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Merit Enterprises v Deputy Commissioner of Income Tax

Income Tax Appellate Tribunal

SPECIAL BENCH, HYDERABAD

26 April 2006

It(Ss) A. No. 31/Hyd/2001 (Block Period 1 April 1989 to 18 November 1999)

The Judgment was delivered by : J. SUDHAKAR REDDY (ACCOUNTANT MEMBER)

1. This reference arises out of the appeal, against the assessment order passed by the Deputy Commissioner of Income-tax, Central Circle-I, Hyderabad under section 158BC of the Income-tax Act, 1961, for the block period from April 1, 1989, to November 18, 1999, dated nil, stated in the brief facts of the case by the assessee as completed on April 27, 2001, filed with the Tribunal on December 13, 2001, challenging the levy of surcharge of Rs. 8, 65, 680 on the tax of Rs. 86, 56, 800 levied at the special rate of 60 per cent.

2 At the outset, it would be appropriate to refer to the reasons furnished by the Division Bench, which led to the constitution of the Special Bench. Its reasons are extracted below :

“2. The short issue in this appeal is whether the levy of surcharge in terms of the provisions of the Finance Act, 2002, is valid in a block assessment made under section 158BC of the Income-tax Act. The tax has to be charged in a block assessment in terms of section 158BA(2) of the Income-tax Act read with section 113 of the said Act :

1. The undisclosed income of the block period is charged to tax at the rate of 60 per cent. stipulated under section 113. Section 113 of the Act reads as under :

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

The following proviso to section 113 was inserted only by the Finance Act, 2002, with effect from June 1, 2002 :

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

It may also be observed that there is no reference to rate of surcharge in section 113. Surcharge is prescribed only in the relevant Finance Act, and it varies from year to year.

2. In the case before us, after giving effect to the order of the Commissioner of Income-tax (Appeals), the undisclosed income for the block period April 1, 1989, to November 18, 1999, has been determined at Rs. 1, 44, 28, 000. Tax was levied thereon at Rs. 86, 56, 800. Additionally, surcharge was also levied at Rs. 8, 65, 680. There is no dispute about the quantum of tax levied. The only dispute is about the levy of surcharge of Rs. 8, 65, 680. The contention of the assessee is that as the proviso to section 113, which authorises the levy of surcharge has no application for the block period in question, the levy of a surcharge in the present case is not valid.

3. It is pleaded that the charging section in respect of total income in a regular assessment is section 4 of the Income-tax Act, and this section makes a specific reference to the Central Act, which is the annual Finance Act of the year, and so, the levy of surcharge in a regular assessment is valid. But, the position in respect of levy of surcharge in a block assessment is totally different. It is pleaded that Chapter XTV-B is a self-contained code for the computation of undisclosed income and also for bringing it to tax and as there is no reference at all to any provision of the Finance Act in the Chapter before the insertion of the proviso to section 113, the levy of surcharge for the years falling before June 1, 2002, i.e., the date of insertion of the proviso to section 113, is invalid. It is further pleaded that it is exactly because of this invalidity that the proviso to section 113 has been inserted. But, this proviso has no retrospective effect, and so, the levy of surcharge for the earlier years, in a block assessment, as in the case before us, is invalid.

4. Our attention has also been invited to certain proposals mooted by the National Conference of Chief Commissioners, which may be seen at pages 49-50 of the Journal section of [2001] 252 ITR. The discussion relating to levy of surcharge in a block assessment is at pages 49 and 50. The conference proposed amendment of section 113 of the Income-tax Act, which ultimately resulted in the insertion of proviso in section 113. Remarks of the conference in this behalf are as under (page 49) :

‘3. Section 113 : Tax on undisclosed income (levy of surcharge on tax on undisclosed income) :

Section 113 provides for tax on undisclosed income at the rate of 60 per cent. The Finance Act stipulate that the amount of income-tax shall be increased by a surcharge, as applicable to the assessee. Levy of surcharge on tax on regular income does not pose a problem since the amount of income-tax is determined with reference to a particular assessment year, as specified in the Finance Act. The basis for levy of such tax on regular income is contained in section 4 of theIncome-tax Act, in which the charge of tax is linked to any Central Act and such a Central Act in this case is the Finance Act.

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 theFinance Act to section 113 is sufficient authority to levy surcharge, the second problem is that the Finance Act levies surcharge on the amount of income-tax 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 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.’

It is pointed out that though the Conference of the Chief Commissioners recommended that section 113 should be amended retrospectively, it was amended only prospectively, by way of insertion of the proviso to section 113, extracted above, with effect from June 1, 2002. So, it is claimed that even if the original intention has been to levy surcharge even for the earlier years in a block assessment, the Legislature ultimately set right the position only prospectively and deliberately ignored the recommendation of the Conference for retrospective amendment of section 113.

5. The learned Departmental Representative, on the other hand, argued that the annual Finance Acts are quite clear, and they mandated the levy of surcharge. In this context, he referred to the provisions of the annual Finance Act, 1999, Schedule-I, which clearly mandated that the income-tax levied in terms of section 113 shall be increased by a surcharge. It is also contented that the annual Finance Act has as much legal authority as the Income-tax Act, and when it mandates the levy of surcharge, it has to be implemented, even if there is no reference to the levy of surcharge in a block assessment in section 113. It is also contended that the proviso to section 113 is only of a clarificatory nature, and it applies to all block assessments, and even for earlier years. It is also made out that the proposals made by the National Conference of the Chief Commissioners have no relevance, in the context of statutory interpretation of the provisions, and the Tribunal should not be influenced or bound by extraneous matters like Commissioners’ recommendations, remarks of the commentators, etc.

6. We find that there are conflicting decisions of the Tribunal on this issue. The first available decision is that of the Bangalore Bench of the Tribunal in the case of Microland Ltd. v. ACIT 1998 (67) ITD 446.

In this case, the Bangalore Bench observed as under (page 503) :

’38. Learned counsel for the assessee also objects to levy of surcharge separately in addition to tax at the rate of 60 per cent. on the undisclosed income. We agree with him that as per the provisions of section 113, separate surcharge cannot be levied in respect of search and seizure assessments made under Chapter XIV-B. However, in view of the fact that we have held the entire assessment to be liable to cancellation, this particular ground becomes academic in nature.’

There are two more decisions of the Tribunal in favour of the assessee, which are as under :

(a) Principal Officer, Builcon Towers (P.) Ltd. v. Asst. CIT 2000 (113) Taxman 74 (ITAT-Cal.) ; and

(b) DGP Windsor (India) Ltd. v. Deputy CIT 2001 Indlaw ITAT 144 (Mum.).

There is however, another decision of the Delhi Bench of the Tribunal in Friends Overseas P. Ltd. v. Deputy CIT 2001 Indlaw ITAT 213 which is to the contrary effect. In that decision, the Tribunal observed as under (page 380) :

’23. The only other ground surviving for our adjudication is the levy of surcharge on the tax computed under section 113 of the Income-tax Act. Learned counsel’s (sic) is that the Assessing Officer has erred in charging 15 per cent. surcharge as income of the block period is liable to be assessed at flat rate of 60 per cent., without taking into account the surcharge as laid down in the Finance Acts. It has been submitted that as per special provisions of section 158BA(2)/113, tax is to be charged at 60 per cent. without any exemption or slab rates. It is further stated that block assessment comprises of 10 years and there being different rate of surcharge and in most of these years there was no surcharge, it is not possible to levy the surcharge. On the other hand, learned Departmental Representative has invited our attention to the second proviso to section 2(7) of the Finance Act according to which levy of surcharge on income-tax computed as per provisions of section 113 has been contemplated. It is also submitted that in view of the clear provisions of the Finance Act for levy of surcharge on the taxes as determined under section 113, there is no scope of examining rationale of surcharge or the rates of surcharge applicable to various years covered by the block assessment. We find that the second proviso to section 7(2) of the Finance Act, 1995, specifically provides that, “the amount of income-tax computed in accordance with the provisions of section 112 or 113 shall be increased in the case of a domestic company by a surcharge as provided in Para E of Part III to First Schedule”. It is thus clear that the Legislature clearly intended applicability of surcharge even on tax computed under section 113 of the Income-tax Act. In this view of the matter, we see no substance in submissions of the assessee, and accordingly, reject the same.

24. Accordingly, the assessee’s ground of appeal against levy of surcharge, on income-tax computed under section 113, is dismissed.’ Thus, there are conflicting decisions of the Tribunal on the point at issue.

7. The matter is of substantial revenue implication in all search cases. It has wide ramifications, and it required an in depth examination of the position of the annual Finance Acts vis-a-vis the Income-tax Act, 1961, and also an in depth analysis of the principles of statutory interpretation. For these reasons, and as there are conflicting decisions on this issue, we are of the view that the appeal in question is a fit and proper appeal to be heard by a Special Bench, so that at the level of the Tribunal, there can be uniformity of approach on this issue.”

3 Thus and therefore, this Special Bench has been constituted under section 255(3) of the Income-tax Act, 1961, by the hon’ble President of the Tribunal on a reference made by the Division Bench at Hyderabad, to answer its following question :

“Whether, on the facts and in the circumstances of the case, the levy of surcharge on the tax charged under section 113 in respect of the undisclosed income of the block period from April 1, 1989, to November 18, 1999, which is prior to the insertion of the proviso to section 113, is valid in law ?”

4 Learned counsel Shri K. V. S. Bhaskara Rao, on behalf of M/s. Merit Enterprises, appellant-assessee submitted that :

(a) The charging section for the block assessment is section 158BA(2) of the Income-tax Act, 1961, according to which tax is to be charged at the rate specified in section 113.

(b) Section 113 seeks to levy tax on the undisclosed income of the block period not related to the total income of any particular previous year/ assessment year.

(d) According to section 4, which is the charging section, the total income of the previous year is subjected to income-tax and additional income-tax, i.e., surcharge, at the rate prescribed by the Finance Act and thus the levy of surcharge on the tax payable in a block assessment case falls outside the scope of section 4 or the proviso to section 4(1) and, consequently, tax or surcharge cannot be levied by virtue of the Finance Act. Section 158BA(2) specifically provides that the tax shall be charged on the “undisclosed income” of the block period (not the total income) at the rate prescribed in section 113 irrespective of the fact that it relates to a period other than the previous year mentioned in the proviso to section 4(1) of the Act.

(e) “Total income” is defined in section 2(45) and refers to section 5 according to which all income which had accrued or arisen or deemed to accrue or arise during the previous year relevant to the assessment year constitutes total income. ‘Undisclosed income’ is defined in section 158B(b) and the concept of undisclosed income is totally different from the concept of total income.

(f) Total income is charged at the rates prescribed by a Central Act, i.e., the Finance Act, whereas undisclosed income is charged by section 158BA(2) at the rate prescribed in section 113 and there is no reference to the “Central Act” in section 113 which is the charging section.

(g) According to the definition of “tax” in section 2(43), tax includes income-tax and supertax.

(h) Section 158BA(2) refers to “tax” only.

(i) Surcharge is neither referred to in section 158BA(2) nor in section 113.

(j) “Tax” according to section 4 includes additional income-tax which is in the nature of a surcharge ; the Finance Act has the power to levy tax on the total income of the previous year determined in the regular assessment and the power to levy surcharge on the tax determined in regular assessment ; the power to levy 60 per cent. tax as given in section 113 in the case of block assessment does not include the power to levy additional income-tax which is in the nature of surcharge as the Finance Act cannot be made applicable to a block assessment without specific mandate in section 113.

(k) The specific mandate to levy additional income-tax found in section 4 is not found in section 113 prior to amendment with effect from June 1, 2002.

(1) Earlier to June 1, 2002, the Finance Act had no power to levy surcharge in a block assessment.

(m) The National Conference of Chief Commissioners of Income-tax 2001 (252) ITR 49 made a suggestion to amend section 113 retrospectively, after recognising the difficulty, but despite the specific recommendation, the amendment was brought into force only with effect from June 1, 2002.

5 Referring to the stand of the Revenue that Parliament has legislative power which is derived from entry 82 in the Union List and Articles 265, 270 and 271 of theConstitution Of India, 1950, and that once it is accepted that the Legislature has the competence to introduce a new charge, then it is immaterial whether that power is exercised by incorporating the charge either in the Income-tax Act or any other statute, it should not be lost sight of that the legislative competence of Parliament is not in question at all and that section 158BA(2) in Chapter XTV-B and section 113 in Chapter XII are also provisions in the Income-tax Act, which is enacted by Parliament, and that there is a definite inconsistency or incongruity in the provisions of surcharge in a block assessment as per the Finance Acts, 1999 to 2001. In sections 158BA(2) and 113 of the Act, there was an inconsistency and it was removed by amending section 113 with effect from June 1, 2002, after which no dispute is raised at all.

