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CASE NO.: Appeal (civil)  32 of 2008

PETITIONER: Commissioner of Income Central II  

RESPONDENT: Suresh N. Gupta

DATE OF JUDGMENT: 07/01/2008

BENCH: S.H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

(Arising out of S.L.P. (C) No.4617 of 2007)

KAPADIA, J.

       Leave granted. 2.      Whether the AO had erred in imposing surcharge at 17% on  the tax amount of Rs. 97,456/- under Section 113 of the Income- tax Act, 1961 (\0231961 Act\024) for the \023block period\024 comprising of  previous years relevant to 10 assessment years, i.e., 1991-92 to  2000-01, including the period from 1.4.2000 to 17.1.2001.

FACTS    2.      On 17.1.2001 a search under Section 132 of the 1961 Act  was carried out at the premises of the respondent-assessee, an  individual. The search unearthed an unexplained investment of  Rs. 65,000/- being the value of household valuables and            Rs. 97,427/- on account of unexplained marriage expenses  (undisclosed income). Accordingly, in the block assessment, the  A.O. determined the assessee\022s undisclosed income at Rs.  1,62,427/-. He computed tax thereon at 60% in terms of Section  113 of the 1961 Act amounting to Rs. 97,456/- on which  surcharge was levied at 17%, i.e., Rs.16,504/-. The levy of  surcharge was challenged by the assessee in appeal before the  CIT(A). The said appeal was allowed. The decision of CIT(A) has  been confirmed by the Tribunal and the High Court. Hence, this  civil appeal.

Points for determination: 3.      Two points arise for determination: Whether on the facts  and circumstances of this case, the Finance Act, 2001 (\023FA\024 for  short) was applicable to \023block assessment\024 under Chapter XIV-B  in respect of the search carried out on 17.1.2001; secondly,  whether the proviso inserted in Section 113 by the Finance Act,  2002 is clarificatory?

Whether Finance Act, 2001 was applicable to block  assessment under Chapter XIV-B up to 1.06.2002:

4.      Chapter XIV-B was inserted by the Finance Act, 1995, w.e.f.  1.7.1995. According to the assessee, the said Chapter is a self- contained chapter as it lays down a special procedure for  assessment of \023undisclosed income\024 found during search for the  \023block period\024, containing a charging section (158BA), a  computation section (158BB), a procedural section for block  assessment (158BC), limitation provision for completion of block

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assessment (158BE) and the provisions for imposition of interest  and penalty (158BFA).  

5.      According to the assessee, the scheme of assessment of  \023undisclosed income\024 under Chapter XIV B is different from  scheme of assessment of \023total income\024 of any person in terms of  Section 4(1) of the 1961 Act inasmuch as under Chapter XIV-B  assessment is made of \023undisclosed income\024 as against  assessment of \023total income\024 under Section 4(1) of the Act; that,  assessment under Chapter XIV-B is made for the \021block period\024  as against assessment of income of the \023previous year\024 under  Section 4(1) of the Act; that, under Chapter XIV-B \023undisclosed  income\024 is assessed at 60% in terms of Section 158BA(2) read  with Section 113 as against taxation of normal income at the  rates prescribed in the relevant Finance Act; that, the provisions  of the Finance Act are not found in the block assessment scheme  under Chapter XIV-B up to 1.06.2002 and, therefore, according  to the assessee, Finance Act, 2001 was not applicable to Chapter  XIV-B. According to the assessee, proviso to Section 4(1) of the  1961 Act carves out an exception to the normal rule in Section  4(1) and provides that, where under any provision of the 1961  Act, tax is to be charged in respect of income of a period other  than \023the previous year\024, such tax shall be levied as may be  specifically provided under special provision of the 1961 Act.  According to the assessee, Chapter XIV-B is such special  provision as it concerns assessment of undisclosed income for  the \023block period\024 which is the period other than the previous  year referred to in Section 4(1). Therefore, according to the  assessee, block assessment falls not in Section 4(1) but it falls  under the aforesaid proviso to Section 4(1) of the 1961 Act.  Consequently, it is urged that since there is no reference to the  Finance Act under Chapter XIV-B (Section 158BA), which only  looks at a fixed rate of 60% stipulated under Section 113, it was  not open to the AO to impose surcharge at 17% prior to  1.06.2002.       6.      We find no merit in the above arguments. We quote  hereinbelow Article 271 of the Constitution of India and Section 4  of the 1961 Act, which read as follows: \023271.  Surcharge on certain duties and taxes for  purposes of the Union.\027 Notwithstanding anything in  articles 269 and 270, Parliament may at any time  increase any of the duties or taxes referred to in those  articles by a surcharge for purposes of the Union and the  whole proceeds of any such surcharge shall form part of  the Consolidated Fund of India.\024

\023Charge of income-tax.

