Page 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.8750 OF 2014 (arising out of SLP (C) No. 540 of 2009)

COMMISSIONER OF INCOME TAX (CENTRAL)-I, NEW DELHI …..APPELLANT(S)

VERSUS

VATIKA TOWNSHIP PRIVATE LIMITED …..RESPONDENT(S)

W I T H

CIVIL APPEAL NO.8764 OF 2014 (arising out of SLP (C) No. 1362 of 2009)

CIVIL APPEAL NO.8762 OF 2014 (arising out of SLP (C) No. 1339 of 2009)

CIVIL APPEAL NO.8773 OF 2014 (arising out of SLP (C) No. 19319 of 2008)

CIVIL APPEAL NO.8763 OF 2014 (arising out of SLP (C) No. 1342 of 2009)

CIVIL APPEAL NO.8755 OF 2014 (arising out of SLP (C) No. 31528 of 2008)

CIVIL APPEAL NO.8775 OF 2014 (arising out of SLP (C) No. 22444 of 2008)

Civil Appeal No.________ of 2014 &   connected matters  Page 1 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 2

CIVIL APPEAL NO.8779 OF 2014 (arising out of SLP (C) No. 27162 of 2008)

CIVIL APPEAL NO.8780 OF 2014 (arising out of SLP (C) No. 27413 of 2008)

CIVIL APPEAL NO.8774 OF 2014 (arising out of SLP (C) No. 20855 of 2008)

CIVIL APPEAL NO.8765 OF 2014 (arising out of SLP (C) No. 4769 of 2009)

CIVIL APPEAL NO.8760 OF 2014 (arising out of SLP (C) No. 1257 of 2009)

CIVIL APPEAL NO.8756 OF 2014 (arising out of SLP (C) No. 31537 of 2008)

CIVIL APPEAL NO.8759 OF 2014 (arising out of SLP (C) No. 767 of 2009)

CIVIL APPEAL NO.8772 OF 2014 (arising out of SLP (C) No. 14204 of 2008)

CIVIL APPEAL NO.8777 OF 2014 (arising out of SLP (C) No. 26473 of 2008)

CIVIL APPEAL NO.8770 OF 2014 (arising out of SLP (C) No. 13886 of 2008)

CIVIL APPEAL NOS.8752-8753 OF 2014 (arising out of SLP (C) Nos. 4842-4843 of 2008)

CIVIL APPEAL NO.8754 OF 2014 (arising out of SLP (C) No. 5704 of 2008)

CIVIL APPEAL NO.8768 OF 2014 (arising out of SLP (C) No. 6897 of 2008)

CIVIL APPEAL NO.8758 OF 2014 (arising out of SLP (C) No. 745 of 2009)

Civil Appeal No.________ of 2014 &   connected matters  Page 2 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 3

CIVIL APPEAL NO.8776 OF 2014 (arising out of SLP (C) No. 24602 of 2008)

CIVIL APPEAL NO.8769 OF 2014 (arising out of SLP (C) No. 8901 of 2008)

CIVIL APPEAL NO. 1160 OF 2007

CIVIL APPEAL NOS.      8766-8767      OF 2014   (arising out of SLP (C) Nos. 6767-6768 of 2014)

J U D G M E N T

A.K. SIKRI, J.

Delay condoned.   

2. Leave granted in all these matters.   

3. In these batch of appeals, most of which are preferred by the  

Commissioner(s) of Income Tax (hereinafter referred to as 'the  

Department'), with the exception of few appeals filed by the  

assessees,  the  question  of  law  which  has  fallen  for  

consideration  is  as  to  whether  the  proviso  appended  to  

Section 113 of the Income Tax Act (hereinafter referred to as  

'the Act')  which was inserted in that Section by the Finance  

Act,  2002 is  to  operate  prospectively  or  is  clarificatory  and  

curative in nature and, therefore, has retrospective operation.

Civil Appeal No.________ of 2014 &   connected matters  Page 3 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 4

The Background Facts:

4. This question has been referred to the Constitution Bench in  

the  Civil  Appeal  arising  out  of  S.L.P.  No.540/2009  and,  

therefore,  to start  with,  we would be justified in  referring to  

facts of that case.  In fact the answer to the aforesaid question  

would lead to the sealing of the fate of all these appeals one  

way  or  the  other.   The  facts  in  this  appeal,  which  need  

recapitulation,  are  that  there  was  a  search  and  seizure  

operation under Section 132 of the Act on the premises of the  

assessee on 10.02.2001.  Notice under Section 158BC of the  

Act was issued to the assessee on 18.06.2001 requiring him  

to  file  his  return  of  income  for  the  block  period  ending  

10.02.2000.  In  compliance, the assessee filed its return of  

income for the block period from 01.04.1989 to 10.02.2000.  

The  Block  Assessment  in  this  case  was  completed  under  

Section 158BA on 28.02.2002 at a total undisclosed income of  

Rs.85,18,819/-.   After  sometime,  the  Assessing  Officer,  on  

verification  of  working  of  calculation  of  tax,  observed  that  

surcharge had not been levied on the tax imposed upon the  

assessee.  This was treated as a mistake apparent on record  

Civil Appeal No.________ of 2014 &   connected matters  Page 4 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 5

by the Assessing Officer and accordingly a rectification order  

was passed under Section 154 of the Act on 30.06.2003.  This  

order under Section 154 of the Act, by which surcharge was  

levied by the Assessing Officer, was challenged in appeal by  

the  assessee.   The  said  order  was  cancelled  by  the  CIT  

(Appeals)-I,  New Delhi  vide  order  dated 10.12.2003 on the  

ground that  the levy of  surcharge is a debatable issue and  

therefore such an order could not be passed taking umbrage  

under Section 154 of the Act.  The undisclosed income was  

revised under Section 250BC/158BC by the Assessing Officer  

vide order dated 09.09.2003 to Rs.10,90,000/- to give effect to  

the above order of the CIT (Appeals), and thereby removing  

the component of the surcharge.

5. As  the Department  wanted  the  surcharge to  be  levied,  the  

Commissioner of Income Tax (Central-I), New Delhi issued a  

notice  under  Section  263  of  the  Act  to  the  assessee  and  

sought to revise the order dated 09.09.2003 passed by the  

Assessing Officer by which he had given effect to the order of  

the  CIT  (Appeals)  and  in  the  process  did  not  charge  any  

surcharge.  In the opinion of CIT, this led to income having  

escaped the assessment.  According to the CIT, in view of the  

Civil Appeal No.________ of 2014 &   connected matters  Page 5 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 6

provisions of Section 113 of the Act as inserted by the Finance  

Act,  1995 and clarified by the Board Circular  No.717 dated  

14.08.1995, surcharge was leviable on the income assessed.  

According to the CIT the charging provision was Section 4 of  

the Act which was to be read with Section 113 of the Act that  

prescribes the rate and tax for search and seizure cases and  

rate  of  surcharge  as  specified  in  the  Finance  Act  of  the  

relevant year was to be applied.  In this particular case the  

search and seizure operation took place on 14.07.1999 and  

treating this date as relevant, the Finance Act 1999 was to be  

applied.   

6. The CIT,  accordingly,  cancelled the order  dated 09.09.2003  

not levying surcharge upon the assessee, as being erroneous  

and prejudicial to the interests of the revenue.  The Assessing  

Officer was directed by the CIT to levy surcharge @ 10% and  

the amount of income tax computed and issue revised notice  

of  demand.   The order  covered block period 01.04.1989 to  

10.02.2000.   This order of the CIT under Section 263 of the  

Act  was  passed  on  23.03.2004.   The  assessee  filed  the  

appeal before the Income Tax Appellate Tribunal (hereinafter  

referred to as 'the Tribunal') against the said order of the CIT.  

Civil Appeal No.________ of 2014 &   connected matters  Page 6 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 7

The  Tribunal  vide  its  order  dated  23.06.2006  allowed  the  

appeal of the assessee.  The Tribunal held that the insertion of  

the proviso to Section 113 of the Income Tax Act cannot be  

held  to  be  declaratory  or  clarificatory  in  nature  and  was  

prospective in its operation.  Against the order of the Tribunal  

dated 23.06.2006 the revenue approached the High Court of  

Delhi by way of an appeal filed under Section 260 A of the Act  

for the block period 01.04.1989 to 10.02.2000.  This appeal  

has been dismissed vide order dated 17.04.2007 by the High  

Court.  It is this order of the High Court which is the subject  

matter of the appeal in question.