6 There are inconsistencies firstly that while sub-section (8) of section 2 of the Finance Act, 1999, wherein surcharge is sought to be imposed on the tax determined under section 113, appears in Part III relating to advance tax and the tax to be deducted at source under sections 172(4), 175 and 176(2) of the Act, the second proviso requires that tax so chargeable shall be increased by a surcharge on tax levied under section 113. As far as advance tax, TDS under section 192, tax payable under sections 172(4), 175 and 176(2) are concerned, levy of surcharge cannot be faulted, but it cannot be justified in respect of tax charged under section 158BA(2) read with section 113, as these provisions do not find a place in sub-section (8) or any other provision in the body of the Finance Act. Secondly, even assuming that surcharge should be charged, then the question is as to whether it should be at the rate prescribed in the Finance Act of (i) the year when the search was initiated or (ii) the year in which the notice under section 158BC is issued in a subsequent year or the respective years to which the income relates or (iii) the year in which the assessment is made. While under section 4(1), the charge of tax arises for the assessment year, there is no indication in section 158BA(1) as to when exactly the liability to block assessment arises, i.e., whether initiation of search or the last day of execution of the last warrant of authorisation as recorded in panchnama or a date when the Assessing Officer is satisfied after receipt of search materials under section 132(9A) from the authorised officer and initiates action by issue of notice under section 158BC. It could not be the year of initiation of search or the last date of warrant, as theFinance Act, 1995, did not provide for inclusion under Part E of the First Schedule. The problem would arise if the above dates fall in different assessment years. Further, if notice under section 158BD is issued at the fag-end of the time-limit specified in section 158BE(1), then the question is as to whether it would be the year of satisfaction and issue of such notice by the Assessing Officer or the date of search, etc. A question arises posing as to whether there could be different rates in respect of assessments in pursuance of the same search as between cases under sections 158BC and 158BD, though arising out of one search or even with reference to the date of notice or the date of assessment. There is bound to be a time lag involving different assessment years. Reliance is placed on the order of the Calcutta Bench of the Tribunal in the case of Principal Officer, Builcon Towers P. Ltd. v. Asst. CIT 2000 (113) Taxman 74, for the proposition that in the definition of “tax” in section 2(43) and “rate of tax” in section 113, there is no reference to “surcharge” and that there is arbitrary levy of surcharge with reference to date of assessment as the surcharge has been levied at varying rates from year to year. Further reliance is placed on the decision of the Bangalore Bench of the Tribunal in the case of Satyabhushan v. Deputy CIT 2003 Indlaw ITAT 181 (Bang) 165, wherein the Bench took into consideration the speech of the hon’ble Finance Minister on the floor of Parliament and observed that the rate of 60 per cent. fixed in section 113 is a consolidated rate and no further levies like interest, penalty, etc., are intended. Section 113 is a specific legislation and this should prevail over general legislation and that tax cannot be charged over and above the amounts prescribed without amending the section. The Central Board of Direct Taxes also, in its Circular No. 8 of 2002, dated August 27, 2002 2002 (258) ITR 13 clarified that the provision of surcharge came into force only from June 1, 2002 and that this was considered by the Tribunal in the case of Om Prakash Sharma v. Deputy CIT 2004 Indlaw ITAT 129 (Jaipur).

7 The Revenue’s contention is that there is ambiguity as to the rate to be charged and the year to be reckoned, for the levy of surcharge, and it was resolved with reference to the year in which the search took place, as clarified in the proviso to section 113 introduced with effect from June 1, 2002, as well as it is retroactive in nature. Reliance is placed on the judgment of the hon’ble Supreme Court in the case of CWT v. Ellis Bridge Gymkhana 1997 Indlaw SC 1610; 1997 Indlaw SC 1610, specifically at page 121, paragraphs 5 and 6. Retroactivity in operation has to be ruled out as the provision increased the tax liability of the assessee. This issue was dealt with exhaustively in the case of Mrs. Aruna M. Katara v. Deputy CIT 2004 (3) SOT 289 (Pune) (SMC). Tax has to be levied strictly according to the provision and it is not the question of legislative competence. Reliance is placed on the judgment of the hon’ble Supreme Court in the case of State of Punjab v. Niranjan Dass Doomra Rice and General Mills, 1997 Indlaw SC 1704. After analysing the facts of that case, the hon’ble Supreme Court laid down that the cess in question had been imposed without authority of law. There should be consistency in the provisions and that a slight technical flaw would invalidate the levy.

8 On the argument of the Department that harmonious construction has to be adopted as otherwise the provision relating to surcharge has to be declared ultra vires or otiose, which cannot be done by the Tribunal, it was never the argument of the assessee that the provision is unconstitutional. It should be enacted in an appropriate manner consistent with other charging provisions and not by making a provision for levy of surcharge in the Finance Act in a highly incongruous and ambiguous way. The provision simply becomes unworkable and incapable of implementation and for this proposition reliance is placed on the decision of the hon’ble Supreme Court in the case of CIT v. B. C. Srinivasa Setty 1981 Indlaw SC 422 specifically at page 299. A comparative chart of the provisions of the Income-tax Act, 1961, other than Chapter XTV-B and the provisions of Chapter XTV-B is furnished to bring out the ingredients therein, so as to demonstrate that they operate in different fields.

9 Learned counsel Shri Ajay Vohra on behalf of Shri Shiv Nadar and Shri Subroto Bhattacharya, the assessee-interveners submitted that : The legislative intent behind the introduction of special procedure for assessment of undisclosed income found during search by introduction of Chapter XIV-B by the Finance Act, 1995, with effect from July 1, 1995, as well as the findings of the Special Bench of the Tribunal in the case of Nawal Kishore and Sons Jewellers v. Deputy CIT 2003 Indlaw ITAT 55 (Luck.) at page 423 may be seen. Chapter XTV-B was introduced as a self-contained Chapter consisting of sections 158B to 158BH, containing provisions which are in the realm of substantive law seeking to levy tax on undisclosed income of the block period at the rate of 60 per cent. As laid down by the hon’ble Supreme Court in the case of Govind Saran Ganga Saran v. CST 1985 Indlaw SC 418, clearly satisfied by the provisions contained in Chapter XTV-B to treat it as self-contained code to levy tax, are the four components following :

(a) Character of imposition-On “undisclosed income” ;

(b) Clear indication of the person on whom the levy is imposed-“the person subject to search” ;

(d) Value to which the rate is applied-“undisclosed income” of the block period.

10 Thus, Chapter XIV-B is a self-contained code and that one does not have to traverse beyond computation and assessment of undisclosed income.

11 Section 158BA of the Income-tax Act, 1961, may be seen for pointing out that by virtue of the non obstante clause in section 158BA, the provisions have overriding effect on other provisions of the Act. Reference may be made to section 158B(a) which defines the expression “block period” and the expression “undisclosed income” as defined in section 158B(b) as well as section 158BB which provides the mechanism to compute the undisclosed income of the block period as well as section 158BC which lays down the procedure for block assessment. Under the scheme of taxation under Chapter XTV-B, it is not required to pin-point the assessment year to which the income pertains, and on the contrary, the undisclosed income is assessed as income of the block period comprising more than one assessment year which is presently six assessment years and part of the year in which search is conducted, which was earlier 10 years and part of the assessment year in which the search is conducted. The provisions of Chapter XTV-B postulate taxing of undisclosed income of a block period as distinct from previous year relevant to an assessment year and that undisclosed income computed for the block period in terms of subsection (2) of section 158BA is required to be taxed at a special rate which is specified in section 113 of the Act.

12 On the applicability of the Finance Act, reference to the provisions of the Finance Act is not found in the self-contained scheme of undisclosed income in Chapter XTV-B. Referring to section 4 of the Act, reference to the Finance Act is contained in sub-section (1) of section 4. The proviso to section 4(1) carves out an exception to the normal rule in sub-section (1) and that it provides that where under any provisions of the Act, income-tax is charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. Thus, he argued when income-tax is specifically charged on the income of a period other than the previous year, notwithstanding the provisions of sub-section (1) of section 4, tax has to be levied as may be specifically provided under such special provisions of the Act. The proviso to section 4(1) introduces a caveat to the applicability of the relevant Finance Act and where the case falls under the proviso, the relevant Finance Act does not come into play.

13 Thus, under the scheme of taxation under the Income-tax Act, if tax is levied on the total income of an assessee, of a previous year, then in terms of sub-section (1) of section 4, the rate of tax is as specified by the relevant Finance Act and if tax is levied on the income of an assessee for a period other than the previous year, then in terms of the proviso to section 4(1), the levy of tax has to be mandated by the relevant section.

14 Reliance is placed on the proviso to section 4(1) to point out that it is not permissible for the Revenue to invoke the Finance Act when the said special provision does not refer to the Finance Act and levy of surcharge as per the Finance Act, on the tax on undisclosed income for the block period computed under Chapter XTV-B, would be at the cost of doing violence to the language of the said section.

15 As there is no reference to the rate prescribed in the Finance Act in section 113 or in Chapter XTV-B, the levy of surcharge for the period before June 1, 2002, is without authority of law. There is no conflict between the provisions of section 4 and the special scheme of assessment under Chapter XTV-B and argued that it is a settled canon of interpretation based on the maxim generalia specialibus non derogant that the general provisions must yield in favour of the special provisions. Reliance is placed on the Special Bench decision of the Tribunal in the case of Eicher Tractors Ltd. v. Deputy CIT 2002 Indlaw ITAT 135; 2002 Indlaw ITAT 135 (Delhi), as well as the judgment of the hon’ble Supreme Court in the case of CWT v. Trustees of HEH Nizam’s Family (Remainder Wealth) Trust 1977 Indlaw SC 229. The provisions of Chapter XIV-B are special provisions and the same would override general provisions even if it is assumed that there is a conflict, particularly in the light of the fact that section 158BA, the charging provision in the Chapter, contains a non obstante clause overriding the other provisions of the Act. Referring to the proviso to section 113, introduced by the Finance Act, 2002, with effect from June 1, 2002, and the argument of the Revenue that the proviso is clarificatory in nature and enables the Revenue to levy surcharge prior to June 1, 2002, it is to be seen that the surcharge is levied in terms of an authority provided under article 271 of the Constitution Of India, 1950, to increase any of the duties or taxes imposed. Reference may be had to the decision of the hon’ble Supreme Court in the case of CIT v. K. Srinivasan 1971 Indlaw SC 357, to emphasise that surcharge is in the nature of additional imposition/enhancement of tax, which has all the characteristics of tax. Unlike section 4(1), section 113 does not speak of additional income-tax and it is not permissible to read such words in section 113. Courts cannot supply any omission in the language of a statute where it is clear and unambiguous. Reliance is placed on the decision of the hon’ble Supreme Court in the case of CIT v. Elphinstone Spg. and Wvg. Mills Co. Ltd. 1960 Indlaw SC 350, specifically at page 150, to appreciate that it is for the Legislature to avoid the anomaly which arises from interpretation of the language employed. The charging provisions of section 158BA, read with section 113 containing the rate of taxation, do not contain a mandate to collect surcharge prior to the amendment by the Finance Act, 2002.

16 For the proposition that the charging provision, which imposes tax, must be construed strictly, reliance is placed on the following decisions :

(a) CWT v. Ellis Bridge Gymkhana 1997 Indlaw SC 1610 at page 4 (SC) ;

(b) Associated Cement Co. v. CTO 1981 Indlaw SC 395, 476, 478 (SC); and

17 Reliance is placed on the provisions of section 158BA to emphasise that the charge to taxation under the special provisions of Chapter XTV-B get attracted once the search is carried out under section 132 or books are requisitioned under section 132A of the Act and the date of initiation of search or requisition of books is the point of time for application of the provisions of Chapter XIV-B. Further reliance is placed on the following decisions :

(a) Smt. Mahesh Kumari Batra v. Joint CIT 2005 Indlaw ITAT 43 2005 Indlaw ITAT 43 (Asr.) [SB] ; and

(b) Promain Ltd. v. Deputy CIT 2005 Indlaw ITAT 66; 2005 Indlaw ITAT 66 (Delhi) [SB].

18 Thus, the law as existing on the date of initiation of search or requisition of books should determine the tax liability of the assessee under Chapter XIV-B.

19 Reliance is placed on the decision of the hon’ble Supreme Court in the case of Karimtharuvi Tea Estate Ltd. v. State of Kerala 1965 Indlaw SC 357.

20 Without prejudice to the above arguments, even the provisions of the Finance Act do not independently justify the imposition of surcharge on undisclosed income for the following reasons :

(a) The Finance Act only prescribes the rate for levy of income-tax in respect of the total income of the previous year of every person, and

(b) The Finance Act primarily prescribes the rates of income-tax and is not the charging section and in the absence of any other taxing section in the Act for the computation of undisclosed income, there is no scope for imposing surcharge on the basis of the Finance Act.

21 Reliance is placed on the judgment of the hon’ble Supreme Court in the case of Elphinstone 1960 Indlaw SC 350 to highlight that their Lordships held that the liability to tax was imposed not by the Finance Act but by the Income-tax Act and also that the proviso prescribes varying rates for varying circumstances and the proviso is not an independent charging section. Reference may be had to the judgment of the summit court to appreciate that the ratio of that decision squarely applies to the issue in question.

22 Further reliance is placed on the judgment of the hon’ble Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. v. CWT 1965 Indlaw SC 344and in the case of State of Kerala v. Alex George 2004 Indlaw SC 1006 (SC) for the following propositions :

(a) The Income-tax Act is a permanent Act while the Finance Acts are passed every year ;

(b) The function of the Finance Act primarily is to prescribe the rate of tax and the manner of calculation of tax ;

(d) The Finance Act has to be read in consonance with the provisions of the charging section.