4.(1) Where any Central Act enacts that income-tax  shall be charged for any assessment year at any rate or  rates, income-tax at that rate or those rates shall be  charged for that year in accordance with, and subject to  the provisions (including provisions for the levy of  additional income-tax) of, this Act in respect of the total  income of the previous year of every person :

Provided that where by virtue of any provision of this  Act income-tax is to be charged in respect of the income  of a period other than the previous year, income-tax  shall be charged accordingly.

(2) In respect of income chargeable under sub-section  (1), income-tax shall be deducted at the source or paid

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in advance, where it is so deductible or payable under  any provision of this Act.\024

7.      The power to levy a surcharge on income-tax is traceable to  Article 271 read with Entry 82 of List I of Seventh Schedule to the  Constitution of India. That power is not traceable to Section 4 of  the 1961 Act. Every year the Finance Act is enacted by  Parliament to give effect to the financial proposals of the Central  Government. The rate at which a charge on the total income of  the previous year is imposed under Section 4(1) of 1961 Act is  not laid down in the Income-tax Act and, therefore, the said  section provides that the charge has to be fixed by the Central  Act. It is because of this, that income-tax is levied at different  rates under the Finance Act. It must be borne in mind that the  Income-tax Act deals with tax on income and nothing else.  Therefore, in order that the charge should be a legal charge  under Section 4, it must be a tax on the income of the assessee.  If the charge is the tax on anything else, then it would not be a  valid charge. This is the only limitation upon the power or  authority of Parliament to fix any rate it pleases. So long as the  charge is on \023total income\024 of the previous year, there is no  limitation upon the power or authority of Parliament to fix any  rate it pleases. However, if \023rate\024 is understood to mean the fixing  of the tax irrespective of \023total income\024 and unconnected with  \023total income\024, then, in our view, Parliament would be travelling  outside the ambit of Section 4(1). The Income-tax Act, therefore,  contains an elaborate machinery for ascertaining \023total income\024  of an assessee. If Parliament has power to fix tax at a rate which  has no connection with the \023total income\024, then the machinery  set up under the 1961 Act becomes infructuous. In our view,  Section 4(1) prescribes the subject matter of the tax and the rate  of that tax is prescribed by the Legislature, either under the Act  as in the case of Section 113 or vide the Finance Act. As long as  the charge is on \023total income\024 of the previous year and so long  as the rate relates to the subject matter of the tax, there is  nothing to prevent Parliament from fixing the rate. But the rate  must be applied to the \023total income\024 and the tax that an  assessee has to pay must be at the rate in respect of total income  of the previous year.

8.      Having discussed the scope of Article 271 and Section 4 of  the 1961 Act, we have to look at some of the relevant provisions  of Chapter XIV-B. The purpose of this Chapter is to lay down a  special procedure for assessment of surcharge cases with a view  to combat tax evasion and also to expedite and simplify  assessments in search cases. Undisclosed incomes have to be  related in different years in which income was earned under  block assessment. This is because in such cases, the \023block  period\024 is for previous years relevant to 10/6 assessment years  and also the period of the current previous year up to the date of  the search, i.e., from 1.4.2000 to 17.01.2001, in this case. The  essence of this new procedure, therefore, is a separate single  assessment of the \023undisclosed income\024, detected as a result of  search and this separate assessment has to be in addition to the  normal assessment covering the same period. Therefore, a  separate return covering the years of the block period is a pre- requisite for making block assessment. Under the said procedure,  Explanation is inserted in Section 158 BB, which is computation  section, explaining the method of computation of  \023undisclosed  income\024 of the block period.

9.      We quote hereinbelow Sections 158B, 158BA, 158BB,  158BC and 158BH, which read as follows: \023158B. In this Chapter, unless the context otherwise

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requires,

(a) block period means the period comprising previous  years relevant to six assessment years preceding the  previous year in which the search was conducted under  section 132 or any requisition was made under section  132A and also includes the period up to the date of the  commencement of such search or date of such requisition  in the previous year in which the said search   was conducted or requisition was made.

Provided that where the search is initiated or the  requisition is made before the 1st day of June, 2001, the  provisions of this clause shall have effect as if for the  words \023six assessment years\024 the words \023ten assessment  years\024 had been substituted.   (b) \023undisclosed income\024 includes any money, bullion,  jewellery or other valuable article or thing or any income  based on any entry in the books of account or other  documents or transactions, where such money, bullion,  jewellery, valuable article, thing, entry in the books of  account or other document or transaction represents  wholly or partly income or property which has not been  or would not have been disclosed for the purposes of this  Act.

Assessment of undisclosed income as a result of  search.

