SUPREME COURT OF INDIA
Commissioner of Income-tax
v.
Suresh N. Gupta
S. H. Kapadia AND B. Sudershan Reddy, JJ.
Civil Appeal No. 32 of 2008
January 7, 2008
Section 113, read with Chapter XIV-B of the Income-tax Act, 1961, read
with Para A of Part I of First Schedule to Finance Act, 2001 - Block assessment
in search cases - Tax in case of - Block period 1991-92 to 2000-01 - On
17-1-2001 a search under section 132 was carried out at premises of
respondent-assessee which unearthed certain undisclosed income - Assessing
Officer computed tax thereon at 60 per cent in terms of section 113 and also
levied surcharge at 17 per cent on amount so taxed - Assessee challenged levy
of surcharge in appeal before Commissioner (Appeals) - Commissioner (Appeals)
allowed assessee’s appeal - Decision of Commissioner (Appeals) was confirmed by
Tribunal and High Court - Whether since even without proviso to section 113
(inserted vide Finance Act, 2002 with effect from 1-6-2002), Finance Act, 2001
was applicable to block assessment under Chapter XIV- B in relation to search
initiated on 17-1-2001 surcharge was leviable at rate of 17 per cent on amount
of tax computed - Held, yes
Section 113 of the Income-tax Act, 1961 - Block assessment in search cases
- Tax in case of - Block period 1991-92 to 2000-01 - Whether proviso inserted
in section 113 by Finance Act, 2002 is clarificatory in nature as it clarifies
that relevant date for applicability of Finance Act would be year in which
search stood initiated under section 158BC- Held, yes
Section 158BB of the Income-tax Act, 1961 -
Block assessment in search cases - Computation of undisclosed income - Whether
section 158BB is required to be read with section 4 - Held, yes
On 17.1.2001 a search under section 132 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 Assessing
Officer determined the assessee's undisclosed income at Rs. 1,62,427. He
computed tax thereon at 60 per cent in terms of section 113 of the
1961 Act amounting to Rs. 97,456 on which surcharge was levied at 17 per cent
i.e., Rs. 16,504. The levy of surcharge was challenged by the assessee in
appeal before the Commissioner (Appeals). The said appeal was allowed, the
decision of Commissioner (Appeals) was confirmed by the Tribunal and the High
Court.
On appeal to the Supreme Court:
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 ‘total income’ of the previous year, there is no limitation upon the power or authority of Parliament to fix any rate it pleases. However, if ‘rate’ is understood to mean the fixing of the tax irrespective of ‘total income’ and unconnected with ‘total income’, then, Parliament would be travelling outside the ambit of section 4(1). The Income-tax Act, therefore, contains an elaborate machinery for ascertaining ‘total income’ of an assessee. If Parliament has power to fix tax at a rate which has no connection with the "total income", then the machinery set up under the 1961 Act becomes infructuous. 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 ‘total income’ of the previous year and so long as the rate relates to the subject matter of the tax, there is nothing to prevent Parliament from fixing the rate. But the rate must be applied to the "total income" and the tax that an assessee has to pay must be at the rate in respect of total income of the previous year. [Para 7]
The purpose of this Chapter
XIV-B 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, i.e.,
from 1.4.2000 to 17.1.2001, in instant 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, Explanation is
inserted in section 158BB, which is computation section, explaining the method
of computation of "undisclosed income" of the block period. [Para 8]
Reading of the relevant provisions of Chapter
XIV-B one finds that section 158 BA deals with assessment of "undisclosed
income" as a result of search whereas computation of such income falls
under section 158BB. The procedure for block assessment falls in section 158BC.
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 Assessing Officer shall proceed to assess the
undisclosed income in accordance with the provisions of Chapter XIV-B. [Para
11]
Section 158B defines "block period" 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 ‘previous year’ is a distinct unit of time for the purposes of assessment. However, when one comes to section 158BA, one finds 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 "previous years" as well as the concept of "total income". Those concepts are retained Chapter XIV-B 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 instant case, the Court was 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 "undisclosed income" in the manner provided for in Chapter IV of the 1961 Act which deals with "computation of total income". 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, one 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 158BH 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 ‘previous years’ and ‘total income’ in Chapter XIV-B, 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. [Para 13]
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 prerequisite for making a ''block assessment". However, in the matter of computation, the principle of aggregation of total incomes, is inbuilt into section 158BB. One has 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, 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. [Para 14]
Under section 158BB, there is the theory of "block period". It is based on "the principle of aggregation of total incomes". 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 "undisclosed income” 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 "total income" and "previous year” 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. The word "block period", 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 "undisclosed incomes” 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 "undisclosed income" 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, the concept of a charge on the "total income” 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. [Para15]
Once
section 158BB is required to be read with section 4 of the 1961 Act, then the
relevant Finance Act of the concerned year would automatically stands attracted
to the computation under Chapter XIV-B. [Para 16]
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 Finance Act 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. In instant case, it was 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 "income-tax" as used in section
2(1) and as used in the proviso to subsection(3) of section 2 of the Finance
Act, 2001 did not include die amount of surcharge. Surcharge was a separate
item of taxation, different from income-tax. This was made clear vide section
2(l)(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 section 113 shall be increased by a
surcharge calculated at the rate of 17 per cent 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 was 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 could not claim that the
amount of income-tax so determined should not be increased by addition of the
surcharge. Therefore, the Assessing Officer had rightly imposed surcharge at 17
per cent on the undisclosed income of the assessee in instant case,
particularly when the search was carried out on 17.1.2001. [Para 21]
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 per cent. That rate is fixed by the 1961 Act itself. That rate has been x 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. 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 instant case, the Assessing Officer had applied the rate of surcharge at 17 per cent which rate finds place in Para A of Part I of the First Schedule to the said Finance Act of 2001, therefore, surcharge leviable under Finance Act was a distinct charge, not dependant for its leviability on the assessee's liability to pay income-tax but on assessed tax. [Para 22]
For the aforestated reasons, it was held that
even without proviso to section 113 (inserted vide Finance Act 2002 with
effect from 1.6.2002), Finance Act 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
per cent amounting to Rs. 16,504. [Para 23]
Whether in section of the proviso in section
113 by the Finance Act, 2002 was applicable to search up to 31-5-2002.
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's liability to pay income-tax but on the assessed tax. 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's Finance Act would be applicable. To clear this doubt precisely, the proviso has been inserted in section 113 by which it is indicated that the Finance Act of the year in which the search was initiated would apply. Therefore, 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 Finance Act. Therefore, one has to read the proviso as it stands. [Para 25]
There
was 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 Finance Act and often in both. This made liability uncertain. In the
instant case, however, the rate of tax in case of block assessment at 60 per
cent was prescribed by section 113 but the year of the Finance Act 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 Finance Act would be the year
in which the search stood initiated under section 158BC. [Para 25 and 26]
For
the aforestated reasons, the impugned judgment of the High Court was set aside
and, accordingly, the department’s appeal was allowed . [Para 28]