23 The levy of surcharge for the purpose of section 113 by the relevant Finance Act is de hors the scheme of the Act and that the imposition of such levy does not mesh in with either the proviso to section 4(1) or the provisions of section 158BA, read with section 113 of the Act. When the Finance Act seeks to impose any additional liability to tax, there must be a mandate under the charging provisions of the Act and that in the absence of the same, no additional liability can be charged by the Finance Act and further the imposition of surcharge independently with reference to the provisions of the Finance Act is not in consonance with the provisions of section 4 of the Act which clearly mandates that the tax shall be levied in accordance with the special provisions governing charge of tax in respect of income of a period other than the previous year.

24 Further, the levy of surcharge prior to June 1, 2002, on the basis of the provisions of the Finance Act would be anomalous for the following reasons : (a) TheFinance Act contains the proposals for the following financial year e.g., the Finance Act, 2001, contains the proposals for the financial year 2001-02. The rates of taxation are further provided in the First Schedule of the Finance Act. Part I of the First Schedule refers to rate of taxation for the assessment year beginning on 1st April and preceding the year in respect of which proposals are introduced. So Part I of the Finance Act, 2001 contains rates for the assessment year 2001-02. Further Part III of the same Schedule refers to/contains the rates for the following assessment year. So Part III of the Finance Act, 2001 contains rates for the assessment year 2002-03.

(b) Now based on the aforesaid proviso to section 2(3) of the Finance Act, surcharge is to be levied at the rates specified in Part I of the First Schedule. So in the case of search initiated/conducted on August 1, 2001, the Department/Revenue seeks to rely upon the proviso to section 2(3) of the Finance Act, 2001 to levy surcharge. Part I of the Finance Act, 2001 would contain the rates of tax for the assessment year 2001-02 whereas the search was initiated on August 1, 2001, falling in the previous year 2001-02 and relevant to the assessment year 2002-03. The levy of surcharge, in such circumstances, at the rates specified in Part I of First Schedule, i.e., the rate applicable for the assessment year 2001-02 would be clearly illegal since the rates applicable to the assessment year 2001-02 could not be applied for the search conducted on August 1, 2001. Such an imposition would be in clear conflict with the decision of the hon’ble Supreme Court in the case of Karimtharuvi Tea Estate Ltd. 1965 Indlaw SC 357.

(c) Further, there is no reason why the surcharge, as prescribed by the Finance Act for the assessment year immediately preceding the previous year in which the search was initiated should be adopted-why not the surcharge applicable for the first year of the block period or any year in between or the year in which the search was conducted ?

(d) Until the amendment in section 113 with effect from June 1, 2002, there was inconsistency with regard to levy of surcharge. The question which usually bothered tax authorities was whether surcharge is to be levied with reference to the rates provided for in the Finance Act of :

-the year in which search was initiated ; or

-the year in which the search was concluded ; or

-the year in which the block assessment proceedings under section 158BC were initiated ; or

-the year in which the block assessment order was passed.

Further complexity regarding the application of the relevant provisions of the Finance Act used to arise in a case where proceedings were initiated under section 158BD of the Act since there was no time-limit for initiation of proceedings under that section.

(e) Lastly if it is to be held that the surcharge would even be leviable in respect of search carried out on or before May 31, 2002, the amendment made in section 113 of the Act would be rendered futile/irrelevant, and such a construction would be against the well accepted principles of interpretation of the statutes.

25 For all the aforesaid reasons, imposition of surcharge in respect of search conducted prior to June 1, 2002, would not be in consonance with the Scheme of the Act.

26 Reference is also made to the recommendations of the Conference of Chief Commissioners of Income-tax as well as the proviso introduced by the Finance Act, 2002, to emphasise that the Legislature in its wisdom thought it fit not to bring such proviso to section 113 retrospectively as recommended by the Conference. Any amendment made to the statute has prospective effect unless stated otherwise expressly or by necessary implication. For this proposition, reliance is placed on the following case laws :

(a) CIT v. H. Ballengerg 1989 Indlaw KER 210 (Ker) ;

(b) CIT v. Rajasthan Mercantile Co. Ltd. 1994 Indlaw DEL 182 (Delhi);

(d) CITv. Kerala Electric Lamp Works Ltd. 2003 Indlaw KER 25 (Ker);

(e) Microland Ltd. v. Asst. CIT 1998 (67) ITD 446 (Bang.)

(f) Principal Officer, Builcon Towers P. Ltd. v. Asst. CIT 2000 (113) Taxman 74 (ITAT-Cal) ;

(g) Paramount Enterprises Ltd. v. Deputy CIT 2001 Indlaw ITAT 301 at 147 (Delhi) ;

(h) Om Prakash Sharma v. Deputy CIT 2004 Indlaw ITAT 129 Qaipur) ;

(i) Satyabhushan v. Deputy CIT 2003 Indlaw ITAT 181 (Bang) ;

(j) Mrs. Aruna M. Katara v. Deputy CIT 2004 (3) SOT 289 (Pune) ; and

(k) Asst. CIT v. Dr. Mrs. Sharda Adhalkha 2005 Indlaw ITAT 51 (Asr). Thus and therefore, the prayer is for the question referred to this Special 27 Bench to be answered in the negative and in favour of the assessee.

28 Learned counsel Shri P. Muralikrishna, on behalf of Shri M. Yugandhar, the assessee-intervener, submitted that : The contentions put forward by both Shri Ajay Vohra and Shri K. V. S. Bhaskara Rao are reiterated. The crux of arguments can be summarised in the following propositions :

(a) “Rates of tax” normally specified in Chapter II, Section 2 of the Finance Act relating to each of the assessment years have no application to the tax leviable under section 113 of the Income-tax Act in the case of block assessment of search cases.

(b) Chapter XTV-B is a special procedure for assessment of search cases and is a self-contained code for assessment of undisclosed income relating to the block period. Section 113 determines the rate of tax for income brought to tax in terms of section 158BA(2) Finance Act for each of the assessment years has no application.

(c) Prior to the insertion of the proviso to section 113 of the Income-tax Act, 1961, the question of levy of surcharge on the tax computed under section 113 of the Income-tax Act, 1961, does not even arise for consideration.

(d) There has been no valid levy of surcharge under any Central Act/ Finance Act during the period July 1, 1995, the date on which Chapter XIV-B was first inserted by the Finance Act, 1995, to June 1, 2002 the date on which the proviso was inserted in section 113 of the Income-tax Act, 1961 authorising levy of surcharge, for the reasons that neither sub-section (8) of section 2 of the Finance Act nor the first proviso refers to Chapter XTV-B.

(e) The language employed in Chapter II of the Finance Act normally specifies the rates of tax applicable for the income of the previous year relevant to the assessment year commencing on the 1st April of the relevant year and these provisions are not applicable to search cases under Chapter XIV-B for which the rates are provided in section 113.

(f) The only provision which, if at all, has some relevance to a particular assessment year, is the proviso specified in sub-section (3) of section 2 under Chapter II of the Finance Act, and the provision was inserted in the context of specifying the rates under section 2 for the assessment year commencing on 1st day of April, 2001. The rates are confined only for the assessment year 2001-02. Sub-section (3) of section 2 only deals with the tax chargeable with reference to the rates imposed under sub-section (1) of section 2 or to rates specified in that Chapter or section for a particular assessment year, i.e., 2001-02. Reference to section 113 in sub-section (3) of section 2 of the Finance Act does not convey any meaning as in all search cases block assessment period consists of several assessment years. Without specifying the criteria for the purpose of determining the rate of surcharge specified in the Finance Act, it is not possible to levy the surcharge based on the above proviso.

(g) Even assuming that the Central Act/Finance Act seeks to levy surcharge on the amount of income-tax computed in accordance with section 113 of the Act, it can only successfully do so if it frames a provision appropriate to that end. If the law fails and the taxpayer cannot be brought within its letter, no question of unjustness as such arises.

29 Reliance is placed on the following decisions :

(a) CIT v. Jalgaon Electric Supply Co. Ltd. 1960 Indlaw SC 165 (SC) specifically at pages 188 and 189.

(b) CIT v. Shahzada Nand and Sons 1966 Indlaw SC 236 (SC) at pages 399 to 401.

‘ (c) Asst. CIT v. Thanthi Trust 2001 Indlaw SC 241 (SC) ; (d) Vikrant Tyres Ltd. v. First ITO 2001 Indlaw SC 20991 (SC).

30 Learned counsel Shri Ajay Gandhi on behalf of Unix Electronics Pvt. Ltd. and Smt. Priti Bhushan Mehta, the assessee-interveners submitted that: The arguments made by the other interveners as above are reiterated. The main thrust of their argument is that levy of surcharge by applying the provisions of theFinance Act in a search case covered by Chapter XIV-B is not feasible and that the reference to section 113 in the context of surcharge in the Finance Acts was unintended, or a drafting error and that the proviso to section 113 inserted by the Finance Act, 2002, was a prospective proviso.

31 Learned senior standing counsel of the Department, for the DR(CIT) representing the Revenue, submitted that : Though a peripheral view of Chapter XTV-B might give an impression that it is a self-contained code for assessing the undisclosed income, an in depth study of the provisions of the Act make it clear that it is not so. Chapter XTV-B does not even provide for rate of tax leviable on the undisclosed income and section 158BA(2) looks to section 113, which is in Chapter XII, for the purpose of rate of tax, on the undisclosed income. This itself proves that Chapter XIV-B is not a self-contained code.

32 It is not correct to say that, the induction of theory of block period excludes the concept of assessment year and previous years from the whole scheme of Chapter XTV-B since clause (a) of section 158B defines “block period” as meaning certain number of assessment years preceding previous year in which search was conducted. This necessarily demonstrates that the concept of assessment year and the income relatable thereto, is not given a go by altogether in Chapter XTV-B. On the other hand, it is only in the context of getting over the possible technical difficulties that might be arising in fixing taxable assessment year, Parliament, in its wisdom, has provided for integration of the undisclosed income of all the assessment years as relatable to one block period and levying fixed rate of tax. That does not necessarily mean that the theory of assessment year has been given a total go by. Form No. 2B prescribed in terms of the Income-tax Rule12(la), which is meant to be used for returning income for block assessment, takes into account the break-up of undisclosed income of each of the assessment years included in the block period. The total income including undisclosed income computed under section 158BB, is expected to be disclosed in Part – II with reference to each of the assessment years. Undisclosed income for the block period is aggregated only towards the end of the form. Relying on the decision of the hon’ble jurisdictional High Court in Venkatagiri Raja’s case 2003 (6) ALD 463, he submitted that the statutory forms also constitute integral part of the statutory scheme and they could be looked up for the purpose of interpreting the statutory provision in the enactment. Thus, the concept canvassed by the assessee’s counsel that “assessment year” is divorced from Chapter XTV-B is untenable in law. Further, reference may be had to section 158BH which provides as follows :

“Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter.”

33 No part of the Income-tax Act should be excluded in the context of computation of undisclosed income even under Chapter XIV-B of the Act. Thus, a fair construction of section 158BH shows that Chapter XIV-B is given an overriding effect by section 158BH. Thus, where there is a conflict between provision in Chapter XIV-B and rest of the provisions of the Income-tax Act, Chapter XTV-B would prevail and where they co-exist, the rest of the provisions of the Income-tax Act have to be given effect to. The overriding effect conferred on Chapter XTV-B is only against other provisions in the Income-tax Act, but not any other statute and the Finance Act falls outside the purview of overriding effect conferred on Chapter XTV-B of the Act.

34 As regards the scope of the non obstante clause, reliance is placed on the judgment of the hon’ble Supreme Court in the case of N. M. Veerappa v. Canara Bank 1988 Indlaw SC 345; 1988 Indlaw SC 345, to emphasise that the scope and width of the non obstante clause is to be decided on the basis of what is contained in the enacting part of the provision. Further, reliance is placed on the judgment of the hon’ble Supreme Court in the case of State of West Bengal v. Madan Mohan Ghosh 2002 Indlaw SC 290 to enlighten that it was held that non obstante clause was intended to confer primacy only to the statutory provisions in existence as on that date and that primacy would not extend to future laws. The non obstante clause figuring in section 158BA(1) is a restrictive one and it cannot be given wider effect as it gives primacy to Chapter XTV-B over the other provisions of the Act and, at any rate, does not confer overriding effect over the provisions of the Finance Act. Even if it is to be assumed that surcharge in the Finance Act, 1999, is inconsistent with section 158BA(2) read with section 113, Finance Act, 1999, being a subsequent enactment, the same has to be given effect to and the question of the Finance Act, 1999, yielding to section 158BA(2) of the Act does not arise.

35 Even otherwise, when there is a conflict between prior law and subsequent law, it is the latter that prevails. For this proposition, reliance is placed on the decision of the hon’ble Supreme Court in Sarwan Singh v. Kasturi Lal, 1976 Indlaw SC 424 at page 275, para. 23. Thus, Parliament, being fully conscious of the existence of Chapter XTV-B and especially section 158BA(1) with non obstante clause, provided for levy of surcharge by the Finance Act, 1999, in the case of all assessees and the Finance Acts of 1996 to 1998 provide for levy of surcharge on non-domestic companies.