7. It is clear from the aforesaid narration that the High Court has  

taken the view that proviso inserted in Section 113 of the Act  

by the Finance Act, 2002 was prospective in nature and the  

surcharge as leviable under the aforesaid proviso could not be  

made applicable to the block assessment in question of  an  

earlier period i.e. the period from 01.04.1989 to 10.02.2000 in  

the instant case.

The Reference Order

8. It so happened that this very issue about the said proviso to  

Civil Appeal No.________ of 2014 &   connected matters  Page 7 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 8

Section  113,  viz.,  whether  it  is  clarificatory  and  curative  in  

nature and, therefore, can be applied retrospectively or it is to  

take effect from the date i.e. 01.06.2002 when it was inserted  

by the Finance Act, 2002, attracted the attention of this Court  

and  was  considered  by  the  Division  Bench  in  the  case  of  

Commissioner  of  Income  Tax,  Central  II v.  Suresh  N.  

Gupta1.   The  Division  Bench  held  that  the  said  proviso  is  

clarificatory  in  nature.   When  the  instant  appeal  came  up  

before another Division Bench on 06.01.2009 for hearing, the  

said  Division  Bench  expressed  its  doubts  about  the  

correctness  of  the  view  taken  in  Suresh  N.  Gupta and  

directed the Registry to place the matter before Hon'ble the  

Chief Justice of India for constitution of a larger Bench.  We  

reproduce order dated 06.01.2009 in its entirety as under:

“Delay condoned.

The question which fell for consideration before  the High Court  was as to whether the proviso  appended to Section 113 of the Income Tax Act  is  clarificatory  and/or  curative  in  nature.   The  said  provision had come into force with  effect  from 01.06.2002.  It reads as under:

“Provided  that  the  tax  chargeable  under  this  section  shall  be  increased  by  a  surcharge,  if  any, levied by any Central Act and applicable in  the  assessment  year  relevant  to  the  previous  

1 (2008) 4 SCC 362 Civil Appeal No.________ of 2014 &   connected matters  Page 8 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 9

year  in  which  the  search  is  initiated  under  Section  132  or  the  requisition  is  made  under  Section 132-A.

In this case, the search and seizure took place  on 06.10.2001.  An order of block assessment in  terms of Section 158BC was made in respect of  the  assessment  years  1984  to  2003.   The  surcharge was levied on 30.06.2003.

In support of its contention that the said proviso  was  retrospective  in  nature,  the  learned  Additional  Solicitor  General  relies  upon  a  Division  Bench  decision  of  this  Court  in  Commissioner  of  Income  Tax,  Central  II  v.  Suresh N. Gupta, (2008) 4 SCC 362 wherein it  has been held:

“37.   According  to  the  assessee,  prior  to  01.06.2002,  the  position  was  ambiguous  as  it  was  not  clear  even  to  the  Department  as  to  which year's FA would be applicable.  To clear  this  doubt  precisely,  the  proviso  has  been  inserted in Section 113 by which it is indicated  that  FA of  the  year  in  which  the  search  was  initiated would apply.  Therefore, in our view, the  said  proviso  was  clarificatory  in  nature.   In  taxation, the legislation of the type indicated by  the proviso has to be read strictly.  There is no  question  of  retrospective  effect.   The  proviso  only  clarifies  that  out  of  the  four  dates,  Parliament has opted for the date, namely, the  year in which the search is initiated, which date  would be relevant for applicability of a particular  FA.  Therefore, we have to read the proviso as it  stands.

38.  There  is  one  more  reason  for  rejecting  the  above submission.  Prior to 01.06.2002, in the  1961  Act  and  sometimes  in  FA and  often  in  both.   This  made  liability  uncertain.   In  the  present case, however, the rate of tax in case of  block  assessment  at  60%  was  prescribed  by  Section  113  but  the  year  of  FA  imposing  surcharge was not stipulated.  This resulted in  the  above  four  ambiguities.   Therefore,  

Civil Appeal No.________ of 2014 &   connected matters  Page 9 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 10

clarification  was  needed.   The  proviso  was  curative in nature.  Hence, the proviso inserted  in  Section 113 merely  clarifies  that  out  of  the  above  four  dates,  the  relevant  date  for  applicability  of  FA would be the year in which  the  search  stood  initiated  under  Section  158- BC.”

As the said proviso was introduced with effect  from 01.06.2002, i.e. with prospective effect and  by reason thereof, tax chargeable under Section  135 of the Income Tax Act is to be increased by  surcharge levied by a Central Act, we are of the  opinion that keeping in view the principles of law  that  the  taxing  statute  should  be  construed  strictly  and a statute,  ordinarily,  should not  be  held  to  have  any  retrospective  effect,  it  is  necessary that the matter  be considered by a  larger Bench.

We, while issuing notice, direct the Registry to  place  the  matter  before  Hon'ble  the  Chief  Justice for constitution of a larger Bench.”

9. A three  Member  Bench  was  constituted  before  which  the  

matter came up for hearing on 08.04.2010.  On that date, the  

said Bench passed the following order :

“Vide  order  dated  06.01.2009  the  lead  matter  was referred to be listed before a larger Bench  and  consequently  the  matter,  along  with  connected  matters,  were  listed  before  a  three  Judge Bench.

After  having  heard  learned  counsel  on  both  sides  at  length,  looking  to  the  important  questions  of  law  involved  having  wide  ramifications  and  pendency  of  several  matters  on the same issue before several  High Courts  and Tribunals,  we deem it  appropriate  to refer  the matters for being placed before Five Judges  

Civil Appeal No.________ of 2014 &   connected matters  Page 10 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 11

Bench.  Matter be placed accordingly.”

10. This is precisely  raison d'etre  for  hearing the matter  by the  

present Constitution Bench.  We may observe here that after  

the aforesaid reference, other connected appeals raising the  

identical issue have been tagged with direction to be heard  

along with this appeal.

The Statutory Provisions

11. Before  adverting  to  the  submissions  of  the  Department,  as  

argued  by  Mr.  P.S.  Narsimha,  learned  Additional  Solicitor  

General  and  rebuttal  thereto  given  by  various  counsel  

appearing for the assessees, we deem it apposite to take note  

of the relevant statutory provisions, having bearing over the  

matter, along with proviso to Section 113, which is the bone of  

contention  and  subject  mater  of  interpretation.   As  is  well  

known, Section 4 of the Act is the charging Section in the Act.  

It reads as under:

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

Civil Appeal No.________ of 2014 &   connected matters  Page 11 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 12

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

(2)  In  respect  of  income  chargeable  under  sub- section  (1),  income-tax  shall  be  deducted  at  the  source or paid in advance, where it is so deductible  or payable under any provision of this Act.”

12. Though, Section 4 of the Act is the charging Section, it is well  

known that  rate  or  rates  at  which  the  income tax  is  to  be  

charged is specified each year by enacting a Finance Act at  

the time of presentation of the annual Budget.

13. While Section 4 of the Act deals with the charge of income tax,  

the  Parliament  also  has  the  power  to  levy  surcharge  on  

income tax.  Power to levy a surcharge is contained in Article  

271 of the Constitution of India which read as under:

“271.  Surcharge  on  certain  duties  and  taxes  for  purposes of the Union Notwithstanding anything in  Articles 269 and 270, Parliament may at any time  increase any of the duties or taxes referred in those  articles by a surcharge for purposes of the Union  and  the  whole  proceeds  of  any  such  surcharge  shall form part the Consolidated Fund of India.”

14. The surcharge on the income tax was introduced for the first  

time  by  the  Finance  Act,  1995,  in  Section  2  (3)  thereof.  