158BA. (1) Notwithstanding anything contained in any  other provisions of this Act, where after the 30th day of  June, 1995 a search is initiated under section 132 or  books of account, other documents or any assets are  requisitioned under section 132A in the case of any  person, then, the Assessing Officer shall proceed to  assess the undisclosed income in accordance with the  provisions of this Chapter.

(2) The total undisclosed income relating to the block  period shall be charged to tax, at the rate specified in  section 113, as income of the block period irrespective of  the previous year or years to which such income relates  and irrespective of the fact whether regular assessment  for any one or more of the relevant assessment years is  pending or not.

Explanation. For the removal of doubts, it is hereby  declared that-

(a) the assessment made under this Chapter shall be in  addition to the regular assessment in respect of each  previous year included in the block period;

(b) the total undisclosed income relating to the block  period shall not include the income assessed in any  regular assessment as income of such block period;

(c) the income assessed in this Chapter shall not be  included in the regular assessment of any previous year  included in the block period.

(3) Where the assessee proves to the satisfaction of the  Assessing Officer that any part of income referred to in  sub-section (1) relates to an assessment year for which

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the previous year has not ended or the date of filing the  return of income under sub-section (1) of section 139 for  any previous year has not expired, and such income or  the transactions relating to such income are recorded on  or before the date of the search or requisition in the books  of account or other documents maintained in the normal  course relating to such previous years, the said income  shall not be included in the block period.

Computation of undisclosed income of the block  period.

158BB. (1) The undisclosed income of the block period  shall be the aggregate of the total income of the previous  years falling within the block period computed, in  accordance with the provisions of Chapter IV, on the  basis of evidence found as a result of search or  requisition of books of account or documents and such  other materials or information as are available with the  Assessing Officer, as reduced by the aggregate of the  total income, or as the case may be, as increased by the  aggregate of the losses of such previous years,  determined,-

(a) where assessments under section 143 or section 144  or section 147 have been concluded, on the basis of such  assessments;

(b) where returns of income have been filed under section  139 or section 147 but assessments have not been made  till the date of search or requisition, on the basis of the  income disclosed in such returns;

(c) where the due date for filing a return of income has  expired but no return of income has been filed, as nil;

(d) where the previous year has not ended or the date of  filing the return of income under sub-section (1) of  section 139 has not expired, on the basis of entries  relating to such income or transactions as recorded in the  books of account and other documents maintained in the  normal course on or before the date of the search or  requisition relating to such previous years;

(e) where any order of settlement has been made under  sub-section (4) of section 245D, on the basis of such  order;

(f) where an assessment of undisclosed income had been  made earlier under clause (c) of section 158BC, on the  basis of such assessment.          Explanation.- For the purposes of determination of  undisclosed income,

(a) the total income or loss of each previous year shall,  for the purpose of aggregation, be taken as the total  income or loss computed in accordance with the  provisions of Chapter IV without giving effect to set off  of brought forward losses under Chapter VI or  unabsorbed depreciation under sub-section (2) of section  32;

(b) of a firm, returned income and total income assessed  for each of the previous years falling within the block

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period shall be the income determined before allowing  deduction of salary, interest, commission, bonus or  remuneration by whatever name called to any partner not  being a working partner:

Provided that undisclosed income of the firm so  determined shall not be chargeable to tax in the hands of  the partners, whether on allocation or on account of  enhancement;

(c) assessment under section 143 includes determination  of income under sub-section (1) or sub-section (1B) of  section 143.

(2) In computing the undisclosed income of the block  period, the provisions of sections 68, 69, 69A, 69B and  69C shall, so far as may be, apply and references to  financial year in those sections shall be construed as  references to the relevant previous year falling in the  block period including the previous year ending with the  date of search or of the requisition.

(3) The burden of proving to the satisfaction of the  Assessing Officer that any undisclosed income had  already been disclosed in any return of income filed by  the assessee before the commencement of search or of  the requisition, as the case may be, shall be on the  assessee.

(4) For the purpose of assessment under this Chapter,  losses brought forward from the previous year under  Chapter VI or unabsorbed depreciation under sub-section  (2) of section 32 shall not be set off against the  undisclosed income determined in the block assessment  under this Chapter, but may be carried forward for being  set off in the regular assessments.

Procedure for block assessment.