36 Furthermore, it is one of the elementary rules of interpretation that there should be harmonious construction of the statutes. The court’s duty is to construe the provisions of the various statutes as to harmonize them, so that the purpose of the statutes may be given effect to. For this proposition reliance is placed on the judgment of the hon’ble Supreme Court in the case of Sultana Begum v. Prem Chand Jain 1996 Indlaw SC 1760 at page 382 para. 15. Thus, the aim of interpretation should be to construe harmoniously. The provisions of the Income-tax Act as well as the Finance Act, but not to nullify either of them. Reference may be made to the relevant provisions of the Finance Act, 1999, to highlight that a plain reading of these provisions clearly indicate that Parliament has specifically provided for charging of surcharge with reference to advance tax payable in the year 1999 and corresponding Part III of the First Schedule to theFinance Act, 1999, provides for surcharge. Since the levy has been introduced in Part III of the First Schedule, it is not in dispute that the said provision has to be taken into account for the purpose of computation of advance tax for the financial year commencing on April 1, 1999 in respect of undisclosed income also. The provisions which are found in Part III of the First Schedule to the Finance Act, 1999, have also been correspondingly introduced in the Finance Act,2000, in Part I of the First Schedule, so as to make it applicable to the assessment year 2000-01 which corresponds to the previous year 1999-2000.

37 In view of the specific incorporation of the provisions of the Finance Act, 1999, and due provision having been made for levy of surcharge in the Finance Act,2000, it is inescapable to conclude that the surcharge is leviable on undisclosed income of all assessees from the assessment year 2000-01 (previous year April 1, 1999 to March 31, 2000) and for domestic companies, in respect of undisclosed income for the anterior period in view of the relevant provisions of the Finance Acts of 1995, 1996 and 1997. The submission of the assessees that surcharge is not leviable for the period anterior to June 1, 2002, cannot be accepted as that would be making the relevant Finance Acts to the extent of levy of surcharge as dead letters and that such an interpretation cannot be termed as a harmonious construction. It amounts to ignoring the relevant piece of legislation, which is found in the statute book, specifically when the assessees have not argued that the said provisions of the relevant Finance Act to the extent of levy of surcharge are ultra vires the Constitution Of India, 1950 and, in law, such an issue cannot be raised before this Tribunal. If the proviso to section 113 introduced by the Finance Act, 2002, is construed prospectively and is made inapplicable to period before June 1, 2002, it would tantamount to ignoring the provisions in the Finance Acts of 1995, 1996, 1997, 1998, 1999 and 2000, which is not permissible in law. Reliance is placed on the judgment of the hon’ble Supreme Court in the case of CIT v. Hindustan Bulk Carriers 2002 Indlaw SC 1574; 2002 Indlaw SC 1574 at page 74, paragraphs 14 to 21. The intention to levy surcharge, especially under section 113 of the Income-tax Act, 1961, was made explicit in the Finance Act, 1999, and hence the same cannot be allowed to fail.

38 While Parliament’s power to levy surcharge on income-tax is traceable to its power under article 271 read with entry 82 of List I of VII Schedule to theConstitution Of India, 1950, the power of Parliament to levy surcharge is not traceable to section 4 of the Income-tax Act, 1961. Section 4, according to learned senior standing counsel of the Revenue, only stipulates that income-tax shall be charged at the rates that may be specified by any Central Act, for varying periods, and for the working of income-tax one has to look into the relevant Finance Act. Thus, one need not look into section 4 of the Income-tax Act as Parliament has got the prerogative to levy tax on all incomes other than agricultural income, by reason of entry 82 to List I of VII Schedule of the Constitution and that the surcharge has been levied in accordance with this power. Therefore, the submissions of the assessees that levy of surcharge is inconsistent with section 4 cannot be countenanced.

39 The assessee’s contention that the Finance Act is intended only to stipulate the rate and that charge cannot be created by the Finance Act, is a palpably erroneous proposition which deserves to be rejected in view of the Full Bench (three judges) decision of the hon’ble Supreme Court in the case of Madurai District Central Co-operative Bank Ltd. v. Third ITO 1975 Indlaw SC 330. Pages 29 to 31 and 36 of that judgment may be seen to know that in view of this binding precedent, it is inescapable to conclude that Parliament has got the power to levy surcharge through the Finance Act.

40 On the decision of the hon’ble Supreme Court in the case of CIT v. Elphinstone Spinning and Weaving Mills Co. Ltd. 1960 Indlaw SC 350 relied upon by the assessee, it does not really advance the case of the assessee as the hon’ble Supreme Court found relevant provisions as lacking in creation of charge and this was also admitted by the Department. That judgment is distinguishable for the reason that the Department having admitted lack of creation of charge, the Commissioner of Income-tax canvassed for the proposition that the surcharge is leviable by virtue of the Finance Act even if there is no income, which was, however, rejected by the Supreme Court. Accepting the Revenue’s contention in Elphinstone Spinning and Weaving Mills Co. Ltd.’s case

41 The comparison sought to be made between Elphinstone case 1960 Indlaw SC 350 (SC) on the one hand and the present case on the other, is not warranted. In Elphinstone case

42 While there is no controversy with regard to the proposition of the assessee that if the charge fails the question of taxing the assessee does not arise, the hon’ble Supreme Court in Elphinstone case 1960 Indlaw SC 350 construed the relevant provisions as amounting to not creating a charge and that decision turned on the peculiar facts of that case and it cannot be treated as an authority for the proposition that surcharge cannot be levied by a Finance Act. While Elphinstone case

43 Reliance is placed on the judgment of the hon’ble Supreme Court in the case of C1T v. K. Srinivasan 1971 Indlaw SC 357, in which the apex court ruled that the word “income-tax” in section 2(2) of the Finance Act, 1964, includes surcharge and additional surcharge. Reference may be made to the Finance Act, 1999 (No. 27 of 1999), and section 2 thereof. It states that income-tax shall be charged at the rates specified in Part I of the First Schedule and also stipulates increase of income-tax by levy of surcharge, by making appropriate provisions in section 2(8) read with Part III of Schedule A of the Finance Act and that section 2 of theFinance Act,2000 also correspondingly stipulates that income-tax shall be charged at the rates specified in Part I of the First Schedule. Thus, he submitted that in view of the specific provisions found in section 2 of the Finance Act, 1999 and in the Finance Act,2000, it is clear that the charge has been created and that “income-tax” in section 2(2) includes “surcharge” and “additional surcharge”. There is sufficient language employed in section 2 of the relevant Finance Actproviding for levy of surcharge on the relevant asses-see and in the instant case, therefore, it cannot be said that the charge had failed. The contentions of the assessee that the Revenue relied only on section 2(3) of the Finance Act apart from paras. 1 and 3 appended to the Finance Act, are heavily disputed. Reliance is placed on section 2 of the Finance Act which provides for levy of surcharge. In other words, section 2 of the Finance Act is the relevant charging section for levy of surcharge in a block assessment.

44 The proviso to section 113 introduced by the Finance Act, 2002, is a piece of declaratory legislation and is applicable to all assessment years anterior to June 1, 2002. In effect, the said proviso to section 113 is nothing but a proviso to each of the Finance Acts, which introduced levy of surcharge on the income taxable under section 113 of the Act. As seen from the Finance Acts of 1995 to 1997 (in the case of domestic companies) and the Finance Acts of 1999 and 2000 (in the case of all assessees), Parliament provided for levy of surcharge on the incomes assessable under section 113 of the Act, but did not stipulate the rate of surcharge perhaps because Parliament opined that it was not specifically required to be returned. The assessee’s counsel rightly pointed out that since the search is the triggering point for the ensuing assessments under Chapter XIV-B, it is the law as on the date of search that should be applied for all aspects including rate of tax and surcharge. Thus, whatever rate of surcharge that subsisted as on the date of search would govern the assessees concerned. While admitting that the issue is capable of debate, Parliament intervened to make a declaratory law, clarifying that the surcharge shall be levied at the rate prevalent on the date of search. Thus, his case is that Parliament only clarified the pre-existing legal position and has not made any new provision, much less did it enhance the liability. Thus, it is wrong to argue that surcharge has been introduced for the first time in respect of undisclosed income by the Finance Act, 2002, by introducing the proviso to section 113 of the Income-tax Act, 1961 and it was contemplated by the various Finance Acts.

45 Reliance is placed on the judgment of the hon’ble Supreme Court in the case of Hindustan Ideal Insurance Co. Ltd. v. Life Insurance Corporation of India, 1962 Indlaw SC 528 paragraphs 28 to 30. There can be a declaratory proviso meant for the purpose of clarifying the statutory implications. Reliance is also placed on the observations made by the House of Lords in Guardians of the Poor of the West Derby Union v. Metropolitan Life Assurance Society [1897] A.C. 647 (HL) to highlight that the proviso to section 113 is in effect a declaratory piece of legislation. Instead of placing a declaratory proviso in each of the Finance Acts, Parliament, in its wisdom, incorporated such proviso in section 113 of the Income-tax Act, 1961, which is only intended to clarify the relevant provisions of theFinance Act concerned.

46 Even if the proviso to section 113 introduced by the Finance Act, 2002, is to be excluded from consideration, the same consequence would follow as, on a fair interpretation of the relevant provisions of the Finance Act de hors the proviso to section 113 of the Income-tax Act, 1961, the surcharge could be levied only at the rate prevalent on the date of search as per settled legal position. The plea of the assessee that levy of surcharge on the tax payable on undisclosed income is inconsistent and incongruous, is untenable as the argument that if advance tax had been paid, it would cease to be undisclosed income, is neither here nor there. Parliament, while enacting the relevant provisions of the Finance Act, has only indicated that undisclosed income surfacing as a result of search would not only be exigible to tax payable under section 113, but it would also be exigible to surcharge, and the contrary theory developed by the assessee is peripheral and does not deserve serious consideration. While reiterating that de hors section 113, the Finance Act has impliedly levied surcharge, the theory of retrospectivity does not come to the rescue of the assessee and also that the declaratory legislation can be made by a proviso to avert a possible ambiguity. For this proposition, reliance is placed on the decision of the hon’ble Supreme Court in the case of CIT v. Shelly Products 2003 Indlaw SC 477. In that case the hon’ble Supreme Court has held that the real meaning of the original provision in the statute was implicit and the same was made explicit by the declaratory legislation. Extending these principles to the case on hand, the proviso to section 113 is only a declaratory piece of legislation intended to remove obscurity, if any, found in the relevant Finance Acts.

47 Regarding the reliance placed by the assessee on the resolutions passed at the Chief Commissioners’ Conference, the National Conference of Chief Commissioners of Income-tax cannot be said to have any statutory authority under the Income-tax Act, nor is it vested with any power or jurisdiction to interpret the provisions of the Income-tax Act. There is no provision in the Income-tax Act constituting such a body, much less vesting with it any power to make any suggestion, and that the doubts expressed in that conference or suggestions made there, cannot be taken as an aid to the interpretation of statutes. Reliance is placed on the judgment of the hon’ble Supreme Court in Sanjeev Coke Manufacturing Co. v. Bharat Coking Coal Ltd., 1982 Indlaw SC 134, wherein it was held that once the statute leaves Parliament House, it is not open to even Government to interpret the law and it is only for the courts to state what Parliament meant to say and none else. Even otherwise, the theory of “contemporaneous exposition” cannot be applied to ongoing statutes and the understanding of the Chief Commissioners of Income-tax cannot be looked at as an aid for construction of the statutes. Thus, the suggestions of the National Conference of Chief Commissioners of Income-tax are not relevant in this context.

48 Reference may be had to the decisions of various Benches of the Tribunal which are distinguishable. Reliance is placed on the decision of Calcutta Bench of the Tribunal in the case of Raghunandan Modi v. Asst. CIT I. T. A. (SS) No. 46/K/04, dated October 19, 2004, Madras Bench of the Tribunal in the case of Raya R. Govindarajan v. Asst. CIT 2007 (288) ITR 150; 2005 (3) SOT 1922 (Chennai) and Calcutta Bench of the Tribunal in the case of Asst. CIT v. Sri Subhash Kumar Bhunia I. T. A. (SS) No. 19/Kol./03, dated October 18, 2004. The Calcutta Bench has correctly appreciated the decision of the hon’ble Supreme Court in the case of Madurai District Central Co-operative Bank Ltd. 1975 Indlaw SC 330 and has come to the right conclusion which is the perfect position of law.

49 Regarding the argument of Shri Ajay Vohra, learned counsel for Shri Shiv Nadar, the assessee-intervener-I the assumption on the part of the assessee that the Revenue conceded that the relevant date for imposition of surcharge might be considered to be in doubt is incorrect as it is the case of the Revenue that the date of search is relevant and the rate of surcharge as on the date of search would apply. Regarding the submission of Shri P. Muralikrishna, learned counsel for Shri M. Yugandhar, the assessee-inter-vener-II, the Revenue has not conceded that there is ambiguity as to the rate of surcharge.

50 In his rejoinder, learned counsel Shri Ajay Vohra, on behalf of Shri Shiv Nadar and Shri Subroto Bhattacharya, the assessee-interveners submitted that :

(a) The assessee is not at all challenging the legislative competence in enacting any provision for imposing fresh levy by way of income-tax or by way of a Central Act.

(b) It is also not disputed that such imposition can be effected by amendment either in the provisions of the Act or by way of amendment in the Finance Act or any other Central enactment.

(c) There is no mandate in the Finance Act to impose surcharge in respect of search conducted prior to June 1, 2002, and that the provisions in the Finance Actdo not justify imposition of surcharge.