However,  initially,  this  surcharge  was  levied  only  on  the  Civil Appeal No.________ of 2014 &   connected matters  Page 12 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 13

income of companies i.e. corporate entities incorporated under  

the Indian Companies Act by specified surcharge at the rate of  

15% in the Finance Act, 1996, which was reduced to 7.50% in  

the Finance Act, 1997.  In the next two Finance Acts i.e. 1998  

and 1999, there was no surcharge levied even in the cases of  

companies.  However, by Finance Act, 2000, surcharge at a  

flat rate of 10% came to be levied in respect of individuals,  

HUF, BOI, AOP as well as co-operative societies, partnership  

firms, local authorities and also the companies.  In subsequent  

years,  the  rates  at  which  the  surcharge  is  levied  on  the  

aforesaid  entities  are  of  varying  nature.   A tabulated  form  

showing  surcharge  in  respect  of  different  category  of  

assessees in different assessment years, levied under each  

Finance Act, shall be reproduced at the relevant stage.

15. In  the  present  case,  since  we  are  concerned  with  the  

surcharge  on  the  block  assessment,  it  also  becomes  

imperative to take note of the relevant provisions pertaining to  

the block assessment.    These provisions are  contained in  

Chapter XIV-B.  The purpose of this Chapter is to lay down a  

special procedure for assessment of search cases with a view  

to  combat  tax  evasion  and  also  to  expedite  and  simplify  

Civil Appeal No.________ of 2014 &   connected matters  Page 13 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 14

assessments in search cases.  We reproduce hereinbelow the  

provisions  of  Section  158B,  158BA,  158BB,  158BC  and  

158BH of that Chapter, which have bearing on the issue at  

hand:

“158B.   In  this  Chapter,  unless  the  context  otherwise requires,-

(a)  'block  period' means  the  period  comprising  previous  years  relevant  to  six  assessment  years  preceding  the  previous  year  in  which  the  search  was conducted under Section 132 or any requisition  was made under  Section 132A and also includes  the period up to the date of the commencement of  such  search  or  date  of  such  requisition  in  the  previous  year  in  which  the  said  search  was  conducted or requisition was made. Provided that  where the search is  initiated or  the  requisition  is  made  before  the  1st  day  of  June,  2001, the provisions of this clause shall have effect  as if for the words "six assessment years" the words  "ten assessment years" had been substituted.

(b)  "undisclosed  income"  includes  any  money,  bullion, jewellery or other valuable article or thing or  any  income  based  on  any  entry  in  the  books  of  account or other documents or transactions, where  such  money,  bullion,  jewellery,  valuable  article,  thing,  entry  in  the  books  of  account  or  other  document or transaction represents wholly or partly  income or property which has not been or would not  have been disclosed for the purposes of this Act.

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

Civil Appeal No.________ of 2014 &   connected matters  Page 14 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 20

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

18. From  the  reading  of  the  aforesaid  statutory  provisions  in  

abstract,  particularly  relating  to  surcharge,  it  is  clear  that  

though  provision  for  surcharge  under  the  Finance  Act  has  

been in existence since 1995, in so far as levy of surcharge for  

block assessment is concerned, it is introduced by insertion of  

aforesaid proviso of Section 113.  It is in this background, the  

question  has  arisen  as  to  whether  this  surcharge  on  block  

assessment has been levied for the first time by the aforesaid  

proviso  coming  into  effect  from  01.06.2002  or  it  is  only  

clarificatory in nature because of the reason that the provision  

for surcharge was made in the Finance Act in the year 1995  

and that covered surcharge on block assessment as well.

Judgment in Suresh N. Gupta

19. As already noticed above, this very proviso to Section 113 of  

the Act came up for interpretation in Suresh N. Gupta and the  

Division Bench of this Court took the view that this proviso is  

clarificatory  in  nature  as  it  simply  clarifies  the  date  with  

Civil Appeal No.________ of 2014 &   connected matters  Page 20 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 21

reference to which the rate of surcharge is payable, namely,  

the surcharge levied by the Central Act and applicable in the  

assessment year relevant to the previous year in which the  

search is initiated.  It would be advisable to take note of the  

reasons  which  prevailed  with  the  Bench  to  come  to  the  

aforesaid  conclusion,  inasmuch  as  it  is  the  ratio  of  this  

judgment  which  was  doubted  by  the  Bench   making  the  

reference to the larger Bench.

20. The  Court  in  Suresh  N.  Gupta  formulated  two  points  for  

consideration, viz.;

“1. Whether  on  the facts  and circumstances  of  this  case,  the  Finance  Act,  2001  was  applicable  to  “block  assessment”  under  Chapter XIVB in respect of search carried out  on January 17, 2001?

2.  Whether the proviso inserted in Section 113  by the Finance Act, 2002, is clarificatory?”

Dealing  with  the  first  question,  the  Court  noted  the  

contention of  the assessee that  Chapter  XIVB,  which  

was inserted by the Finance Act, 1995 with effect from  

July  1,  1995  was  a  self-contained  chapter  as  it  lays  

down  a  special  procedure  for  assessment  of  

undisclosed income found during search for the “block  

Civil Appeal No.________ of 2014 &   connected matters  Page 21 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 22

period”.   It  was  argued  by  the  assessee  that  this  

Chapter  contains  a  charging  section  (158BA),  a  

computation section (158BB), a procedural section for  

block  assessment  (158BC),  limitation  provision  for  

completion  of  block  assessment  (158BE)  and  the  

provisions  for  imposition  of  interest  and  penalty  

(158BFA).   It  was  also  argued  that  the  scheme  of  

assessment  of  “undisclosed  income”  under  Chapter  

XIV-B  is  different  from the  scheme of  assessment  of  

“total income” of any person in terms of Section 4(1) of  

the Act.  In support of this argument, it was submitted  

that whereas Chapter XIV-B deals with assessment of  

“undisclosed income”, Section 4 of the Act relates to the  

assessment of “total income”.  Moreover, “block period”  

mentioned  in  Chapter  XIV-B  was  different  from  the  

assessment  of  income  of  the  “previous  year”  under  

Section 4(1) of the Act.  Even the rate of tax at which the  

“undisclosed income” is assessed is different inasmuch  

as it is 60% as specified in Section 158BA(2) read with  

section 113 of the Act, in contradistinction to the taxation  

of normal income which is at the rates specified in the  

Civil Appeal No.________ of 2014 &   connected matters  Page 22 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 23

relevant  Finance Act.   In  nutshell,  it  was argued that  

block  assessment  falls  in  Chapter  XIV-B  for  which  

charging  section  was  section  158BA  and  for  

assessment of block period, charging section was not  

section 4(1) of  the Act.   On that  basis,  the assessee  

wanted the Court  to hold that  it  was not open to the  

Assessing  Officer  to  levy  surcharge  prior  to  June  1,  

2002, i.e. before the insertion of proviso to Section 113  

of the Act.

21. This argument was rejected by the Court.  The Bench  

took note of  Article 271 of  the Constitution along with  

Entry  82  of  List  1  of  the  Seventh  Schedule  to  the  

Constitution of India and Section 4 of the Act which is  

the  charging  section.   It  held  that  the  power  to  levy  

surcharge on income tax is traceable to Article 271 read  

with Entry 82 and not to Section 4 of the Act.  The rate at  

which the charge on total income on the previous year is  

imposed is not laid down in the Income Tax Act but in  

the Finance Act indicated every year by the Parliament  

to give effect  to the financial  proposals of  the Central  

Government.  It further held that since Income Tax Act  

Civil Appeal No.________ of 2014 &   connected matters  Page 23 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 24

deals  with  tax  on  income  and  nothing  else,  nor  with  

charge should be a legal charge under Section 4, it must  

be a  tax on the income of  the assessee.   Therefore,  

Section 4(1) of the Act was the charging section and the  

rate of tax is prescribed under that very Act i.e. Section  

113.  As long as the charge is on the “total income” of  

the previous year and so long as the rate relates to the  

subject matter of the tax, there is nothing to prevent the  

Parliament from fixing the date.  What is to be seen is  

that the rate is applied to the “total income” and the tax  

which the assessee has to pay must be at the rate in  

respect of the total income of the previous year.