158BC. Where any search has been conducted under  section 132 or books of account, other documents or  assets are requisitioned under section 132A, in the case  of any person, then,

(a)     the Assessing Officer shall- (i)     in respect of search initiated or books of account or  other documents or any assets requisitioned after the 30th  day of June, 1995, but before the 1st day of January,  1997, serve a notice to such person requiring him to  furnish within such time not being less than fifteen days;

(ii)    in respect of search initiated or books of account or  other documents or any assets requisitioned on or after  the 1st day of January, 1997, serve a notice to such  person requiring him to furnish within such time not  being less than fifteen days but not more than forty-five  days,

as may be specified in the notice a return in the  prescribed form and verified in the same manner as a  return under clause (i) of sub-section (1) of section 142,  setting forth his total income including the undisclosed  income for the block period :

Provided that no notice under section 148 is required to

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be issued for the purpose of proceeding under this  Chapter :

Provided further that a person who has furnished a return  under this clause shall not be entitled to file a revised  return;   (b)     the Assessing Officer shall proceed to determine  the undisclosed income of the block period in the manner  laid down in section 158BB and the provisions of section  142, sub-sections (2) and (3) of section 143 and section  144 shall, so far as may be, apply;

(c)     the Assessing Officer, on determination of the  undisclosed income of the block period in accordance  with this Chapter, shall pass an order of assessment and  determine the tax payable by him on the basis of such  assessment;

(d)     the assets seized under section 132 or requisitioned  under section 132A shall be retained to the extent  necessary and the provisions of section 132B shall apply  subject to such modifications as may be necessary and  the references to regular assessment or reassessment in  section 132B shall be construed as references to block  assessment.

xxx

Application of other provisions of this Act.

158BH. Save as otherwise provided in this Chapter, all  other provisions of this Act shall apply to assessment  made under this Chapter.\024

10.     We also quote hereinbelow Section 113 with and without the  proviso inserted vide Finance Act, 2002 w.e.f. 1.6.2002, which  read as follows:

\023Tax in the case of block assessment of search cases.  

113. The total undisclosed income of the block period,  determined under section 158BC, shall be chargeable to  tax at the rate of sixty per cent.

Proviso inserted vide Finance Act, 2002 w.e.f. 1.6.2002  reads as follows:

Provided that the tax chargeable under this section shall  be increased by a surcharge, if any, levied by any Central  Act and applicable in the assessment year relevant to the  previous year in which the search is initiated under  section 132 or the requisition is made under section  132A.\024

11.     Reading of the relevant provisions of Chapter XIV-B one  finds that Section 158 BA deals with assessment of \023undisclosed  income\024 as a result of search whereas computation of such  income falls under Section 158BB. The procedure for block  assessment falls in Section 158 BC. Section 158 BA begins with  non obstante clause. It states that nothing contained in any other  provisions of the 1961 Act, where search is initiated after  30.6.1995 under Section 132 or in cases of requisition under  Section 132A after the cut off date, the AO shall proceed to  assess the undisclosed income in accordance with the provisions

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of Chapter XIV-B.

12.     Relying on Section 158BA(1) assessee claims that Chapter  XIV-B is a special procedure for assessment of cases; that it  constitutes a self contained mechanism and, hence, it falls  outside the scope of Section 4(1) of the 1961 Act, particularly  when Section 4(1) imposes a charge on the \023total income\024 and not  on the \023undisclosed income\024 and, particularly when Section 158  BA(2) is an independent charging section in contrast to Section  4(1) of the 1961 Act, which imposes a charge on the \023total  income\024 of the previous year. According to the assessee, the  charge under Section 158BA(2) is on the \023block period\024 and not  on the total income of the \023previous year\024. Therefore, according to  the assessee, Chapter XIV-B is a self-contained mechanism.        13.     As stated above, these arguments advanced on behalf of the  assessee has no merit. Section 158B defines \023block period\024 to  mean the period comprising the previous years relevant to 10/6  assessment years preceding the previous year in which the  search was conducted under Section 132. It also includes the  period up to the date of commencement of such search or date of  requisition. Under Section 4, the subject of charge is the income  of the previous year and not the income of the assessment year.  Thus, tax is levied on the actual income of the previous year.  Each \023previous year\024 is a distinct unit of time for the purposes of  assessment. However, when we come to Section 158BA, we find  that Parliament has taken the block period to mean the period  comprising previous years relevant to 10/6 assessment years  preceding the previous year in which the search is conducted. In  other words, Parliament has in search cases expanded the unit of  time for block assessment purposes from 1 year to 10/6 previous  years. However, it is important to note that the unit of time  remains constant. It is open to Parliament to treat the unit of  time as one year in normal assessment cases and, at the same  time, it is also open to Parliament to treat 10/6 previous years as  a unit of time for block assessment period. The important thing  to be noted is that the block assessment computation in Section  158BB does not exclude the concept of \023previous years\024 as well  as the concept of \023total income\024. Those concepts are retained.  Further, we need to examine the scheme of Chapter XIV-B. The  said Chapter has three parts consisting of assessment,  computation and procedure for making block assessment.  Assessment of undisclosed income as a result of search stands  covered by Section 158BA whereas computation of undisclosed  income of the block period falls in Section 158BB and procedure  for block assessment falls in Section 158BC. In this case, we are  mainly concerned with computation of undisclosed income under  Section 158BB(1). This section incorporates principle of  aggregation of total income of the previous years falling within  the block period computed in accordance with the provisions of  Chapter IV. The important thing to be noted is that the  computation has to be done even under Section 158BB of  \023undisclosed income\024 in the manner provided for in Chapter IV of  the 1961 Act which deals with \023computation of total income\024.  Chapter IV deals with computation in cases of normal  assessment. Chapter IV is not ruled out by provisions of Chapter  XIV-B. In this connection, we may also take note of Section  158BH which deals with application of other provisions of the  1961 Act to the block assessment procedure in Chapter XIV-B.  Section 158 BH makes it clear that save as otherwise provided in  Chapter XIV-B, all other provisions of the 1961 Act shall equally  apply to block assessment. Therefore, one has to read the non  obstante clause in Section 158BA in juxtaposition with Section  158BH. Keeping in mind the provisions of Section 158BB and  keeping in mind the retention of the concepts of \023previous years\024