(d) The Revenue has quoted the judgment of the summit court in the case of Madurai District Central Co-operative Bank Ltd. 1975 Indlaw SC 330 (SC). Reliance placed by the Revenue on this judgment is totally out of context. The ratio of the decision should be read in the context of, and with reference to the facts on which such decision was based, and not otherwise. It is well-settled that it is neither desirable nor permissible to pick out a word or a sentence from the judgment, divorced from the context of the question under consideration and treat it to be complete law. In this regard, reliance is placed on the following judgments :

(a) CIT v. Sun Engineering Works P. Ltd. 1992 Indlaw SC 611 (SC) ;

(b) Padmasundara Rao v. State of Tamil Nadu 2002 Indlaw SC 167 (SC) ; and

51 The judgment of the hon’ble Supreme Court in the case of Madurai District Central Co-operative Bank Ltd. 1975 Indlaw SC 330 may be seen.

(a) The court in that case was concerned only with the levy of “additional surcharge” and not with “surcharge” and “special surcharge”,

(b) To determine the validity of imposition of such additional surcharge, enquiry must first be made as regards the scope of a Finance Act and then as regards the interpretation of the Finance Act of 1963, and

52 Kind attention of the Bench is drawn to the observations of the hon’ble Supreme Court at pages 30, 32, 34 and 35 of the Report. The court has concluded that the Finance Act provided for levy of a new and independent charge and the additional surcharge was a distinct charge which is not dependent for its levy on the assessee’s liability to pay income-tax and super tax. The ratio of the decision in that case is summarized as follows :

(a) The Legislature is competent to impose a new/fresh levy ;

(b) Such levy can be introduced through the Finance Act;

(c) The relevant provisions in the Finance Act created an independent and separate levy by way of “additional surcharge” inasmuch as the Finance Act provided :

(i) the basis of levy ;

(ii) the manner of levying such additional surcharge ; and (iii) the value on which the additional surcharge was levied. Such independent charge created by theFinance Act, independent of the provisions of the Act, must be enforced ;

(d) The additional surcharge, contra distinguished with surcharge on income, was not dependent on the assessee’s liability to pay tax ;

(e) The imposition of such “additional surcharge” was in consonance with the provisions of section 4 of the Act.

53 The provisions of the various Finance Acts, which sought to levy surcharge on the tax payable on income of the block period, did not lay down an independent and separate charge. In this context, the propositions laid down by the hon’ble Supreme Court in the case of Govind Saran Ganga Saran v. CST 1985 Indlaw SC 418 may be seen. The stand of this intervener on the Finance Act is summarised as follows :

(a) The levy of surcharge was totally dependent on the assessee’s liability to pay tax on “undisclosed income” for the “block period” ;

(b) The rate for imposition of surcharge was unknown since the relevant date for imposition of surcharge, as admitted by the Revenue’s standing counsel during the course of hearing, was in doubt. It was not known as to which date was relevant for determining the imposition of surcharge.

(c) In the case of proceedings under section 158BD, there was ambiguity in so far as it was not known as to what was the rate of surcharge that was applicable, in addition to the ambiguity that was already existing in the case of proceedings under section 158BD. The ambiguity as to the rate applicable was as follows :

(i) The rate applicable for the year in which the search was initiated ; or

(ii) The rate applicable for the year in which the search was concluded ; or

(iii) The rate applicable for the year in which the block assessment proceedings under section 158BC were initiated ; or

(iv) The rate applicable for the year in which the block assessment order was passed.

(v) There was contradiction in the provisions of the Finance Act (s) inasmuch as both Part I of the First Schedule and Part III of the First Schedule referred to levy of surcharge. The applicability of either of the rates would have resulted in absurdity.

54 Rates referred in Part III of the First Schedule could not apply to “undisclosed income” since the said Part contains rates for payment of advance tax. Part III could have no application in any situation since on “undisclosed income” no advance tax is paid. In fact, if advance tax has been paid on certain income, it cannot be held to be “undisclosed income”. In this regard, reference can be had to the following decisions wherein it has been held that if advance tax had been paid but no return was filed, such income could not be regarded as “undisclosed income” :

(a) Asst. CIT v. A. R. Enterprises 2004 Indlaw MAD 396 (Mad) ;

(b) Dr. Mrs. Alaka Goswami v. CIT 2004 Indlaw GUW 32 (Gauhati) ;

(d) Nilesh R. Shah v. Asst. CIT 1999 Indlaw ITAT 139 (Chennai).

The application of rates contained in Part I of the First Schedule would also not be in consonance with the scheme of the provisions relating to imposition of tax as explained hereunder :

In the case of search initiated/conducted on August 1, 2001, the Department/Revenue relies upon the proviso to section 2(3) of the Finance Act, 2001 to levy surcharge, which refers to Part I of the First Schedule. Part I of the Finance Act, 2001 would contain the rates of tax for the assessment year 2001-02. However, the search, it will be appreciated, was initiated on August 1, 2001, i.e., falling in the previous year 2001-02 and relevant to the assessment year 2002-03.

The levy of surcharge, in such circumstances, at the rates specified in Part I of the First Schedule, i.e., the rate applicable for the assessment year 2001-02, would be clearly illegal since the rates applicable to the assessment year 2001-02 could not be applied for the search conducted on August 1, 2001. Such an imposition would be in clear conflict with the decision of the Supreme Court in the case of Karimtharuvi Tea Estate Ltd. v. State of Kerala 1965 Indlaw SC 357.

56 Based on the above, prior to the amendment in section 113, the provisions of the Finance Act did not impose an independent charge for levying surcharge since the prerequisite components for a valid imposition were non-existent.

57 The levy of surcharge prior to the amendment in section 113 was not in consonance with the provisions of the Income-tax Act, especially proviso to section 4. The decision in the case of Madurai District Central Cooperative Bank Ltd. v. Third ITO 1975 Indlaw SC 330 (SC), relied upon by the Revenue, is not applicable to the facts of this case and that, on the other hand, the judgment of the hon’ble Supreme Court in the case of Elphin-stone Spinning and Weaving Mills Co. Ltd.1960 Indlaw SC 350 is very much applicable. The judgments of the Tribunal in the cases of Raya R. Govindarajan v. CIT (Asst.) 2007 (288) ITR 150; 2005 Indlaw ITAT 92 (Tri-Chennai) ; 2005 Indlaw ITAT 83 (Chennai), Raghunandan Modi and Sri Subhash Kumar Bhunia (supra) are distinguishable. They do not lay down the correct position of law. The Department was wrong in submitting that the amendment to section 113 would operate retrospectively and that Chapter XTV-B is not a self-contained code.

58 Learned counsel Shri P. Muralikrishna, on behalf of Shri M. Yugandhar, the assessee-intervener in his rejoinder submitted that : The replies of learned counsel Sri Ajay Vohra for the assessee-intervener-I, Shri Shiv Nadar, are adopted. The decisions quoted by learned senior standing counsel for the Revenue reveal that most of the judgments are not relevant to the issue under consideration. Reference may be had to Hindustan Ideal Insurance Co. Ltd. v. Life Insurance Corporation of India, 1962 Indlaw SC 528, at paragraph 28 of that judgment. The proviso in the Finance Act does not convey the meaning that the surcharge is leviable on the tax payable under section 113 as the main provisions of the Finance Act refer to the rates for the assessment years commencing on the first day of April and not block assessment and that proviso cannot expand the scope of the main section. This decision of the hon’ble Supreme Court in fact supports the case of the assessee. As regards the judgment in D. Sanjeevayya v. Election Tribunal, 1967 Indlaw SC 133, reference to paragraph 4 thereof is made. The proposition therein is not applicable to the facts of this case as it is impossible to interpret the provisions contained in sub-section (3)/(8) of section 2 of theFinance Act as the provisions levying surcharge pertain to block assessment. In this case, no such reconciliation is possible. The propositions in the decision in M. V. Javali v. Mahajan Borewell and Co. 1997 Indlaw SC 630; 1997 Indlaw SC 630, are that in construing the provisions of a statute, courts should be slow to adopt a construction which tends to make part of the statute meaningless or ineffective and that an attempt must always be made so as to reconcile the relevant provisions as to advance the remedy intended by the statute and in such a case, it is legitimate and even necessary to adopt the rule of liberal construction whereby meaning is given to all parts of the provisions.

59 The provisions of section 158BA read with section 113 have to be construed strictly and they do not provide for levy of surcharge on the tax determined on undisclosed income and that the specific provisions governing the computation of tax in block assessment hold the field. The judgment of the hon’ble Supreme Court has no application to the facts of the case on hand. Regarding the decision in Shyam Sunder v. Ram Kumar 2001 Indlaw SC 20065, at paragraph 37 thereof, the hon’ble Supreme Court has clearly stated that “a statute which affects the substantive right has to be held prospective unless made retrospective either expressly or by necessary intendment”. This judgment in fact supports the case of the assessee. The jucgment of the hon’ble Supreme Court in the case of CIT v. Shaan Finance P. Ltd. and CIT v. First Leasing Co. of India Ltd. 1998 Indlaw SC 651 specifically at page 317, has laid down therein that “in interpreting a fiscal statute, the court cannot proceed to make good deficiencies if there be any ; the court must interpret the statute as it stands and in the case of doubt in a manner favourable to the taxpayer”. He relied on the judgment of :he hon’ble Supreme Court in Union of India v. Onkar S. Kanwar 2002 Indlaw SC 1124 at page 769. It is laid down therein that “where two views are possible then the one which is in favour of the assessee must be adopted”. For this proposition, reliance is also placed on the judgments in the cases of CIT v. Quantas Airways Ltd. 2002 Indlaw DEL 39 (Delhi) and A. P. State Civil Supplies Corporation Ltd. v. Deputy CIT2002 Indlaw ITAT 68 (Hyd) and CWT v. Ellis Bridge Gymkhana 1997 Indlaw SC 1610 (SC).

60 Learned counsel Shri Ajay Gandhi, on behalf of Unix Electronics and Smt. Priti Bhushan Mehta, the assessee-interveners adopted the same arguments as other assessee-interveners above.

61 The rival submissions heard and relevant orders read besides going through the facts of the case on record and the written submissions filed on record by the assessee-appellant, the Department and the assessee-interveners. After doing so and duly considering the various aspects of the issue involved in our long and due deliberations, even for and against, amongst us, giving due care and meticulous attention to the complexities involved, while closely analysing the facts and circumstances of the instant case roped with the issue in adjudication before us and in the light of the various provisions of law under different enactments and copious case-laws showering non-stop like torrential rain overflowing even to the subsequent month heard from the previous month of hearing, tremendous arguments put forth with their untiring efforts and zeal had by the learned representatives of the assessee-appellant with those of the assessee-interveners entering appearance from different States in the country, and of the Department with particularly its learned senior standing counsel, ably assisted by the Departmental Representatives, presenting before us their respective stand highlighting in their own inimitable style, all of which we are bound to appreciate on record, thus inundating us to sail over and reach our destination of decision that the stand of the assessees has substantial force, which we are rendering with considered reasons as hereinbelow.

62 We proceed to consider answering the question referred to this Special Bench after listing out the areas that are not in dispute before us that :

(a) The Legislature is competent to impose a fresh and new levy of surcharge.

(b) The Legislature can levy surcharge either through the Income-tax Act or through the Finance Act, or any other Central Act by reason of article 271 of theConstitution Of India, 1950 read with entry 82 in List 1 of the 7th Schedule to the Constitution. In other words, the source of power of Parliament as well as the manner in which it chooses to levy surcharge is not in dispute before this Bench.

(c) The assessee has not raised before the Tribunal an issue as to the constitutional validity of the levy of surcharge as both parties are conscious of the fact that such an argument cannot be raised before the Tribunal.

(d) There is no express intendment in the proviso introduced to section 113 of the Income-tax Act, 1961 by the Finance Act, 2002, that it is retrospective, though the Revenue argues that this is retroactive due to necessary implication.

(e) The resolution of the National Conference of Chief Commissioners of Income-tax cannot be used as an aid for interpreting the Income-tax Act, nor does it have any statutory power to make recommendations, and that it is just an opinion expressed in yet another seminar.

(f) Parliament did not stipulate the rate of surcharge applicable, explicitly prior to the introduction of the proviso to section 113 and that this issue is capable of debate, though while stating so the Revenue’s argument is that the rate of surcharge applicable as on the date of search, should be the rate applicable to the block, as such an interpretation would be harmonious and the proviso to section 113 is as declaratory legislation and this proviso clarifies and reiterates the intention of the Legislature as it always was.

Though the resolution of the National Conference of Chief Commis- 63 sioners of Income-tax cannot be considered as an aid to interpretation of a statute, nor as a guideline for decision in this case, we find that the resolution has aptly and precisely put the problem of levy of surcharge prior to the insertion of the proviso to section 113 in the proper perspective. The comments and suggestions of the conference are as follows (see [2001] 252 ITR 0ournal) 49) :

“3. Section 113 : Tax on undisclosed income (Levy of Surcharge on tax on undisclosed income).

Section 113 provides for tax on undisclosed income at the rate of 60 per cent. The Finance Act stipulates that the amount of income-tax shall be increased by a surcharge, as applicable to the assessee. Levy of surcharge on tax on regular income does not pose a problem since the amount of income-tax is determined with reference to a particular assessment year, as specified in the Finance Act. The basis for levy of such tax on regular income is contained in section 4 of theIncome-tax Act, in which the charge of tax is linked to any Central Act and such a Central Act in this case is the Finance Act.