22. The  Bench  was  of  the  view  that  the  concepts  of  

“previous  years”  as  well  as  “total  income”  in  Chapter  

XIV-B were retained.  Therefore Section 158BB was to  

be read with Section 4 of the Act implying thereby that  

Section 4 remains the charging section.  The procedure  

contained  in  Section  4  was  not  ruled  out  from  block  

assessment procedure even in the case of assessment  

of block period.  It was, nevertheless, an assessment on  

the total income of the previous years falling within the  

Civil Appeal No.________ of 2014 &   connected matters  Page 24 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 25

block  period  including  returned/assessed  incomes  as  

per  regular  returns  and  regular  assessment.   As  a  

fortiori, the provisions of the relevant Finance Act have  

got to be read into the block assessment scheme under  

Chapter  XIV-B,  even  prior  to  June  1,  2002.   As  a  

sequential,  even  without  the  proviso  to  section  113,  

which was inserted by the Finance Act, 2002 with effect  

from  June  1,  2002,  the  Finance  Act  2001,  was  

applicable  to  block  assessment  under  Chapter  XIV-B  

and accordingly surcharge was leviable.

23. Adverting  to  the  second  question  formulated  by  the  

Bench,  namely,  whether  insertion  of  the  proviso  in  

section 113 by the Finance Act, 2002 was applicable to  

search of  the earlier  period as well  i.e.  upto May 31,  

2002, the Court pointed out that in view of its answer to  

the first question, second question did not even require  

any examination.  It, however, proceeded to answer this  

question as well having regard to the submission of the  

assessee  that  before  the  said  proviso,  there  was  

inconsistency with regard to levy of surcharge and the  

position was ambiguous as it was not clear even to the  

Civil Appeal No.________ of 2014 &   connected matters  Page 25 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 26

Department  as to  which year's  Finance Act  would  be  

applicable.   Brushing  aside  this  argument,  the  Court  

held that to clear this very doubt precisely, the proviso  

had been inserted in section 113 and therefore it  was  

only clarificatory in nature.  The Court specifically noted  

that  before the proviso was inserted,  there was some  

doubts in the mind of the Department and the taxpayers  

about the date with reference to which the rate at which  

surcharge is payable.  The confusion was as to whether  

surcharge  was  leviable  with  reference  to  the  rates  

provided for in the Finance Act of the year in which the  

search was initiated or the year in which the search was  

concluded  or the  year  in  which  block  assessment  

proceedings under Section 158BC were initiated or the  

year in which block assessment order was passed.  The  

Court opined that proviso only clarifies that out of the  

aforesaid 4 dates, the Parliament has opted for the date  

in which the search is initiated, as the date relevant for  

applicability of a particular Finance Act.

24. Aforesaid were the reasons to arrive at a conclusion that  

the proviso was clarificatory and/or curative in nature.

Civil Appeal No.________ of 2014 &   connected matters  Page 26 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 27

25. It  would  be  our  duty  to  point  out  at  this  stage  that  

another  Division  Bench  in  the  case  of  CIT v.  Sanjiv  

Bhatara2, has followed the aforesaid judgment by giving  

same reasons in support.

26. It is not necessary to take note of the arguments advanced by  

the learned ASG for the Department and various counsel who  

appeared for the assessees in these appeals, in detail.  The  

reason for making these remarks by us is that Mr. Narasimha,  

learned ASG, had argued on the same lines which formed the  

basis  of  rendering  the  decision  of  the  Division  Bench  in  

Suresh N. Gupta that have already been summarised above.  

Of course, it was his incessant effort with all effervescence, to  

persuade this Court to accept the conclusion arrived at in the  

said  judgment.  Learned  counsel  for  the  assessees  also  

emphasised  those  very  submissions advanced in  that  case  

which did not find favour with the Division Bench.  In addition,  

these  counsel  articulated  some  more  arguments  with  all  

enthusiasm and temerity, reference to which would be made  

while giving our analysis to the various provisions leading up  

to the answer to the issue involved.

2 (2009) 310 ITR 105 (SC) Civil Appeal No.________ of 2014 &   connected matters  Page 27 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 28

Scheme of Chapter XIVB

27. Before we proceed to answer the question, it would be  

necessary  to  keep  in  mind  the  scheme  of  block  

assessment introduced in  Chapter XIVB to Finance Act,  

1995 w.e.f. 1st July, 1995.  As already mentioned in brief  

by us, Chapter XIVB of the Act which deals with block  

assessment lays down a special procedure for search  

cases.  The main reason for adding these provisions in  

the Act was to curb tax evasion and expedite as well as  

simplify  the  assessments  in  such  search  cases.  

Undisclosed  incomes  have  to  be  related  in  different  

years  in  which  income  was  earned  under  block  

assessment.  This is because in such cases, the “block  

period”  is  for  previous  years  relevant  to  10/6  

assessment  years  and  also  the  period  of  the  current  

previous year  up to the date of  the search,  i.e.,  form  

April  1, 2000, to January 17, 2001, in this case.  The  

essence of this new procedure, therefore, is a separate  

single  assessment  of  the  “undisclosed  income”,  

detected  as  a  result  of  search  and  this  separate  

assessment  has  to  be  in  addition  to  the  normal  

Civil Appeal No.________ of 2014 &   connected matters  Page 28 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 29

assessment  covering  the  same  period.   Therefore,  a  

separate return covering the years of the block period is  

a pre-requisite for making block assessment.  Under the  

said  procedure,  the  Explanation  is  inserted  in  section  

158BB, which is the computation section, explaining the  

method of computation of “undisclosed income” of the  

block period.  It is now well accepted that this Chapter is  

a  complete  code  in  itself  providing  for  self-contained  

machinery for assessment of undisclosed income for the  

block period of 10 years or 6 years, as the case may be.  

In  case of  regular  assessments  for  which returns are  

filed on yearly basis, Section 4 of the Act is the charging  

section.  However, at what rate the income is to be taxed  

is specified every year by the Parliament in the Finance  

Act.  In contradistinction, when it comes to payment of  

tax  on  the  undisclosed  income  relating  to  the  block  

period,  rate is  specified in  Section 113 of  the Act.   It  

remains static at 60% of the undisclosed income which  

is the categorical  stipulation in the Section 113 of  the  

Act.  Section 158BA(2) of the Act clearly states that the  

total  undisclosed  income  relating  to  the  block  period  

Civil Appeal No.________ of 2014 &   connected matters  Page 29 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 30

“shall  be charged to  tax”  at  the rates specified under  

Section 113 as income of the block period irrespective of  

previous year or years.  Under Section 113 of the Act,  

the undisclosed income is chargeable to tax at the rate  

of 60%.

28. From the above, it becomes manifest that Chapter XIVB  

comprehensively takes care of all the aspects relating to  

the  block assessment  relating  to  undisclosed income,  

which  includes  Section  156BA(2)  as  the  charging  

section and even the rate at which such income is to be  

taxed is mentioned in Section 113 of the Act.  No doubt,  

Section 4 of the Act is also a charging section which is  

made applicable on 'total income of previous year'.  As  

per Section 2 (45), 'total income' means the total amount  

of  income  referred  to  in  Section  5,  computed  in  the  

manner  laid  down  in  the  Act.   Section  5  of  the  Act  

enumerates the scope of total income and prescribes,  

inter  alia, that  it  would  include  all  income  which  is  

received or is deemed to receive in India in any previous  

year by or on behalf of a person who is a Resident.  No  

doubt, undisclosed income referred to in Chapter XIVB  

Civil Appeal No.________ of 2014 &   connected matters  Page 30 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 31

is also an income which was received but not disclosed,  

therefore, in the first blush, argument of the Department  

that undisclosed income referred to in Chapter XIVB is  

also a part of total income and consequently Section 4  

becomes the charging section in respect thereof as well.  

However, a little closer scrutiny leads us to conclude that  

that is not the position as per the scheme of Chapter  

XIVB.  In the first place, income referred to in Section 5  

talks  of  total  income  of  any  'previous  year'.   As  per  

Section 2 (34) of the Act, 'previous year' means previous  

year as defined in Section 3.  Section 3 lays down that  

previous  year  means  'the  financial  year  immediately  

preceding the assessment year'.   Undisclosed income  

referred  to  in  Chapter  XIVB  is  not  relateable  to  the  

previous year.  On the contrary, it is for the block period  

which may be 6 years or 10 years, as the case may be.  