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and \023total income\024 in Chapter XIV-B, we are of the view that  Chapter IV is not ruled out from block assessment procedure  and, therefore, one has to read Section 158BB with Section 4 of  the 1961 Act.       14.     There is one more fact which needs to be noted. A bare  reading of the provisions of Section 158BA and Section 158BB  indicates that the searches conducted by the Department are an  important means of unearthing black money. However,  undisclosed income has to be related to different years in which  the income was earned. The essence of the block assessment  procedure, therefore, is a separate single assessment of  undisclosed income, detected as a result of a search. This  separate assessment is in addition to normal or regular  assessment covering the same period. A separate return is a pre- requisite for making a \023block assessment\024. However, in the  matter of computation, the principle of aggregation of total  incomes, is inbuilt into Section 158BB. We have to subtract   one  aggregate from the other. Further, while applying the principle of  aggregation of the total income, computation is required to be  done in accordance with the provisions of Chapter IV. Therefore,  in our view, Section 4 has to be read with Section 158BB. That  section is not ruled out by Section 158BB. If Section 4 has to be  read with Section 158BB for computing undisclosed income then  the provisions of the relevant Finance Act have got to be read into  the block assessment scheme under Chapter XIV-B, even prior to  1.6.2002.   15.     Under Section 158BB, there is the theory of \023block period\024.  It is based on \023the principle of aggregation of total incomes\024.  Under that section, the first aggregate to be computed is the total  income of the previous years falling within the block period  including returned/assessed incomes as per regular returns and  regular assessments. The second aggregate to be computed is the  aggregate of the total incomes/losses of the previous years  determined in terms of clauses (a) to (f) of Section 158BB(1). The  difference between first aggregate and the second aggregate is  described in Section 158B(b) as the \023undisclosed income\024 to be  taxed under the provisions of Section 113 of the 1961 Act at the  special rates prescribed. Further, clause (a) of Explanation to  Section 158BB clarifies that the total income/loss of each  previous years shall, for the purpose of aggregation, be taken as  the total income or loss computed in accordance with the  provisions of Chapter IV without giving effect to set off of brought  forward losses under Chapter VI or  unabsorbed depreciation  under Section 32(2) of the 1961 Act. Hence, one has to read  Section 158BB with Section 4 of the 1961 Act. There is no  conflict between the computation machinery under Chapter XIV- B and normal computation machinery under Chapter IV. This is  the importance behind enactment of Section 158BH which inter  alia states that if there is no conflict between the provisions of  Chapter XIV-B and any other provisions of the 1961 Act, then the  later will operate. There is a fallacy in the argument of the  assessee that the concepts of \023total income\024 and \023previous year\024  are given go by in Chapter XIV-B. The above analysis of Section  158BB indicates that both the concepts are retained in Chapter  XIV-B. The only difference is that Section 4 of the 1961 Act  charges the total income of a person of one single previous year  (unit of assessment) whereas Section 158BA(2) levies a charge on  the income of a person for the block period of previous years  relevant to 10/6 assessment years. In our view, the word \023block  period\024, as defined in Section 158B(a), comprises previous years  relevant to 10/6 assessment years as one unit of time for the  purposes of assessment. As stated above, the object behind  enactment of Chapter XIV-B is to assess and compute