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 theFinance 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 on the issue. Suggestions :

64 The provisions of the Income-tax Act, 1961, which are relevant for deciding the issue before us are as follows : Section 2.(9) :

“‘assessment year’ means the period of twelve months commencing on the 1st day of April every year ;” Section 2.(34) :

“‘previous year’ means the previous year as defined in section 3 ;” Section 2.(37A) :

“‘rate or rates in force’ or ‘rates in force’, in relation to an assessment year or financial year, mean-

(i) for the purposes of calculating income-tax under the first proviso to sub-section (5) of section 132, or computing the income-tax chargeable under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 or deducting income-tax under section 192 from income chargeable under the head ‘Salaries’ or computation of the ‘advance tax’ payable under Chapter XVII-C in a case not falling under section 115A or section 115B or section 115BB or section 115E or section 164 or section 164A or section 167B, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, and for the purposes of computation of the ‘advance tax’ payable under Chapter XVII-C in a case falling under section 115A or section 115B or section 115BB or section 115E or section 164 or section 164A or section 167B, section 115B or section 164, the rate or rates specified in section 115A or section 115B or section 115BB or section 115E or section 164 or section 164A or section 167B, as the case may be, or the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, whichever is applicable ;

(ii) for the purposes of deduction of tax under sections 193, 194, 194A, 194B, 194BB, 194D and 195, the rate or rates of income-tax specified in this behalf in theFinance Act of the relevant year ;

(iii) for the purposes of deduction of tax under section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, whichever is applicable by virtue of the provisions of section 90 ;” Section 2.(40) :

‘”regular assessment’ means the assessment made under sub-section (3) of section 143 or section 144 ;” Section 2.(43) :

“‘tax’ in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date ;” Section 2.(45) :

“Total income’ means the total amount of income referred to in section 5, computed in the manner laid down in this Act;” (emphasis1 ours) Section 4.(1) :

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

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.” (emphasis1 ours) Section 5 :

“5. Scope of total income.-(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived. . . ” (underlining1 is provided by us)

Thus, the total income under section 2(45) is the total income of a previous year defined in section 2(34), as this is mandated by section 5. Section 113 :

“113. Tax in the case of block assessment of search cases.-The total undisclosed income for the block period, determined under section 158BC, shall be chargeable to tax at the rate of sixty per cent.”

The proviso to section 113, introduced by the Finance Act, 2002, with effect from June 1, 2002, 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 year in which the search is initiated under section 132 or the requisition is made under section 132A.”

Chapter XIV-B – Special Procedure for assessment of search cases – “158B. Definitions.-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 represent wholly or partly income or property which has not been or would not have been disclosed for the purposes of this Act …” (emphasis1 ours)

Section 158BA :

“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 undisclosed income in accordance with the provisions of this Chapter.

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

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

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

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

(3) Where the assessee proves to the satisfaction of the Assessing Officer that any part of income referred to in sub-section (1) relates to an assessment year for which the previous year has not ended or the date of filing the return of income under sub-section (1) of section 139 for any previous year has not expired, and such income or the transactions relating to such income are recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal course relating to such previous years, the said income shall not be included in the block period.” (emphasis1 ours) Section 158BB :

“158BB. Computation of undisclosed income of the block period.- (1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search. …” Section 158BC :

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

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

Section 158BH :

“158BH. Application of other provisions of this Act.-Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter.”

65 The issues that arise for our consideration are framed as under :

(a) Whether the proviso to section 113 introduced by the Finance Act, 2002, with effect from June 1, 2002, can be considered as a piece of clarificatory legislation or declaratory legislation and, thus, retroactive in nature ?

(b) Whether the Finance Acts, 1995 to 2000 imposed an independent and distinct levy/charge of surcharge on block assessment prior to insertion of the proviso to section 113 of the Income-tax Act, 1961 ?

(d) Whether it can be held that there was an unintended reference to section 113 in the Finance Acts, 1995 to 2000, inasmuch as, it was never the intention of the Legislature to levy surcharge in cases covered by section 113 and whether it can be considered a drafting error ?

66 Interpretation of statutes stipulates search for the real meaning of the words employed in the legislation to resolve ambiguities. While so, mens legis, i.e., the mind of the law, as made in the legislation must be ascertained as demonstrated in the statute. If one takes literal meaning it is like just seeing the body, i.e., (*deha * *) [Vernagular portion deleted] but missing the soul i.e., .(* * *) (dehi). Hence, composite perception of “Deha” and “Dehi” must be had to attain the core of the meaning while detecting and deducing it by judicial interpretation. There are procedures to be followed in resolving conflicts as also regarding the rule of preference in the case of conflict. Maharashi Jaimini expounded Meemamsa Rules (of interpretation) which are adopted to find out the real meaning of the provisions, including clauses or words incorporated in the statute, having due regard to the object and purpose of the provisions whenever it became necessary. The elementary and important principles of interpretation laid down demonstrate these :

(a) Firstly, (*[Vernagular portion deleted] * *); (Sarthakya) axiom is that every word and sentence must have the same meaning and purpose ;

(b) Secondly, (*[Vernagular portion deleted] * *) (Laghava) axiom is that when one rule or proposition would suffice, more must not be assumed ;

(c) Thirdly, (*[Vernagular portion deleted] * *) (Arthaikaitva) axiom is that to a word or sentence occurring at one and the same place, double meaning should not be given ;

(d) Fourthly, (*[Vernagular portion deleted] * *) (Gunapradhana) axiom is that if a word or sentence which on the face of it purports to express a subordinate idea which clashes with the principal idea, the former must be adjusted to the latter or altogether disregarded ;

(e) Fifthly, (*[Vernagular portion deleted] * *) ; (Samanjasya) axiom is that contradiction between words and sentences should not be presumed, where it is possible to reconcile them ;

(f) Sixthly, (*[Vernagular portion deleted] * *) (Vikalpa) axiom is that where there is a real contradiction, one of the contradictory matters may be adopted at one’s option.

67 Maxwell on Interpretation of Statutes says that a construction which would leave without effect any part of the language of the statute would normally be rejected, and further that it is reasonable to presume that the same meaning is employed by the use of the same expression in several parts of the Act. Thus, in the light of the principles laid down by various famous jurists like Maharshi Jaimini, Craies, Maxwell on Interpretation of Statutes, we begin to dissect as below the various arguments advanced by the assessee, Department and interveners referred to above, for dealing with the issues as follows.

68 The first issue for consideration as to whether the proviso to section 113 inserted by the Finance Act, 2002, is a declaratory legislation and thus retroactive in nature. The contention of the Revenue is that the insertion of the proviso has to be held as having retroactive operation in view of the mention of section 113 in the various Finance Acts, and that this piece of legislation can be considered a clarificatory or declaratory legislation, which is retroactive in nature and thus has to be considered retrospective.

69 The primary contention of the Revenue is that the amendment is only procedural, and thus retroactive. We do not find merit in this argument, for the reason that the proviso to section 113 enabling the increase of “tax chargeable under this section by a surcharge”, is a substantive amendment. At this juncture, we may extract below the Notes on Clauses given in 2002 (254) ITR 118, 149, which reads as under :

“Clause 41 seeks to amend section 113 of the Income-tax Act relating to tax in the case of block assessment of search cases.

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

It is proposed to insert a proviso in the said section to provide that the tax chargeable under that section shall be increased by a surcharge, if any, levied by any Central Act and applicable in the assessment year relevant to the previous year in which the search was initiated under section 132 or requisition was made under section 132A.

This amendment will take effect from 1st June, 2002.” (emphasis1 ours)

70 The relevant portion of the Memorandum explaining provisions in the Finance Bill, 2002, 2001 Indlaw MAD 345, 213, reads as follows :

“It is further proposed to amend section 113 of the Income-tax Act to provide that the tax chargeable on the undisclosed income determined under Chapter XIV-B shall be increased by the amount of surcharge applicable in the previous year in which the search commenced or requisition was made, and to amend clause (a) of subsection (2) of section 119 of the Income-tax Act to enable the Central Board of Direct Taxes to issue such directions as it deems fit for relaxing the provisions of section 158BFA relating to charging of interest.

These amendments will take effect from 1st June, 2002.”

71 The amendment in question has vested in the assessing authority a power to enhance the amount of tax computed under section 113 by the amount of surcharge. So, what is aimed at by the amendment is not a change in procedure, but a substantial levy. Such an amendment cannot be termed as a mere procedural one, so as to be retrospective and applicable to all pending matters, but has to be deemed to be a substantive one effective only from the date specified in the Act itself.

72 In this context, we may refer to the decision of the hon’ble Kerala High Court in the case of N. T. John v. CIT 1996 Indlaw KER 297 wherein considering the question whether section 158BA contained in Chapter XIV-B is retrospective or prospective in operation, the hon’ble Kerala High Court held, as per relevant position of the headnote (at pages 314-315) as under :

“Normally, a change in the law of procedure operates retrospectively. In the case of Chapter XIV-B, there was no change of procedure, but a special procedure was provided. Section 158BA would not apply in a case where a search was initiated under section 132 before June 30, 1995. In that view, it cannot be said that Chapter XIV-B has retrospective operation.”

73 Similarly, in the case of Jayalakshmi Leasing Co., In re 1997 Indlaw SC 2842 the Special Bench of the Income Tax Settlement Commission, examining the jurisdiction to admit and deal with applications in respect of cases of block periods arising under Chapter XIV-B of the Income-tax Act, on the interpretation of statutory provisions observed, vide relevant portion of the headnote on pages 2 and 3, as follows :

“. . .The failure to specifically bar the application of Chapter XIXA to proceedings under Chapter XIV-B could be taken to indicate a legislative intent not to exclude the provisions of Chapter XIXA to block assessment proceedings. Section 158BH would also support this view. The conclusion that a later enactment repeals an earlier enactment is to be resorted to only if the two enactments are so inconsistent with or repugnant to each other that they cannot stand together. The Act must be construed as it stands today and a harmonious construction of all the provisions in the Act is called for in this context. Any construction which renders any provision of the Act nugatory and defeats the object of that provision must, if it is possible, be avoided. Even if two views were possible it would be preferable to adopt the view which will allow the applicability of the ‘simplified procedure’ laid down in Chapter XIXA to all assessees including assessees falling within the ambit of Chapter XIV-B, than the truncated view denying the benefits of this procedure, when in fact there is no express specific prohibition in this regard and express permission can be read from section 158BH.”

74 Similarly, the apex court in K. M. Sharma v. ITO 2002 Indlaw SC 818 examining the retrospective or otherwise nature of the amendment to the provisions of section 150(1) with effect from April 1, 1989, held as per headnote (773-774) as under :

“Held, reversing the decision of the High Court, that the provisions of section 150(1), as amended with effect from April 1, 1989, did not enable the authorities to reopen assessments which had become final due to the bar of limitation prior to April 1, 1989, and this position was equally applicable to reassessments proposed on the basis of order passed under the Income-tax Act or under any other law.

The provision of a fiscal statute, more particularly one regulating the period of limitation, must receive a strict construction. The law of limitation is intended to give certainty and finality to legal proceedings and to avoid exposure to risk of litigation of litigants for an indefinite period on future unforeseen events. Proceedings which had attained finality under existing law due to bar of limitation cannot be held to be open for revival unless the amended provision is clearly given retrospective operation so as to allow upsetting of proceedings which had already concluded and attained finality.

A taxing provision imposing liability is governed by the normal presumption that it is not retrospective and the settled principle of law is that the law to be applied is that which is in force in the assessment year unless otherwise provided expressly or by necessary implication. Even a procedural provision cannot, in the absence of clear contrary intendment expressed therein be given greater retrospectivity than is expressly mentioned so as to enable the authorities to affect finality of tax assessments or to reopen liabilities which have become barred by lapse of time.” (emphasis1 supplied)

75 In the light of the observations of the apex court underlined above, the law that governs the levy of tax on the undisclosed income determined in a block assessment in terms of section 113, is the provisions of section 113 as it stood prior to June 1, 2002, and not the provisions of that section, as amended by the insertion of the proviso thereunder, which came into effect only from June 1, 2002, in the absence of any express or implied indication in the amended provisions imputing retrospective operation to the same.

76 We may also refer to the decision of the apex court in CIT v. Dhadi Sahu 1992 Indlaw SC 753, wherein considering the effect of the amendment to the provisions of section 274(2) by the Taxation Laws (Amendment) Act, 1970 with effect from April 1, 1971, the apex court vide relevant portion of the headnote on pages 611-612 of the Report ([1993] 199 ITR) held as follows :

“The general principle is that a law which brings about a change in the forum does not affect pending actions unless an intention to the contrary is clearly shown. One of the modes by which such an intention is shown is by making a provision for change over of proceedings from the court or the Tribunal where they are pending to the court or Tribunal which under the new law gets jurisdiction to try them.

It is also true that no litigant has any vested right in the matter of procedural law ; but where the question is of change of forum, it ceases to be a question of procedure only. The forum of appeal or proceedings is a vested right as opposed to pure procedure to be followed before a particular forum. The right becomes vested when the proceedings are initiated in the Tribunal or court of first instance and unless the Legislature has, by express words or by necessary implication, clearly so indicated, that vested right will continue in spite of the change of jurisdiction of the different Tribunals or forums.”