Consequently,  as  already  mentioned,  while  analyzing  

the  scheme  of  Chapter  XIVB,  such  Chapter  is  a  

complete  code  in  respect  of  assessments  of  

'undisclosed  income'.   Not  only  it  defines  what  is  

undisclosed income, it also lays down the block period  

Civil Appeal No.________ of 2014 &   connected matters  Page 31 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 32

for which undisclosed income can be taxed.  Further, it  

also lays down the procedure for taxing that income.  It  

is  very  pertinent  to  note  at  this  stage  that  for  this  

purpose,  specific  provision  in  the  form  of  Section  

158BA(2) is inserted making it a charging section.  Thus,  

a  diagnostic  of  Chapter  XIVB  of  the  Act  leads  to  

irresistible conclusion that it contains all the provisions  

starting  from  charging  section  till  the  completion  of  

assessment, by prescribing special procedure in relation  

thereto, making it a complete Code by itself.  Looking it  

from this angle, the character and nature of 'undisclosed  

income'  referred  to  in  Chapter  XIVB  becomes  quite  

distinct from 'total income' referred to in Section 5.  It is  

of some significance to observe that when a separate  

charging section is introduced specifically, to assess the  

undisclosed income, notwithstanding a provision in the  

nature  of  Section  4  already  on  the  statute  book,  this  

move of the legislature has to be assigned some reason,  

otherwise, there was no necessity to make a provision in  

the form of Section 158BA(2).  It could only be that for  

assessing  undisclosed  income,  charging  provision  is  

Civil Appeal No.________ of 2014 &   connected matters  Page 32 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 33

Section 158BA(2) alone.   

29. Notwithstanding the aforesaid position clarified with us,  

we are of the opinion that dehors this discussion, in any  

case on the application of general principles concerning  

retrospectivity,  the  proviso  to  Section  113  of  the  Act  

cannot  be  treated  as  clarificatory  in  nature,  thereby  

having retrospective effect.  To make it clear, we need to  

understand  the  general  principles  concerning  

retrospectivity.

General Principles concerning retrospectivity

30. A legislation, be it a statutory Act or a statutory Rule or a  

statutory Notification, may physically consists of words  

printed on papers.  However, conceptually it is a great  

deal  more than an ordinary prose.  There is  a special  

peculiarity  in  the mode of  verbal  communication by a  

legislation.   A  legislation  is  not  just  a  series  of  

statements, such as one finds in a work of fiction/non  

fiction or even in a judgment of a court of law.  There is a  

technique required to  draft  a  legislation as well  as  to  

understand a legislation.  Former technique is known as  

Civil Appeal No.________ of 2014 &   connected matters  Page 33 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 34

legislative drafting and latter one is to be found in the  

various principles of ‘Interpretation of Statutes’.   Vis-à-

vis ordinary prose, a legislation differs in its provenance,  

lay-out and features as also in the implication as to its  

meaning that arise by presumptions as to the intent of  

the maker thereof.

31. Of the various rules guiding how a legislation has to be  

interpreted,  one  established  rule  is  that  unless  a  

contrary intention appears, a legislation is presumed not  

to be intended to have a retrospective operation.  The  

idea behind the rule is that a current law should govern  

current activities.  Law passed today cannot apply to the  

events of the past.  If we do something today, we do it  

keeping in view the law of today and in force and not  

tomorrow’s backward adjustment of it.  Our belief in the  

nature of the law is founded on the bed rock that every  

human being is entitled to arrange his affairs by relying  

on the existing law and should not find that his plans  

have been retrospectively upset.  This principle of law is  

known as  lex prospicit non respicit : law looks forward  

Civil Appeal No.________ of 2014 &   connected matters  Page 34 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 35

not backward.  As was observed in Phillips vs. Eyre3, a  

retrospective  legislation  is  contrary  to  the  general  

principle  that  legislation  by  which  the  conduct  of  

mankind is to be regulated when introduced for the first  

time to deal  with future acts ought not  to  change the  

character of past transactions carried on upon the faith  

of the then existing law.

32. The obvious basis of the principle against retrospectivity  

is the principle of  'fairness’, which must be the basis of  

every  legal  rule  as  was  observed  in  the  decision  

reported  in  L’Office  Cherifien  des  Phosphates  v.  

Yamashita-Shinnihon  Steamship  Co.Ltd4.  Thus,  

legislations  which  modified  accrued  rights  or  which  

impose  obligations  or  impose  new duties  or  attach  a  

new disability have to be treated as prospective unless  

the legislative intent is clearly to give the enactment a  

retrospective effect; unless the legislation is for purpose  

of supplying an obvious omission in a former legislation  

or to explain a former legislation.  We need not note the  

cornucopia of case law available on the subject because  

3 (1870) LR 6 QB 1 4 (1994) 1 AC 486 Civil Appeal No.________ of 2014 &   connected matters  Page 35 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 36

aforesaid legal position clearly emerges from the various  

decisions and this legal position was conceded by the  

counsel for the parties.  In any case, we shall refer to  

few judgments containing this dicta, a little later.

33. We  would  also  like  to  point  out,  for  the  sake  of  

completeness,  that  where a  benefit  is  conferred by a  

legislation, the rule against a retrospective construction  

is different.  If  a legislation confers a benefit on some  

persons but without inflicting a corresponding detriment  

on some other person or on the public generally,  and  

where to confer such benefit appears to have been the  

legislators object,  then the presumption would be that  

such  a  legislation,  giving  it  a  purposive  construction,  

would warrant it to be given a retrospective effect.  This  

exactly is the justification to treat procedural provisions  

as retrospective.   In  Government  of  India  & Ors.  v.  

Indian Tobacco Association5, the doctrine of fairness  

was held  to  be  relevant  factor  to  construe a  statute  

conferring a benefit,  in the context of it  to be given a  

retrospective operation.  The same doctrine of fairness,  

5 (2005) 7 SCC 396 Civil Appeal No.________ of 2014 &   connected matters  Page 36 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 37

to hold that a statute was retrospective in nature, was  

applied in the case of  Vijay v. State of Maharashtra &  

Ors.6  It was held that where a law is enacted for the  

benefit of community as a whole, even in the absence of  

a provision the statute may be held to be retrospective in  

nature.   However,  we  are  confronted  with  any  such  

situation here.

34. In such cases, retrospectively is attached to benefit the  

persons  in  contradistinction  to  the  provision  imposing  

some burden or liability where the presumption attaches  

towards prospectivity.  In the instant case, the proviso  

added to Section 113 of the Act is not beneficial to the  

assessee.   On the contrary,  it  is  a provision which is  

onerous to the assessee.  Therefore, in a case like this,  

we have to proceed with the normal rule of presumption  

against retrospective operation.  Thus, the rule against  

retrospective operation is a fundamental rule of law that  

no  statute  shall  be construed to  have a  retrospective  

operation  unless  such  a  construction  appears  very  

clearly in the terms of the Act, or arises by necessary  

6 (2006) 6 SCC 286 Civil Appeal No.________ of 2014 &   connected matters  Page 37 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 38

and distinct implication.  Dogmatically framed, the rule is  

no  more  than  a  presumption,  and  thus  could  be  

displaced by out weighing factors.   

