undisclosed income” of the block

period.

8. If  the  “block  period”,  as  defined  in  Section  158-B(a),  comprises

previous years relevant to 10/6 assessment years is treated by Parliament as

one unit of time for assessment purposes, one has to correlate “undisclosed

income” to each of the years in which income was earned by the assessee.  

9. Section 158-BB is required to be read with Section 4 of the Act, then

the relevant Finance Act of the year concerned would automatically stand

attracted to the computation under Chapter XIV-B. Section 158-BB looks at

Section 113. That Section fixes the rate of tax.

10. In the present case undisputedly Para A was applicable at the given

point  of  time.   As  a  general  concept,  income  tax  includes  surcharge.

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Reading  Section  2(1)  of  the  Finance  Act,  2001,  it  is  clear  that  the  term

‘income tax’ as used in Section 2(1) and proviso to Section 2(3) of the said

Act did not include the amount of surcharge.  Surcharge was a separate item

of taxation, different from income tax.  This was made clear vide Section 2

(1)(a), proviso to Section 2(3) and Para A of Part I to Schedule I.   

11. Section 158-BA(2) read with Section 4 of the Act looks at Section

113 for the imposition rate at which tax has to be imposed in the case of

block assessment. That rate is 60%. That rate is fixed by the Act itself. That

rate has been stipulated by Parliament not with a view to oust the levy of

surcharge but to make the levy cost effective and easy. Therefore, a flat rate

is prescribed. The difficulty in block assessment is that one has to correlate

the undisclosed income to different years in which income is earned, hence,

Parliament has fixed a flat rate of tax in Section 113.

12. Though Parliament was aware of rate of  tax prescribed by Section

113  and  yet  in  the  various  Finance  Acts,  Parliament  has  sought  to  levy

surcharge on the tax in the case of block assessment. In the present case, the

assessing officer has applied the rate of surcharge at 17% which rate finds

place in Para A of Part  I of Schedule I to the said Finance Act of 2001,

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therefore, surcharge leviable under Finance Act was a distinct charge, not

dependent for its leviability on the assessee’s liability to pay income tax but

on assessed tax.

13. Therefore,  even without  the proviso to Section 113 (inserted  vide

Finance Act,  2002 w.e.f.  1.6.2002),  Finance Act,  2001 was applicable to

block assessment under Chapter XIV-B in relation to the search initiated on

6.4.2000 and accordingly surcharge was leviable on the tax.

14. According  to  the  assessee,  prior  to  1.6.2002,  the  position  was

ambiguous  as  it  was  not  clear  even  to  the  Department  as  to  whether

surcharge was leviable with reference to the rates provided for in 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  the  block  assessment

proceedings under Section 158 BC were initiated or the year in which block

assessment order was passed. To clear that doubt precisely, the proviso has

been inserted in Section 113 by which it is indicated that Finance Act of the

year in which the search was initiated would apply.  Therefore, it has to be

held that  the proviso  to Section 113 was  clarificatory in  nature.   It  only

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clarifies that out of the four dates, Parliament was opted for the date, namely

the year in which the search was initiated, which date would be relevant for

applicability of a particular Finance Act.  Therefore, the proviso has to be

read as it stands.

15. The  above  position  was  highlighted  in  Suresh  N.  Gupta’s Case

(supra).

16. There is no appearance on behalf of the Assessee-respondent in spite

of service of notice.  

17. In view of what has been stated in the aforesaid case the inevitable

result  is  that  the  appeal  deserves  to  be  allowed,  which  we  direct.  The

impugned order of the High Court in Tax Appeal  No.587 of 2006 is  set

aside and the departmental Civil appeal is allowed with no order as to costs.

…………………………………..J. (Dr. ARIJIT PASAYAT)

……………………….………….J. (Dr. MUKUNDAKAM SHARMA)  

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New Delhi, February 19, 2009

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