77 We may now refer to the decision of the apex court in National Agricultural Co-operative Marketing Federation of India Ltd. v. Union of India 2003 Indlaw SC 289, wherein the court was concerned with the nature of amendment made to the provisions of section 80P(2)(a)(iii). The facts before the apex court in that case are that section 80P(2)(a)(iii) of the Income-tax Act, 1961 as originally inserted provided that in the case of a co-operative society engaged in “(iii) the marketing of the agricultural produce of its members” the whole of the amount of profits and gains of business attributable to such activity would be deducted from the gross total income. The Supreme Court in Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.) 1993 Indlaw SC 928 rendered under the corresponding earlier proviso, section 81, held that the phrase “produce of its members” must refer to agricultural produce actually “produced by its members”. In a later decision, Kerala State Co-operative Marketing Federation Ltd. v. CIT 1998 Indlaw SC 736, a larger Bench of the Supreme Court overruled the decision in the case of Assam Co-operative Apex Marketing Society Ltd. v. CIT (Addl.)

“The legislative power either to introduce enactments having retrospective effect for the first time or to amend an enacted law with retrospective effect, is not only subject to the question of competence but is also subject to several judicially recognized limitations. The first is the requirement that the words used must expressly provide for or clearly imply retrospective operation. The second is that the retrospec-tivity must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional. The third is where the legislation is introduced to overcome a judicial decision : here the power cannot be used to subvert the decision without removing the statutory basis of the decision.” (emphasis1 supplied)

78 In the instant case, the very first condition, i.e., “the words must expressly provide for or clearly imply retrospective operation”, is not fulfilled, inasmuch as the proviso to section 113 came into effect only from June 1, 2002, by the Finance Act, 2002, the same having not been either expressly or impliedly given with retrospective operation.

79 We may now refer to the decision of the Madras High Court in CIT v. Pooshya Exports P. Ltd. 2002 Indlaw MAD 256, wherein examining the issue with regard to retrospective or otherwise nature of the amendment in section 80HHC by the Finance (No.2) Act, 1991, the hon’ble Madras High Court held, as per the relevant portion of the headnote on page 417, as follows :

“If a provision is introduced with a view to confer a benefit, which had not been conferred before such introduction, even though the provision to which the amendment was incorporated is a beneficial provision that does not necessarily imply that the amendment is to be given retrospective effect even without a declaration to that effect from the Legislature. Where the intention of the Legislature is clearly conveyed and wherever the language is clear the intention of the Legislature is to be gathered from the language used. A construction which requires for its support, addition or substitution of words or which results in rejection of words has to be avoided. The court is to pronounce the judgment and not to make law.” (emphasis1 supplied)

80 In the instant case there is a pronouncement by the Legislature itself that the amendment is effective from June 1, 2002. Therefore, in view of the ratio of the Madras High Court noted above, there cannot be retrospectivity against the intention of the Legislature.

81 Similarly, in the case of M. G. Pictures (Madras) Ltd. v. Asst. CIT 2003 Indlaw MAD 3 (Mad), examining the issue with regard to retrospective or otherwise nature of the amendment to section 40A(3) restricting disallowance with effect from April 1, 1996, the hon’ble Madras High Court held, as per the relevant portion of the headnote on page 83, as follows :

“An amendment must have in its language something pointing towards its retrospectivity. In order to hold a statute retrospective, it should be specifically so provided. In order to hold the provision to be having retrospective operation, it would have to be shown that it is of a procedural nature.” (emphasis1 supplied)

82 On the procedural or substantive nature of the provision under consideration in that case, the High Court held as per the relevant portion of the headnote as follows :

“Held :

(ii) That it was clear from the language of section 40A(3) that the language did not in any manner suggest retrospectivity. Considering the tense used in the section, the amendment was prospective. The amendment limiting the discretion of the assessing authorities and creating a right on the assessee to plead for the remaining eighty per cent., expenditure as allowable expenditure could not be viewed as a mere procedural provision. It would have to be held as a provision dealing with substantive right of the assessee. Thus, the amended provision was not of retrospective nature. The Tribunal was right in holding that the amended provision was only prospective.”

83 In the instant case, the proviso to section 113 enabling the enhancement of tax determined under section 113 by the amount of surcharge is clearly a substantive provision, and cannot be said to be a mere procedural one, and in the absence of specific provision in the statute providing for retrospective operation, the same cannot have retrospective effect.

84 Now we may refer to the decision of the hon’ble Karnataka High Court in Kardicoppal Estate v. State of Karnataka 2003 Indlaw KAR 36 wherein interpreting retrospective amendment made to section 15 of the Karnataka Agricultural Income-tax Act, 1957, brought about subsequent to the decision of that court in Ashok Plantation v. Asst. Commissioner of Commercial Taxes, the High Court held that the retrospective amendment is invalid. In that case, the court noted that in Ashok Plantation, the High Court did not point out any lacuna and, on the other hand, the court only noticed both the provisions and interpreted the law as it stood then, in the light of the judgment of the apex court in CIT v. Kulu Valley Transport Co. P. Ltd. 1970 Indlaw SC 73 and held that the retrospective amendment of a provision must not be, only for the purpose of nullifying a judgment where there was no lacuna or defect pointed out in the parent Act. It was also observed that the retrospective amendment takes away the right given to the petitioner and that cannot be done in the guise of curing a non-existing lacuna by the respondents.

85 Similarly, in the case of Gem Granites v. CIT 2004 Indlaw SC 1052, the apex court, examining the retrospective or otherwise nature of the amendment to the provisions of section 80HHC by the Finance Act, 1991, whereby the benefit of section 80HHC has been extended to a specific kind of mineral, held that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. It was also held therein that the subsequent legislation may be looked into to fix the proper interpretation to be put on the statutory provision as it stood earlier. In this case, the hon’ble Summit court has also approved the view taken by the hon’ble Madras High Court in CIT v. Pooshya Exports P. Ltd. 2002 Indlaw MAD 256.

86 Further in the case of CIT v. New Rajasthan Trading Co. 2003 Indlaw RAJ 166 (Raj), on the retrospectivity of the proviso inserted in section 272A(2) by theFinance (No.2) Act, 1991 with effect from October 1, 1991, the hon’ble Rajasthan High Court held that (headnote) :

“The proviso inserted by the Finance (No.2) Act, 1991 with effect from October 1, 1991, to section 272A(2) of the Income-tax Act, 1961, has not been given retrospective effect. In the absence of any retrospective effect to such provisions, this proviso cannot have any impact with regard to any default relating to the assessment year 1989-90 requiring the assessee to file the return on or before April 30, 1989, for the period ending on March 31, 1989. No law can have retrospective effect unless it is so provided specifically by the law itself.” (emphasis1 supplied)

87 In CWT v. B. R. Theatres and Industrial Concerns P. Ltd. 2003 Indlaw MAD 250 (Mad) examining the retrospective or otherwise nature of amendment of section 40 of the Finance Act, 1983 by the Finance Act, 1988, for the purposes of the Wealth-tax Act, 1957, the hon’ble Madras High Court held (headnote) :

“The test to be applied for deciding as to whether a later amendment should be given retrospective effect, despite a legislative declaration specifying a prospective date as the date from which the amendment is to come into force, is as to whether without the aid of the subsequent amendment, the unamended provision is capable of being so construed as to take within its ambit the subsequent amendment. The exclusion of stock-in-trade from the ambit of levy of wealth-tax on assets of closely held companies in section 40(3) of the Finance Act, 1983 could not per se be regarded as an ‘obvious omission’ nor is giving it immunity from the levy of wealth-tax necessary for reasonably interpreting the unamended provision. The amendment effected to section 40 of the Finance Act, 1983, by the Finance Act, 1988, exempting stock-in-trade is only prospective and not retrospective.” (emphasis1 supplied)

88 Further, in Gujarat Ambuja Cements Ltd. v. Union of India 2005 Indlaw SC 1012 (SC) the legislative powers to remove infirmities in earlier legislation and to make retrospective amendments were examined. As per the relevant portion of the headnote, the court observed that the decision of the hon’ble Supreme Court in Laghu Udyog Bharati v. Union of India 1999 Indlaw SC 101; 1999 Indlaw SC 101 was solely on the basis that there was conflict between each of the sections 65, 66, 68(1A) and 71 of the Finance Act, 1994, as amended in 1997 on the one hand and clauses (xii) and (xviii) of rule 2(1)(d) of the Service Tax Rules, 1994, on the other. There was. no question of Parliament overruling the decision of the Supreme Court by passing the Finance Act,2000, and the Finance Act, 2003, to amend the provisions retrospectively. It was held in that context that a Legislature is competent to remove infirmities retrospectively and make any imposition of tax declared invalid, valid.

89 In the case of Kanumarlapudi Lakshminarayana Chetty v. First Addl. ITO 1955 Indlaw AP 2 (AP) ; 1955 Indlaw AP 42, the hon’ble Andhra Pradesh High Court examining the retrospective or otherwise nature of the amendment to the Income-tax Act, by way of insertion of sub-section (5) to section 35 by the Income-tax (Amendment) Act, 1953, observed that the said sub-section (5) is not declaratory of a pre-existing law but it clearly affects vested rights which have accrued to the assessee, and as such the well-settled rule of construction precludes the court from construing the section as retrospective. It was held in that case that a statute affecting vested rights is prima facie prospective unless the statute expressly or by necessary implication indicates to the contrary. Even where it is retrospective in operation, the courts should confine its operation only to the extent the language renders it necessary.

90 Further, in the case of Uppala Peda Venkataramanaiah v. First Additional ITO 1963 Indlaw AP 32 (AP), examining the retrospective or otherwise nature of the provisions of section 155 of the Income-tax Act, 1961, the hon’ble Andhra Pradesh High Court held as follows (headnote) :

“(ii) that in the absence of express words or necessary implication to the contrary a statute which was not purely procedural had only prospective and not retrospective operation ; section 155 of the Income-tax Act, 1961 had only prospective operation.

(iii) that as the appellate orders were passed before the coming into force of the Income-tax Act, 1961, the statutory provisions which were in force at the time when the appellate orders were passed governed those rectification proceedings and the Act of 1961 did not in any manner destroy the rights and privileges acquired under these statutory provisions or the liabilities incurred thereunder ;” (emphasis1 supplied)

91 Similarly, in the case of Harlal v. Lala Prasad, 1931 AIR(Nag) 138, the then hon’ble Nagpur High Court examining the retrospective or otherwise nature of the amendment made to the Transfer of Property Act, observed as under (headnote) :

“Unless an intention to the contrary is clear, an Act is to be construed as operating only on cases or facts which come into existence after the Act, and not retrospectively on cases or facts which had come into existence before the Act.” (emphasis1 supplied)

92 Further in the case of Madhya Pradesh State Road Transport Corporation v. State Transport Appellate Tribunal, 1992 Indlaw MP 100, considering retrospective or otherwise nature of amendment made to the Motor Vehicles Act, 1988, the hon’ble Madhya Pradesh High Court held as follows (headnote) :

“Vested or substantive rights cannot be taken away by an enactment which is ex facie or by implication not retrospective. Before giving a construction of retrospectivity to an Act of Parliament one would require that it should either appear very clearly in the terms of the Act or arise by necessary and distinct interpretation, and perhaps no rule of construction is more firmly established than this-that a retrospective operation is not to be given to a statute so as to impair an existing right or obligation otherwise than as regards matter of procedure, 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 construed as prospective only.” (emphasis1 supplied)

93 Further, in the case of J. P. Jani, ITO v. Induprasad Devshankar Bhatt, 1968 Indlaw SC 421; 1968 Indlaw SC 421, the hon’ble Supreme Court, examining the scope of section 297(2)(d)(ii) of the new Act, i.e., Income-tax Act, 1961, held as follows (pages 603, 601 of [1969] 72 ITR) :

“On a proper construction of section 297(2)(d)(ii) of the new Act, the Income-tax Officer cannot issue a notice under section 148 in order to reopen the assessment of an assessee in a case where the right to reopen the assessment was barred under the old Act at the date when the new Act came into force.

The principle is based on the well-known rule of interpretation that, unless the terms of the statute expressly so provide or unless there is a necessary implication, retrospective operations should not be given to the statute so as to affect, alter or destroy any right already acquired or to revive any remedy already lost by efflux of time.” (emphasis1 supplied)

94 Further, in the case of Y. Arul Nadar v. Authorised Officer, Land Reforms, 1989 Indlaw MAD 245 [FB] considering retrospective or otherwise nature of an amendment made to the statute, the hon’ble Madras High Court held as follows (headnote) :

“The general rule is, when an amendment is introduced in the statute governing the case already pending, the rights and obligations of parties should be decided only according to the law, which existed when the action was begun, unless a clear contrary intention is evident in the Amending Act. There could not be imputation of retrospective operation to an Amending Act and that could be done only by the Amending Act either expressly or by necessary implication. In the instant case the Amending Act has indicated that the amendments introduced shall have only prospective operation and pending proceedings should continue as if the Amending Act had not been passed.” (emphasis1 supplied)

95 Similarly in the case of Maharaja Chintamani Saran Nath Shahdeo v. State of Bihar, 1999 Indlaw SC 574, considering retrospective or otherwise nature of amendment made to the Bihar Land Reforms Act, the hon’ble summit court held that the amending provision restricting compensation to three times of the net income has no retrospective application, as amendment affects substantive right. It was also held that substituted legislation cannot be said to have retrospective operation as the golden rule of construction applies even to a substituted legislation and a substituted legislation cannot be held to be retrospective in the absence of anything in the enactment to show that it is to have retrospective operation. It is apt to extract hereunder the comments of the apex court with regard to the power of the Board of Revenue (page 3611) :

“But in the Act, authorities and their powers have been specified and we do not find any provision which vests power on the Board of Revenue, so we have to proceed on the assumption that the Board of Revenue has no power.”