35. Let us sharpen the discussion a little more.  We may  

note  that  under  certain  circumstances,  a  particular  

amendment can be treated as clarificatory or declaratory  

in  nature.   Such  statutory  provisions  are  labeled  as  

“declaratory statutes”.  The circumstances under which  

a provision can be termed as “declaratory statutes” is  

explained  by  Justice  G.P.  Singh7 in  the  following  

manner:

“Declaratory statutes The  presumption  against  retrospective  operation  is  not  applicable  to  declaratory  statutes.  As stated in CRAIES and approved  by the Supreme Court : “For modern purposes  a declaratory Act may be defined as an Act to  remove doubts existing as to the common law,  or the meaning or effect of any statute.  Such  Acts are usually held to be retrospective.  The  usual reason for passing a declaratory Act is to  set  aside  what  Parliament  deems  to  have  been a judicial error, whether in the statement  of the common law or in the interpretation of  statutes.  Usually, if not invariably, such an Act  contains  a  preamble,  and  also  the  word  'declared' as well as the word 'enacted'.  But  the  use  of  the  words  'it  is  declared'  is  not  conclusive that the Act is declaratory for these  

7 Principles of Statutory Interpretation, 13th Edition 2012 published by LexisNexis Butterworths  Wadhwa, Nagpur

Civil Appeal No.________ of 2014 &   connected matters  Page 38 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 39

words  may,  at  times,  be  used  to  introduced  new rules of law and the Act in the latter case  will  only  be  amending  the  law  and  will  not  necessarily be retrospective.  In determining,  therefore,  the nature of  the Act, regard must  be  had  to  the  substance  rather  than  to  the  form.  If a new Act is 'to explain' an earlier Act,  it  would  be  without  object  unless  construed  retrospective.  An explanatory Act is generally  passed to  supply  an obvious omission  or  to  clear  up  doubts  as  to  the  meaning  of  the  previous Act.  It is well settled that if a statute  is  curative  or  merely  declaratory  of  the  previous  law  retrospective  operation  is  generally  intended.   The  language  'shall  be  deemed always to have meant' is declaratory,  and  is  in  plain  terms  retrospective.   In  the  absence  of  clear  words  indicating  that  the  amending Act is declaratory, it would not be so  construed  when  the  pre-amended  provision  was  clear  and  unambiguous.   An  amending  Act  may  be  purely  clarificatory  to  clear  a  meaning  of  a  provision  of  the  principal  Act  which  was  already  implicit.   A  clarificatory  amendment  of  this  nature  will  have  retrospective  effect  and,  therefore,  if  the  principal  Act  was  existing  law  which  the  Constitution came into force, the amending Act  also will be part of the existing law.”

The above summing up is factually based on  the judgments of this Court as well as English  decisions.

A  Constitution  Bench  of  this  Court  in  Keshavlal  Jethalal  Shah  v.  Mohanlal   Bhagwandas & Anr.8,  while  considering  the  nature of amendment to Section 29(2) of the  Bombay  Rents,  Hotel  and  Lodging  House  Rates Control Act as amended by Gujarat Act  18 of 1965, observed as follows:

“The  amending  clause  does  not  seek  to  explain any pre-existing legislation which was  

8 (1968) 3 SCR 623 Civil Appeal No.________ of 2014 &   connected matters  Page 39 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 40

ambiguous  or  defective.   The  power  of  the  High Court to entertain a petition for exercising  revisional  juris-diction  was  before  the  amendment derived from s. 115, Code of Civil  Procedure,  and  the  legislature  has  by  the  amending  Act  attempted  to  explain  the  meaning of that provision.  An explanatory Act  is  generally  passed  to  supply  an  obvious  omission  or  to  clear  up  doubts  as  to  the  meaning of the previous Act.”

36. It would also be pertinent to mention that assessment  

creates  a  vested  right  and  an  assessee  cannot  be  

subjected  to  reassessment  unless  a  provision  to  that  

effect inserted by amendment is either expressly or by  

necessary implication retrospective.  (See Controller of  

Estate Duty Gujarat-I  v.  M.A. Merchant9.   We would  

also  like  to  reproduce  hereunder  the  following  

observations  made  by  this  Court  in  the  case  of  

Govinddas  v.  Income-tax  Officer10,   while  holding  

Section 171 (6) of the Income- Tax Act to be prospective  

and  inapplicable  for  any  assessment  year  prior  to  1st  

April, 1962, the date on which the Income Tax Act came  

into force:

“11.  Now  it  is  a  well  settled  rule  of  interpretation  hallowed  by  time  and  sanctified  by  judicial  decisions  that,  

9 1989 Supp (1) SCC 499 10 (1976) 1 SCC 906 Civil Appeal No.________ of 2014 &   connected matters  Page 40 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 41

unless the terms of  a statute expressly  so  provide  or  necessarily  require  it,  retrospective  operation  should  not  be  given to a statute so as to take away or  impair an existing right or create a new  obligation  or  impose  a  new  liability  otherwise  than  as  regards  matters  of  procedure.  The general rule as stated by  Halsbury  in  Vol.  36  of  the  Laws  of   England  (3rd Edn.)  and  reiterated  in  several decisions of this Court as well as  English  courts  is  that  all  statutes  other  than those which are merely declaratory  or  which  relate  only  to  matters  of  procedure or of evidence are prima facie  prospectively and retrospective operation  should not be given to a statute so as to  affect, alter or destroy an existing right or  create a new liability or obligation unless  that  effect  cannot  be  avoided  without  doing  violence  to  the  language  of  the  enactment.   If  the  enactment  is  expressed  in  language  which  is  fairly  capable of  either interpretation, it  ought  to be constued as prospective only.”

37. In the case of  C.I.T., Bombay v.  Scindia Steam Navigation  

Co.  Ltd.11,  this  Court  held that  as the liability  to  pay tax is  

computed according to the law in force at the beginning of the  

assessment year, i.e., the first day of April, any change in law  

affecting tax liability  after  that  date though made during the  

currency  of  the  assessment  year,  unless  specifically  made  

retrospective, does not apply to the assessment for that year.

Anwer to the Reference

11 1962 (1) SCR 788 Civil Appeal No.________ of 2014 &   connected matters  Page 41 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 42

38. When we examine the insertion of proviso in Section 113 of  

the  Act,  keeping  in  view  the  aforesaid  principles,  our  

irresistible  conclusion  is  that  the  intention  of  the  legislature  

was to make it prospective in nature.  This proviso cannot be  

treated as declaratory/statutory or curative in nature.  There  

are various reasons for coming to this conclusion which we  

enumerate hereinbelow:

Reasons in Support  

39.         (a)  The  first  and  foremost  poser  is  as  to  whether  it  was  

possible to make the block assessment with the addition  

of levy of surcharge, in the absence of proviso to Section  

113? In Suresh N. Gupta itself, it was acknowledged and  

admitted  that  the  position  prior  to  the  amendment  of  

Section 113 of the Act whereby the proviso was added,  

whether  surcharge  was  payable  in  respect  of  block  

assessment or  not,  was totally ambiguous and unclear.  

The Court pointed out that some assessing officers had  

taken the view that no surcharge is leviable.  Others were  

at a loss to apply a particular rate of surcharge as they  

were not clear as to which Finance Act, prescribing such  

Civil Appeal No.________ of 2014 &   connected matters  Page 42 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 43

rates,  was  applicable.   It  is  a  matter  of  common  

knowledge  and  is  also  pointed  out  that  the  surcharge  

varies from year to year.  However, the assessing officers  

were  in-determinative  about  the  date  with  reference  to  

which rates provided for  in the Finance Act were to be  

made applicable.  They had four dates before them viz.:

(i)   Whether  surcharge  was  leviable  with  reference to the rates provided for in the  Finance  Act  of  the  year  in  which  the  search was inititated; or

(ii)  the  year  in  which  the  search  was  concluded; or

(iii)  the year in which the block assessment  proceedings under   Section 158 BC of  the Act were initiated; or

(iv)  the year in which block assessment order  was passed.

The  position  which  prevailed  before  amending  Section  

113 of the Act was that some Assessing Officers were not  

levying any surcharge and others who had a view that  

surcharge is payable were adopting different dates for the  

application of a particular Finance Act, which resulted in  

different rates of surcharge in the assessment orders.  In  

the absence of  a specified date,  it  was not possible to  

Civil Appeal No.________ of 2014 &   connected matters  Page 43 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 44

levy  surcharge  and  there  could  not  have  been  an  

assessment  without  a  particular  rate  of  surcharge.   As  

stated above, in  Suresh N. Gupta itself,  the Court has  

pointed out four different dates which were bothering the  

assessees as well as the Department.  The choice of a  

particular  date  would  have  material  bearing  on  the  

payment of surcharge.  Not only the surcharge is different  

for different years, it varies according to the category of  

assessees and for some years, there is no surcharge at  

all.  This can be seen from the following table prescribing  

surcharge for different assessment years:

PART – I

Finance Act

Relevant  Section of  

Finance Act Para - A Para – B Para – C Para – D Para - E

IND,  HUF,  BOI, AOP

Co-operative  Society Firm

Local  Authority Companies

1995 Section 2 (3) - - - -

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

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

1998 Section 2 (3) - - - - -

1999 Section 2 (3) - - - - -

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

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

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

Civil Appeal No.________ of 2014 &   connected matters  Page 44 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 45

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

Rate at which tax, or for that matter surcharge is to be  

levied  is  an  essential  component  of  the  tax  regime  in  

Govindasaran  Gangasaran  v. Commissioner  of   

Income Tax12, this Court, while explaining the conceptual  

meaning of a tax, delineated four components therein, as  

is  clear  from  the  following  passage  from  the  said  

judgment :

“The components which enter into the concept  of  a  tax  are  well  known.   The  first  is  the  character of the imposition known by its nature  which prescribes the taxable event attracting  the levy, the second is a clear indication of the  person on whom the levy is imposed and who  is obliged to pay the tax, the third is the rate at  which the tax is imposed, and the fourth is the  measure  or  value  to  which  the  rate  will  be  applied for computing the tax liability.   If those  components  are  not  clearly  and  definitely  ascertainable, it is difficult to say that the levy  exists  in  point  of  law.   Any  uncertainty  or  vagueness in the legislative scheme defining  any of  those components of  the levy will  be  fatal to its validity.”