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\023undisclosed incomes\024 relatable to different accounting years in  which the income is earned. Therefore, if the block period  comprising of previous years relevant to 10/6 assessment years  is treated by Parliament as one unit of time for assessment  purposes, one has to correlate \023undisclosed income\024 to each of  the years in which income was earned by the assessee. It is true  that under Chapter XIV-B, computation of regular income and  computation of undisclosed income has to be worked out  separately. However, to arrive at the figure of Undisclosed  Income, the said parallel calculations have to converge in order to  work out the difference between the first and the second  aggregates of the total incomes/losses of the previous year, in  which undisclosed income is taxed under Section 113. Therefore,  in our view, the concept of a charge on the \023total income\024 of the  previous year under the 1961 Act is retained even under Chapter  XIV-B. Therefore, Section 158BB which deals with computation  of undisclosed income of the block period has to be read with  computation of total income under Chapter IV of the 1961 Act.        16.     Once Section 158BB is required to be read with Section 4 of  the 1961 Act, then the relevant FA of the concerned year would  automatically stands attracted to the computation under Chapter  XIV-B.  Section 158BB looks at Section 113. That section fixes  the rate of tax at 60%. In the present case, e.g., the AO assigned  the value of Rs. 2,70,000/- to Unaccounted Investment in  household valuables. That amount was distributed between three  brothers including the assessee after deducting Rs. 75,000/- and  that is how a sum of Rs. 65,000/- has been added as undisclosed  income for assessment year 2001-02 in the hands of the  assessee.        17.     In the case of Govind Saran Ganga Saran  v.   Commissioner of Sales Tax and Ors. [(1985) 155 ITR 144 (SC)]  this Court held that, there are four components of tax, namely,  character of the imposition,  person on whom the incidence of tax  falls, the rate at which tax is imposed and lastly, the value to  which the rate is applied for computing tax liability.       Applicability of the Finance Act, 2001:  18.     Applying the law as discussed hereinabove, we find that in  the present case, the AO has imposed surcharge of 17% on the  tax calculated at 60% on the total undisclosed income of            Rs. 1,62,427/-, which tax comes to Rs.97456/-. The AO imposed  surcharge of 17% on Rs.97,456/- amounting to Rs. 16,504/- by  placing reliance on the FA of 2001.

19.     We quote hereinbelow Section 2(1) r/w Para A of Part I of  the First Schedule, which read as follows:

\023Income-tax.

2.(1) Subject to the provisions of sub-sections (2)  and (3), for the assessment year commencing on the  1st day of April, 2001, income-tax shall be charged  at the rates specified in Part I of the First Schedule  and such tax as reduced by the rebate of income- tax calculated under Chapter VIII-A of the Income- tax Act, 1961, (43 of 1961) (hereinafter referred to  as the Income-tax Act) shall be increased, -

(a)     in cases to which Paragraphs A, B, C and D of  that Part apply, by a surcharge for purposes of  the Union; and  

(b)     in the cases to which Paragraph E of that Part

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applies, by a surcharge, calculated in each case  in the manner provided therein.

(2)  ...

(3) In cases to which the provisions of Chapter XII  or Chapter XII-A or sub-section (1A) of section 161  or section 164 or section 164A or section 167B of  the Income-tax Act apply, the tax chargeable shall  be determined as provided in that Chapter or that  section and with reference to the rates imposed by  sub-section (1) or the rates as specified in that  Chapter or section, as the case may be:

Provided  that the amount of income-tax computed  in accordance with the provisions of sections 112  and 113 shall be increased by a surcharge for  purposes of the Union or surcharge as provided in  Paragraph A, B, C, D or E, as the case may be, of  Part I of the First Schedule:

Provided further  that in respect of any income  chargeable to tax under sections 115A, 115AB,  115AC, 115ACA, 115AD, 115B, 115BB, 115BBA,  115E and 115JB of the Income-tax Act, the amount  of income-tax computed under this sub-section  shall be increased, -

(a) by a surcharge for purposes of the Union,  calculated, -

(i) in the case of a co-operative society, a first  and a local ;authority, at the rate of twelve per  cent of such income-tax;

(ii) in the case of a person other than a  company, a co-operative society, a firm and a  local authority, -

(A) at the rate of twelve per cent of such  income-tax where the total income  exceeds sixty thousand rupees but does  not exceed one lakh fifty thousand  rupees; or  

(B) at the rate of seventeen per cent of  such income-tax where the total income  exceeds one lakh fifty thousand rupees;  and

(b) by a surcharge calculated at the rate of thirteen  per cent of such income-tax in the case of a  domestic company.\024      

20.     Para A of Part I of the First Schedule reads as follows:      \023THE FIRST SCHEDULE      [See section 2]            PART I      INCOME-TAX      Paragraph A            In the case of every individual or Hindu

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undivided family or association of persons or  body of individuals, whether incorporated or  not, or every artificial juridical person referred  to in sub-clause (vii) of clause (31) of section 2  of the Income-tax Act, not being a case to  which any other Paragraph of this Part  applies,-                        Rates of income-tax       (1) Where the total income  does not exceed Rs.  50,000

Nil; (2) Where the total income  exceeds Rs. 50,000 but  does not exceed Rs.  60,000

