Wednesday 17 September 2014

Whether insertion of provisio to Sec 113 vide Finance Act, 2002 to levy surcharge in case of block assessment can be said to be clarificatory in nature and thereby having retro effect - NO: Supreme Court Constitution Bench

THE issue before the Bench is - Whether insertion of a provisio to Sec 113 vide Finance Act, 2002 to levy surcharge in the case of block assessment can be said to be clarificatory in nature and thereby having retro effect. NO is the decision.
Facts of the case
The assessee company is engaged in the business of real estate development and construction of residential as well as commercial properties. A search u/s 132 was conducted on the premises of the assessee and accordingly, notice u/s 158BC was issued requiring it to file return for the block period ending 10th Feb, 2000. In compliance, the assessee had filed its return and consequently, block assessment was completed u/s 158BA at a total undisclosed income of Rs.85,18,819/-. After sometime, the AO after 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 by the AO and accordingly a rectification order was passed u/s 154 on 30th June, 2003. On appeal, the CIT(A) cancelled the surcharge on ground that the levy of surcharge was a debatable issue and therefore such an order could not be passed taking umbrage u/s 154. The undisclosed income was revised u/s 250BC/158BC by the AO to Rs.10,90,000/- to give effect to the order of the CIT(A) and thereby removing the component of the surcharge.
As the Department wanted the surcharge to be levied, the CIT(A) issued a notice u/s 263 to the assessee and sought to revise the order passed by the AO by which he had given effect to the order of the CIT(A) and in the process did not charge any surcharge. According to the CIT the charging provision was Section 4, which was to be read with Section 113 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. The CIT, accordingly, cancelled the order of not levying surcharge upon the assessee, as being erroneous and prejudicial to the interests of the revenue. The AO was directed by the CIT to levy surcharge @ 10% and the amount of income tax computed and issue revised notice of demand. On further appeal, the Tribunal allowed the appeal of assessee by holding that the insertion of the proviso to Section 113 cannot be held to be declaratory or clarificatory in nature and was prospective in its operation.
On further appeal, the High Court dismissed the appeal of the Revenue filed u/s 260A for the block period. The High Court has taken the view that proviso inserted in Section 113 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.
Having heard the parties, the Supreme Court held that,
++ the question that needs to be answered is whether the proviso inserted u/s 113 by the Finance Act, 2002 was prospective in nature and the surcharge as leviable under the aforesaid proviso could be made applicable to the block assessment. We note that though, Section 4 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. Moreover, while Section 4 deals with the charge of income tax, the Parliament also has the power to levy surcharge on income tax. Such power to levy a surcharge is contained in Article 271 of the Constitution of India. However, in so far as rates of tax chargeable in case of block assessment is concerned, that is not provided in the Finance Act. Pertinently, the provision to this effect has been made in the Income Tax Act itself and is contained u/s 113. This Section, before insertion of proviso stated that the total undisclosed income of the block period, determined u/s 158BC, shall be chargeable to tax at the rate of 60%;
++ after the insertion of proviso to Section 113 by Finance Act, 2002, 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 1st June, 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. However, 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. 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 pre-requisite for making block assessment;
++ considering the general principles concerning retrospectivity, we are of the opinion that the proviso to Section 113 cannot be treated as clarificatory in nature, thereby having retrospective effect. We would also like to point out 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. However, in the instant case, the proviso added to Section 113 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 and distinct implication. Therefore, irresistible conclusion is that the intention of the legislature was to make the said proviso prospective in nature and it cannot be treated as declaratory or curative in nature. Accordingly, assessees contentions are allowed deleting the surcharge levied by the AO for this block assessment pertaining to the period prior to 1st June, 2002.
++ above all, the basic question that remained unanswered is that whetherit it was possible to make the block assessment with the addition of levy of surcharge, in the absence of proviso to Section 113. In case of In Suresh N. Gupta itself, it was acknowledged and admitted that the position prior to the amendment of Section 113 whereby the proviso was added, whether surcharge was payable in respect of block assessment or not, was totally ambiguous and unclear. Rate at which tax, or for that matter surcharge is to be levied is an essential component of the tax regime in case of Govindasaran Gangasaran v. Commissioner of Income Tax, wherein it was made clear 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. Therefore, 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

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