It is clear from the above that the rate at which the tax is  

to be imposed is an essential component of tax and where  

the  rate  is  not  stipulated  or  it  cannot  be  applied  with  

precision, it would be difficult to tax a person.  This very  

12 155 ITR 144 Civil Appeal No.________ of 2014 &   connected matters  Page 45 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 46

conceptualisation  of  tax  was  rephrased  in  C.I.T.,   

Bangalore  v. B.C.  Srinivasa  Shetty13,  in  the  following  

manner:

“The character of computation of provisions in  each case bears a relationship to the nature of  the charge.   Thus,  the charging section and  the computation provisions together constitute  an integrated code.  When there is a case to  which the computation provisions cannot apply  at all,  it  is evident that such a case was not  intended to fall within the charging section.”

In  absence  of  certainty  about  the  rate  because  of  

uncertainty  about  the date  with  reference to  which the  

rate is to be applied, it cannot be said that surcharge as  

per  the  existing  provision  was  leviable  on  block  

assessment  qua undisclosed  income.   Therefore,  it  

cannot  be  said  that  the  proviso  added  to  Section  113  

defining  the  said  date  was  only  clarificatory  in  nature.  

From the aforesaid table showing the different  rates of  

surcharge in different years, it would be clear that choice  

of date has to be formed as in some of the years, there  

would not be any surcharge at all.   

(b) Pertinently,  the  Department  itself  acknowledged  and  

admitted this fact which is clear from the manner the issue  

13 125 ITR 294 Civil Appeal No.________ of 2014 &   connected matters  Page 46 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 47

was  debated  in  a  Conference  of  Chief  Commissioners  

which  was  held  sometime  in  the  year  2001.   In  this  

Conference, some proposals relating to simplification and  

rationalisation of procedures and provisions were noted in  

respect of block assessment.  The foofaraw made in the  

Conference by those who had to apply the provision, was  

not  without  substance  because  of  the  garboil  situation  

which this provision had created and in amply reflected in  

the proposals which was submitted in the following terms:  

“In the case of a block assessment, there are  two  problems  in  relation  to  the  levy  of  surcharge.  The first is that Section 113 does  not mention a  Central Act.  In the absence of  a  reference  to  another  Central  Act  in  the  charging section, it becomes difficult to justify  levy of surcharge.  Even if it is assumed that  reference in the Finance Act to section 113 is a  sufficient  authority  to  levy  surcharge,  the  second problem is that the Finance Act levies  surcharge on the amount of income-tax on the  income  of  a  particular  assessment  year  whereas in the block assessment tax is levied  on the undisclosed income of the block period.  Absence of a specific assessment year in the  block  assessment  may  render  the  levy  suspect.   Yet  another problem is  the rate of  surcharge  applicable.   To  illustrate,  if  the  search  took  place  on,  say,  April  4,  1996,  whether the rate of surcharge is to be adopted  as applicable to the assessment year 1996-97  or the assessment year 1997-98, the rate of  surcharge  being  different  for  the  two  years?  The provisions of section 113 or the provisions  of the Finance Act do not offer any guidance  

Civil Appeal No.________ of 2014 &   connected matters  Page 47 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 48

on the issue.

Suggestions :

The foregoing problem indicates that  levy of  surcharge on undisclosed income is a matter  of uncertainty and is prone to litigation.  In the  circumstances, it is suggested that section 113  may  be  amended  retrospectively  in  order  to  provide  for  levy  of  surcharge  at  the  rate  applicable to the assessment year relevant to  the  financial  year  in  which  the  search  was  concluded.”   

The  Chief  Commissioners  accepted  the  position,  in  no  

uncertain terms, that as per the language of Section 113,  

as it existed, it was difficult to justify levy of surcharge.  It  

was  also  acknowledged  that  even  if  Section  113  

empowered  to  levy  surcharge,  since  block  assessment  

tax  is  levied  on  the  undisclosed  income  of  the  block  

period, absence of specific assessment year in the block  

assessment would render the levy suspect.  

(c) We would like to embark on a discussion on some basic  

and fundamental concepts, which would shed further light  

on the subject matter.  No doubt, there is no scope for  

accepting the Libertarian theory which postulates among  

others, no taxation by the State as it amounts to violation  

of individual liberty and advocates minimal interference by  

the  State.   The  Libertarianism  propounded  by  the  

Civil Appeal No.________ of 2014 &   connected matters  Page 48 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 49

Australian-born economist philosopher Friedrich A. Hayek  

and  American  economist  Milton  Friedman  stands  

emphatically  rejected by all  civilised and democratically  

governed  States,  in  favour  of  strongly  conceptualised  

“welfare  state”.   To  attain  welfare  state  is  our  

constitutional goal as well, enshrined as one of its basic  

feature, which runs through our Constitution.  It is for this  

reason, specific provisions are made in the Constitution,  

empowering the legislature to make laws for levy of taxes,  

including the income-tax.  The rationale behind collection  

of  taxes  is  that  revenue  generated  therefrom  shall  be  

spent by the governments on various developmental and  

welfare schemes, among others.   

At the same time, it is also mandated that there cannot be  

imposition of any tax without the authority of law.  Such a  

law  has  to  be  unambiguous  and  should  prescribe  the  

liability  to  pay  taxes  in  clear  terms.   If  the  concerned  

provision of the taxing statute is ambiguous and vague  

and is susceptible to two interpretations, the interpretation  

which favours the subjects, as against there the revenue,  

has to be preferred.  This is a well established principle of  

Civil Appeal No.________ of 2014 &   connected matters  Page 49 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 50

statutory interpretation, to help finding out as to whether  

particular category of assessee are to pay a particular tax  

or not.   No doubt, with the application of  this principle,  

Courts make endeavour  to find out  the intention of  the  

legislature.  At the same time, this very principle is based  

on “fairness” doctrine as it lays down that if it is not very  

clear  from the  provisions  of  the  Act  as  to  whether  the  

particular  tax  is  to  be  levied  to  a  particular  class  of  

persons or not, the subject should not be fastened with  

any  liability  to  pay  tax.   This  principle  also  acts  as  a  

balancing factor between the two jurisprudential theories  

of  justice  –  Libertarian  theory  on  the  one  hand  and  

Kantian theory along with Egalitarian theory propounded  

by John Rawls on the other hand.   

Tax laws are clearly in derogation of personal rights and  

property  interests  and  are,  therefore,  subject  to  strict  

construction, and any ambiguity must be resolved against  

imposition of the tax.  In  Billings v. U.S.14,  the Supreme  

Court clearly acknowledged this basic and long-standing  

rule of statutory construction:

14 232 U.S. 261, at p.265, 34 S.Ct. 421 (1914) Civil Appeal No.________ of 2014 &   connected matters  Page 50 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 51

“Tax  Statutes  .   .   .   should  be  strictly  construed, and, if any ambiguity be found to  exist,  it  must  be  resolved  in  favor  of  the  citizen.   Eidman v.  Martinez,  184  U.S.  578,  583;  United States v. Wigglesworth,  2 Story,  369,  374;  Mutual  Benefit  Life  Ins.  Co.  v.   Herold,  198  F.  199,  201,  aff'd  201  F.  918;  Parkview Bldg.  Assn. v.  Herold,  203 F. 876,  880;  Mutual Trust Co. v. Miller,  177 N.Y. 51,  57.”