10 per cent of the  amount by which the  total income exceeds Rs.  50,000; (3) Where the total income  exceeds Rs. 60,000 but  does not exceed Rs.  1,50,000 Rs. 1,000 plus 20 per  cent of the amount by  which the total income  exceeds Rs. 60,000;

(4) Where the total income  exceeds Rs. 1,50,000 Rs. 19,000 plus 30 per  cent of the amount by  which the total income  exceeds Rs. 1,50,000.                  Surcharge on income-tax The amount of income-tax computed in accordance  with the preceding provisions of this Paragraph or  in section 112 or section 113 shall,-

(i)     in the case of every individual or Hindu  undivided family, or association of  persons or body of individuals having a  total income exceeding sixty thousand  rupees, be reduced by the amount of  rebate of income-tax calculated under  Chapter VIII-A, and the income-tax as so  reduced, be increased by a surcharge for  purposes of the Union calculated-

(A)     at the rate of twelve per cent of  such income-tax where the total  income exceeds sixty thousand

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rupees but does not exceed one  lakh fifty thousand rupees; or

(B)     at the rate of seventeen per cent of  such income-tax where the total  income exceeds one lakh fifty  thousand rupees;

(ii)    in the case of every person other than  those mentioned in item (i), be increased  by a surcharge for purposes of the Union  calculated at the rate of twelve per cent  of such income-tax:

Provided that in case of persons mentioned in sub- item (A) of item (i) above having a total income  exceeding sixty thousand rupees, the total amount  payable as income-tax and surcharge on such  income shall not exceed the total amount payable as  income-tax on a total income of sixty thousand  rupees by more than the amount of income that  exceeds sixty thousand rupees:

Provided further that in case of persons mentioned  in sub-item (B) of item (i) above having a total  income exceeding one lakh fifty thousand rupees,  the total amount payable as income-tax and  surcharge on such income shall not exceed the total  amount payable as income-tax and surcharge on a  total income of one lakh fifty thousand rupees by  more than the amount of income that exceeds one  lakh fifty thousand rupees.\024                                                    (emphasis supplied)       21.     The Finance Act, 2001 stood enacted by Parliament to give  effect to the financial proposals of the Central Government for the  financial year 2001-02. It is important to note that every FA  prescribes a graduated scale for payment of tax, i.e., different  rates for different slabs of income. As a general concept, income- tax includes surcharge. Under Section 4 of the 1961 Act, income- tax is assessed and paid in the next succeeding year upon the  results of the year before. Section 2(1) of the Finance Act, 2001  inter alia stated that, subject to the provisions of sub-sections (2)  and (3), for the assessment year commencing on 1.4.2001,  income-tax shall be charged at the rates specified in Part I of the  First Schedule and such tax shall be increased in cases to which  paragraphs A, B, C and D  of that part applied, by a surcharge  for purposes of the Union. Under sub-section (3), it was expressly  stated that in cases falling under Chapter XII (which includes  Section 113) the tax chargeable shall be determined as provided  in that Chapter. By way of proviso to sub-section (3), it was  further stipulated that the amount of income-tax computed in  accordance with Section 113 shall be increased by a surcharge as  provided in Paragraphs A, B, C, D or E, as the case may be of  Part I to the First Schedule. In this case, it is not in dispute that  Para A was applicable at the given point of time. Reading Section  2(1) of the Finance Act, 2001, it is clear that the term \023income- tax\024 as used in Section 2(1) and as used in the proviso to sub- section (3) of Section 2 of the Finance Act, 2001 did not include  the amount of surcharge. Surcharge was a separate item of  taxation, different from income-tax. This was made clear vide   section 2(1)(a), proviso to section 2(3) and Paragraph A of Part I to  the First Schedule, which stated that the amount of income-tax  computed in accordance with the provisions of Section 112 or

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Section 113 shall be increased by a surcharge calculated at the  rate of 17% of such income-tax. Under the provisions of Section  2(1) of the Finance Act, 2001, which is made subject to sub- section (3) of that section, the assessee is entitled to claim that  income-tax on his undisclosed income to be calculated by  applying the rate or rates as prescribed in the Finance Act, 2001,  but he cannot claim that the amount of income-tax so  determined should not be increased by addition of the surcharge.  Therefore, in our opinion, the AO has rightly imposed surcharge  at 17% on the undisclosed income of the assessee in this case,  particularly when the search was carried out on 17.1.2001.       22.     As stated above, Section 158BA(2) read with Section 4 of the  1961 Act looks at Section 113 for the imposition rate at which tax  has to be imposed in the case of block assessment. That rate is  60%. That rate is fixed by the 1961 Act itself. That rate has been  stipulated by Parliament not with a view to oust the levy of  surcharge but to make the levy cost-effective and easy. Therefore,  a flat rate is prescribed. The difficulty in block assessment is that  one has to correlate the undisclosed income to different years in  which income is earned, hence, Parliament has fixed a flat rate of  tax in Section 113 [See: (1995) 212 ITR (St.) 69]. On the contrary,  a bare perusal of various Finance Acts starting from 1999  indicates that Parliament was aware of rate of tax prescribed by  Section 113 and yet in the various Finance Acts, Parliament has  sought to levy surcharge on the tax in the case of block  assessment. In the present case, the AO has applied the rate of  surcharge at 17% which rate finds place in Para A of Part I of the  First Schedule to the said FA of 2001, therefore, surcharge  leviable under the FA was a distinct charge, not dependant for its  leviability on the assessee\022s liability to pay income-tax but on  assessed tax.       23.     For the aforestated reasons, we hold that even without the  proviso to Section 113 (inserted vide FA 2002  w.e.f. 1.6.2002),  the FA 2001 was applicable to block assessment under Chapter  XIV-B in relation to the search initiated on 17.1.2001 and  accordingly surcharge was leviable on the tax amounting to             Rs. 97,456/- at 17% amounting to Rs. 16504/-. We accordingly  answer the above question in favour of the revenue and against  the assessee.       Whether insertion of the proviso in Section 113 by the  Finance Act, 2002 was applicable to search up to 31.5.2002:  

24.     In view of our findings on the first point, strictly speaking,  we are not required to examine this question. However, it has  been vehemently urged on behalf of the assessee that the said  proviso cannot operate retrospectively. This argument is founded  on the basis that until the amendment in Section 113 w.e.f.  1.6.2002, there was inconsistency with regard to levy of  surcharge. According to the assessee, the question which usually  bothered both the assessee and the Department was whether  surcharge was leviable with reference to the rates provided for in  the FA of the year in which the search was initiated or the year in  which the search was concluded or the year in which the block  assessment proceedings under Section 158BC were initiated or  the year in which block assessment order was passed. According  to the assessee, there was a conference of Chief Commissioners  which had suggested to the Central Government to amend  Section 113 with retrospective effect. However, despite such  recommendations, the Central Government inserted the proviso  in Section 113 only with effect from 1.6.2002. Therefore,  according to the assessee, the proviso cannot be interpreted as

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retrospective.

25.     We find no merit in the above arguments. Both, the Finance  Acts of 2000 and 2001, indicated that a substantive charge was  created in respect of the income-tax to be levied. Both these Acts   prescribed the rates of surcharge. The said surcharge did not  depend for its leviability on the assessee\022s liability to pay income- tax but on the assessed tax. The assessee has relied upon the  above anomalies in support of their contention that such  anomalies made the charge ineffective. In our view, such  submission amounts to begging the question. According to the  assessee, prior to 1.6.2002, the position was ambiguous as it was  not clear even to the Department as to which year\022s FA would be  applicable. To clear this doubt precisely, the proviso has been  inserted in Section 113 by which it is indicated that the FA of the  year in which the search was initiated would apply. Therefore, in  our view, the said proviso was clarificatory in nature. In taxation,  the Legislation of the type indicated by the proviso has to be read  strictly. There is no question of retrospective effect. The proviso  only clarifies that out of the four dates, Parliament has opted for  the date, namely the year in which the search is initiated, which  date would be relevant for applicability of a particular FA.  Therefore, we have to read the proviso as it stands.  

26.     There is one more reason for rejecting the above  submission. Prior to 1.6.2002, in several cases, tax was  prescribed sometimes in the 1961 Act and sometimes in the FA  and often in both. This made liability uncertain. In the present  case, however, the rate of tax in case of block assessment at 60%  was prescribed by Section 113 but the year of the FA imposing  surcharge was not stipulated. This resulted in the above four  ambiguities. Therefore, clarification was needed. The proviso was  curative in nature.  Hence, the proviso inserted in Section 113  merely clarifies that out of the above four dates, the relevant date  for applicability of the FA would be the year in which the search  stood initiated under Section 158BC.

27.     In the case of Allied Motors (P) Ltd.  v.  Commissioner of  Income-tax [(1997) 224 ITR 677 (SC)] this Court observed as  follows:      \023A proviso which is inserted to remedy  unintended consequences and to make the  provision workable, a proviso which supplies  an obvious omission in the section and is  required to be read into the section to give the  section a reasonable interpretation, requires to  be treated as retrospective in operation, so that  a reasonable interpretation can be given to the  section as a whole.\024             28.     For the aforestated reasons, we set aside the impugned  judgment of the High Court dated 13.2.2006 in Tax Appeal No.  1042 of 2005 and, accordingly, we allow the Department\022s civil  appeal with no order as to costs.