Again, in United States v. Merriam15, the Supreme Court  

clearly stated at pp. 187-88:

“On behalf of the Government it is urged  that  taxation  is  a  practical  matter  and  concerns itself with the substance of the  thing  upon  which  the  tax  is  imposed  rather  than  with  legal  forms  or  expressions.   But  in  statutes  levying  taxes  the  literal  meaning  of  the  words  employed  is  most  important,  for  such  statutes  are  not  to  be  extended  by  implication beyond the clear import of the  language  used.   If  the  words  are  doubtful,  the  doubt  must  be  resolved  against the Government and in favor of  the taxpayer.  Gould v. Gould,  245 U.S.  151, 153”

As Lord  Cairns  said  many years  ago  in  Partington  v.  

Attorney-General16: “As I understand the principle of all  

fiscal legislation it is this : If the person sought to be taxed  

comes  within  the  letter  of  the  law  he  must  be  taxed,  

however  great  the hardship  may appear  to  the  judicial  

15 263 U.S. 179, 44 S.Ct. 69 (1923) 16 (1869) LR 4 HL 100 Civil Appeal No.________ of 2014 &   connected matters  Page 51 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 52

mind to be.  On the other hand, if the Crown, seeking to  

recover the tax, cannot bring the subject within the letter  

of the law, the subject is free, however apparently within  

the spirit of the law the case might otherwise appear to  

be.

(d) There  are  some  other  circumstances  which  reflect  the  

legislative intent.  The problem which was highlighted in  

the Conference of  Chief  Commissioners on the rate of  

surcharge  applicable  is  noted  above.   In  view  of  the  

aforesaid  difficulties  pointed  out  by  the  Chief  

Commissioners in their Conference, it becomes clear that  

as per the provisions then enforced, levy of surcharge in  

the block assessment on the undisclosed income was a  

difficult  proposition.   It  is  for  this  reason  retrospective  

amendment  to  Section  113  was  suggested.  

Notwithstanding the same, the legislature chose not to do  

so, as is clear from the discussion hereinafter.

 “Notes on Clauses” appended to Finance Bill, 2002 while  

proposing  insertion  of  proviso  categorically  states  that  

“this  amendment  will  take  effect  from  1st June,  2002”.  

These  become  epigraphic  words,  when  seen  in  

Civil Appeal No.________ of 2014 &   connected matters  Page 52 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 53

contradistinction to other amendments specifically stating  

those to be clarificatory or retrospectively depicting clear  

intention of the legislature.  It can be seen from the same  

notes that few other amendments in the Income Tax Act  

were made by the same Finance Act specifically making  

those amendments retrospectively.  For example, clause  

40  seeks  to  amend  S.92F.   Clause  iii  (a)  of  S.92F  is  

amended “so as to clarify that the activities mentioned in  

the said clause include the carrying out  of  any work in  

pursuance of a contract.”  This amendment takes effect  

retrospectively  from  01.04.2002.   Various  other  

amendments also take place retrospectively.  The Notes  

on Clauses show that the legislature is fully aware of 3  

concepts:

(i) prospective  amendment  with  effect  from  a  fixed  date;

(ii) retrospective  amendment  with  effect  from a  fixed  anterior date; and

(iii) clarificatory amendments which are retrospective in  nature.

Thus, it was a conscious decision of the legislature, even  

when the legislature knew the implication thereof and took  

note  of  the  reasons  which  led  to  the  insertion  of  the  

Civil Appeal No.________ of 2014 &   connected matters  Page 53 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 54

proviso, that the amendment is to operate prospectively.  

Learned  counsel  appearing  for  the  assessees  

sagaciously  contrasted  the  aforesaid  stipulation  while  

effecting  amendment  in  Section  113  of  the  Act,  with  

various other provisions not only in the same Finance Act  

but  Finance  Acts  pertaining  to  other  years  where  the  

legislature  specifically  provided  such  amendment  to  be  

either  retrospective  or  clarificatory.   In  so  far  as  

amendment to Section 113 is concerned, there is no such  

language used and on the contrary, specific stipulation is  

added making the provision effective from 1st June, 2002.

(e) There is  yet  another very interesting piece of  evidence  

that clarifies the provision beyond any pale of doubt, viz.  

understanding of CBDT itself regarding this provision.  It  

is contained in CBDT circular No.8 of 2002 dated  27 th  

August,  2002,  with  the  subject  “Finance  Act,  2002  –  

Explanatory Notes on provision relating to Direct Taxes”.  

This  circular  has  been  issued  after  the  passing  of  the  

Finance Act, 2002, by which amendment to Section 113  

was made.  In this circular, various amendments to the  

Income Tax Act are discussed amply demonstrating as to  

Civil Appeal No.________ of 2014 &   connected matters  Page 54 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 55

which  amendments  are  clarificatory/retrospective  in  

operation and which amendments are prospective.  For  

example,  explanation to Section 158BB is  stated to be  

clarificatory  in  nature.   Likewise,  it  is  mentioned  that  

amendments in Section 145 whereby provisions of  that  

section  are  made  applicable  to  block  assessments  is  

made clarificatory  and  would  take effect  retrospectively  

from 1st day of July, 1995.  When it comes to amendment  

to Section 113 of the Act, this very circular provides that  

the said amendment along with amendments in Section  

158BE, would be prospective i.e. it will take effect from 1st  

June, 2002.

(f) Finance Act,  2003, again makes the position clear that  

surcharge in respect of block assessment of undisclosed  

income  was  made  prospective.   Such  a  stipulation  is  

contained in second proviso to sub-section (3) of Section  

2 of Finance Act, 2003.  This proviso reads as under:

“Provided further that the amount of  income- tax  computed  in  accordance  with  the  provisions of section 113 shall be increased by  a  surcharge  for  purposes  of  the  Union  as  provided in Paragraph A, B, C, D or E, as the  case may be, of Part III of the First Schedule  of  the  Finance Act  of  the  year  in  which  the  search  is  initiated  under  section  132  or  

Civil Appeal No.________ of 2014 &   connected matters  Page 55 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 56

requisition is made under section 132A of the  income-tax Act.”

Addition of this proviso in the Finance Act, 2003 further  

makes it  clear  that  such a  provision was necessary  to  

provide for surcharge in the cases of block assessments  

and thereby making it prospective in nature.  The charge  

in respect of the surcharge, having been created for the  

first time by the insertion of the proviso to Section 113, is  

clearly  a  substantive  provision  and  hence  is  to  be  

construed  prospective  in  operation.   The  amendment  

neither purports to be merely clarificatory nor is there any  

material  to  suggest that  it  was intended by Parliament.  

Furthermore, an amendment made to a taxing statute can  

be said to be intended to remove 'hardships' only of the  

assessee,  not  of  the  Department.   On  the  contrary,  

imposing  a  retrospective  levy  on  the  assessee  would  

have  caused  undue  hardship  and  for  that  reason  

Parliament  specifically  chose  to  make  the  proviso  

effective from 1.6.2002.

40. The aforesaid discursive of ours also makes it obvious that the  

Civil Appeal No.________ of 2014 &   connected matters  Page 56 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)

Page 57

conclusion of the Division Bench in Suresh N. Gupta treating  

the proviso as clarificatory and giving it retrospective effect is  

not  a  correct  conclusion.   Said  judgment  is  accordingly  

overruled.

41. As a result of the aforesaid discussion, the appeals filed by the  

Income Tax Department are hereby dismissed.  Appeals of the  

assessees are allowed deleting the surcharge levied by the  

assessing officer for this block assessment pertaining to the  

period prior to 1st June, 2002.

…......................................CJI. (R.M. Lodha)

…......................................J. (Jagdish Singh Khehar)

…......................................J. (J. Chelameswar)

…......................................J. (A.K. Sikri)

…......................................J. (Rohinton Fali Nariman)

New Delhi; September 15, 2014.

Civil Appeal No.________ of 2014 &   connected matters  Page 57 of 57 (arising out of  S.L.P. (C) Nos. 540 of 2009)