96 In the instant case too, the provisions of section 113, as they stood at the relevant point of time, viz., prior to June 1, 2002, did not confer any power on the assessing authorities to enhance the tax leviable under section 113 by the amount of surcharge. That being so, in view of the above ratio deci-dendi, one has to assume that the levy of surcharge is not permissible in respect of tax determined on the block assessments made prior to June 1, 2002.

97 Similarly in the case of Sales Tax Officer v. Oriental Coal Corporation 1988 Indlaw SC 764 (SC) ; 1988 Indlaw SC 764 considering retrospective or otherwise nature of a provision in the Amending Act, the hon’ble Supreme Court observed that where the statute thus, on its face, clearly indicates retrospective effect where intended, there can be no justification to read retrospectivity into the amendment made by clause (a) of section 6 of the Amending Act which does not contain any word to that effect.

98 Further, in the case of Govinddas v. ITO 1975 Indlaw SC 341 (SC) ; 1975 Indlaw SC 341 the hon’ble summit court examining retrospective or otherwise nature of the provisions of section 171(6), held that 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 imply an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure.

99 In the case of Agastyar Trust v. Commissioner and Secretary to Government, Revenue Department [2005] 5 RC 20 ; 2005 Indlaw SC 242, the hon’ble Supreme Court, considering the assessee’s claim for exemption under the T. N. Urban Land Tax Act, 1966 on the basis of recognition by a subsequent order of the Income-tax Appellate Tribunal of the assessee as a public charitable trust under section 12A(a) of the Income-tax Act, 1961, it was held as follows (headnote) :

“Since the order recognizing the appellant trust as a charitable trust under section 12A(a) of the Income-tax Act was passed on April 29, 1977 by the Income-tax Appellate Tribunal, the appellant could not claim the benefit of that order as the exemption of the land from payment of urban land tax was claimed only for the period 1965 to 1976. The said order could not be given retrospective effect.” (emphasis1 supplied)

100 This Hyderabad Bench of the Tribunal in the case of A. P. State Civil Supplies Corporation Ltd. v. Deputy CIT 2002 Indlaw ITAT 68, had occasion to consider the applicability of the amended provisions of section 254 (2A) inserted by the Finance Act, 2001 with effect from June 1, 2001, to the matters where stay had already been granted prior to that date. After discussing at length the case law on the point in the light of K. J. Aiyer’s Judicial Dictionary (8th Edition 1980 at page 836) ; commentaries by Sampath Iyengar on Law of Income-tax, Eighth Edition (revised by the hon’ble Supreme Court Justice Mr. S. Ranganathan) Vol. I at page 57 under Sl. 38 with the headnote “Retroactive Legislation” and Chaturvedi and Pithisaria’s ‘Income-tax Law’ Fourth Edition, 1990 Vol. I at page 239, the Tribunal concluded that no retrospectivity could be read into those amended provisions. The relevant portion of the headnote of the said decision reads as under :

“Sub-sections (2A) and (2B) have been inserted by the Finance Act, 1999 with effect from June 1, 1999, and the provisos to the aforesaid section were inserted by the Finance Act, 2001 with effect from June 1, 2001. Nowhere in the language employed in the aforesaid section, particularly in the said sub-section (2A) and especially in the footnote provided whereunder, the word ‘retrospectively’ has been couched by Parliament. It simply states ‘provisos inserted by the Finance Act, 2001 with effect from June 1, 2001′. One cannot appreciate the stand of the Department that the said provisos are inserted by the Finance Act, 2001 with effect from June 1, 2001 retrospectively. One cannot read the language as if the word retrospectively has been introduced into it as interpreted by the Department when it had not been done so by Parliament.

In the instant case, where stay had been granted by the Tribunal already, i.e., prior to June 1, 2001. i.e., the date of coming into force of the aforesaid amendment by inserting the proviso to section 254(2A), right had accrued in favour of the assessee and against the Department by virtue of the Tribunal’s order staying recovery proceedings on the assessee for collection of the demand in dispute. Such a right accrued to the assessee by virtue of the Tribunal’s order coming into effect, could get impaired if the proviso to section 254(2A) is read as retrospective when it has been actually not effected so but only with effect from June 1, 2001, by the Finance Act, 2001. If at all, the said insertion of the proviso might be applicable only to stay petition which had been filed prior to the said date of June 1, 2001, but which has not come up for hearing until the said date of June 1, 2001 but in the instant stay petitions except for the assessment year 1997-98, orders had been passed by the Tribunal very much prior to the date of June 1, 2001. As the concerned proviso inserted by the Amendment Act was not retrospective but only prospective with effect from June 1, 2001, as spelt out by the Amendment Act itself, the stay already granted by the Tribunal on various dates prior to June 1, 2001, would hold good and continue to be in force pending disposal of the relevant appeals out of which the stay petitions had arisen …” (emphasis1 supplied) 101 The above ratio decidendi squarely applies to the facts of the present case wherein the Revenue seeks to press into service the proviso of section 113 brought on to the statute book with effect from June 1, 2002, so as to levy surcharge enabled by the insertion of the proviso below section 113 by the Finance Act, 2002, expressly with effect from June 1, 2002, on tax levied in block assessments, wherein search has commenced prior to June 1, 2002.

102 On the issue whether the legislation in question is retroactive or declaratory in nature, we may examine the case law on the subject. In the case of Shyam Sunder v. Ram Kumar 2001 Indlaw SC 20065, the hon’ble Supreme Court held as under (page 48) :

“37. We are in respectful agreement with the view taken in Moti Ram v. Sura) Bhan, 1960 Indlaw SC 426. The right of pre-emption may be a weak right but none the less the right is recognised by law and can be allowed to be defeated within the parameters of law. A statute which affects the substantive right has to be held prospective unless made retrospective either expressly or by necessary intendment.”

103 Explaining the legal position of retroactive and declaratory legislation at length, the hon’ble Supreme Court in that case at paragraphs 39 to 44 of that judgment, observed as follows (page 48) :

“39. Lastly, it was contended on behalf of the appellants that the Amending Act whereby new section 15 of the Act has been substituted is declaratory and, therefore, has retroactive operation. Ordinarily when an enactment declares the previous law, it requires to be given retroactive effect. The function of a declaratory statute is to supply an omission or to explain a previous statute and when such an Act is passed, it comes into effect when the previous enactment was passed. The legislative power to enact law includes the power to declare what was the previous law and when such a declaratory Act is passed, invariably it has been held to be retrospective. Mere absence of use of the word ‘declaration’ in an Act explaining what was the law before may not appear to be a declaratory Act but if the court finds an Act as declaratory or explanatory, it has to be construed as retrospective. Conversely where a statute uses the word ‘declaratory’, the words so used may not be sufficient to hold that the statute is a declaratory Act as words may be used in order to bring into effect new law. (underlining1 is ours)

40. Craize on Statute Law, 7th Edn. stated the statement of law thus :

‘If a doubt is felt as to what the common law is on some particular subject, and an Act is passed to explain and declare the common law, such an Act is called a declaratory Act.’

41. G.P. Singh on Principles of Statutory Interpretation quoting Carize stated thus :

‘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 words may, at times, be used to introduce 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.

42. In Keshavlal Jethalal Shah v. Mohanlal Bhagwandas, 1968 Indlaw SC 377, this court while interpreting section 29(2) of the Amending Act, held thus :

‘An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. Section 29(2) before it was enacted was precise in its implication as well as in its expression ; the meaning of the words used was not in doubt, and there was no omission in its phraseology which was required to be supplied by the amendment.’

43. In R. Rajagopal Reddy v. Padmini Chandrasekharan 1995 Indlaw SC 2016 (SC) ; 1995 Indlaw SC 2016 it was held thus : (SCC headnote)

‘Declaratory enactment declares and clarifies the real intention of the Legislature in connection with an earlier existing transaction or enactment, it does not create new rights or obligations. If a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. … A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the Constitution came into force the Amending Act also will be part of the existing law. 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.’ 44. From the aforesaid decisions, the legal principle that emerges is that the function of a declaratory or explanatory Act is to supply an obvious omission or to clear up doubts as to meaning of the previous Act and such an Act comes into effect from the date of passing of the previous Act. Learned counsel for the appellants strongly relied upon a decision of a two-judge Bench of this court in Mithilesh Kumari v. Prem Behari Khare 1989 Indlaw SC 736 (SC) ; 1989 Indlaw SC 736 in support of his argument. In the said decision, it was held by this court that the Benami Transactions (Prohibition) Act, 1988 being a declaratory Act, the provisions of section 4 of the Act have retroactive operation. The reliance on this decision by the appellants’ counsel is totally misplaced as this decision was overruled in R. Rajagopal Reddy v. Padmini Chandrasekharan 1995 Indlaw SC 2016 (SC); 1995 Indlaw SC 2016 wherein it was held that the Act was not passed to clear any doubt that existed as to the common law or the meaning of effect of any statute and it was, therefore, not a declaratory Act.

104 Thus, it is well-settled that a tax provision imposing a liability is governed by the normal presumption that it is not retrospective and the settled principle of law is that the law to be applied is that which is in force in the assessment year, unless otherwise provided expressly or by necessary intendment.

105 A reading of the notes on clauses or the amendment to section 113 in the Finance Act, 2002, extracted above, does not give any indication that the legislation was introduced to explain an earlier Finance Act or clarify the real intention of the Legislature or that the proviso was inserted to supply an obvious omission or to clear up doubts as to the levy of surcharge in question. On the contrary, the memorandum explaining the provisions as well as the notes on clauses, also extracted above, states that the rate of tax on undisclosed income in block assessment is only 60 per cent. There is no whisper of surcharge.

106 Learned senior standing counsel for the Department, (at paragraph 22 on page 13 of his written submissions), stated as follows :

“As seen from the Finance Acts of 1995, 1996 and 1997 (in the case of domestic companies) and the Finance Acts of 1999 and 2000 (in the case of all assessees), Parliament provided for levy of surcharge on the incomes assessable under section 113 of the Act, but did not stipulate the rate of surcharge may be because Parliament opined that it was not specifically required to be returned. As has been rightly pointed out by the assessees, since the search is the triggering point for the ensuing assessments under Chapter XIV-B, it is the law as on the date of search that should be applied for all aspects including rate of tax and surcharge. Therefore, whatever rate of surcharge that subsisted as on the date of search, would govern the assessees concerned. However, since the issue is capable of debate, Parliament intervened to make a declaratory law, clarifying that the surcharge shall be levied at the rate prevalent on the date of search. By this, Parliament only clarified the pre-existing legal position and has not made any new provision much less did it enhance the liability.” (emphasis1 ours)

107 This argument is not supported by the express language used by the Legislature while introducing the proviso to section 113. The plea that the Finance Actdid not stipulate the rate of surcharge as Parliament in its wisdom thought it was not specifically required to do so and that as the issue of rate of surcharge is capable of debate, it got clarified by insertion of the proviso to section 113 and thus the amendment is a declaratory and clarificatory legislation which is brought in only to clarify the confusion on the rate of surcharge that has to be applied, is not supported by a plain reading of the section. Nothing is mentioned about pre-existing legal position. The proviso does not have a prefix “for removal of doubts” as in all retrospective or declaratory Legislations. Thus, we have no difficulty in holding that the proviso inserted to section 113 of the Income-tax Act, 1961, by the Finance Act, 2002, with effect from June 1, 2002, is neither retrospective nor declaratory or clarificatory having retroactive operation. In fact, the memorandum explaining the provisions as well as the notes on clauses indicate and make it clear to us to come to a conclusion that surcharge was not leviable earlier and thus a fresh amendment is brought about to levy surcharge from June 1, 2002. None of the ingredients necessary for treating this piece of legislation as retroactive/declaratory is present in this case. Thus, we are not persuaded by this argument of learned standing counsel for the Revenue.

108 In view of the foregoing discussion and considering the ratio decidendi laid down in the case law not only those which are cited before us, but also others being fortifying our view taken, the first contention of the Revenue based on the retrospective nature of the amendment to the provisions of section 113, by the insertion of the proviso thereunder, is liable to be rejected.

109 This brings us to the issue, as to whether the Finance Act has levied surcharge on tax on undisclosed income computed under Chapter XIV-B, by introducing a distinct and independent charge and, if so, whether the levy of surcharge by the Finance Act is an unworkable proposition inasmuch as it is not practical and thus the charge fails. The argument of learned senior standing counsel for the Revenue is that de hors the reference to the proviso to section 113 introduced by theFinance Act, 2002, or to the Income-tax Act itself, there are specific provisions incorporated in the various Finance Acts referred to above, and as it is conceded that Parliament may choose either the Income-tax Act or the Finance Act or any other Central Act to levy surcharge, the surcharge has been rightly levied under the Finance Acts and such a levy is a valid levy. The contention of the assessee is that the Finance Act is lacking in creation of the charge and that, at any rate, there is ambiguity as to the rate of surcharge to be applied, and thus it was unworkable and impractical and hence the charge, if any, fails.

110 The relevant portion of the Finance Act, 1999, which is the basis upon which learned standing counsel submits that the surcharge is leviable through theFinance Act, reads as under :

“(8) Subject to the provisions of sub-section (9), in cases in which income-tax has to be charged under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 of the Income-tax Act or deducted under section 192 of the said Act from income chargeable under the head ‘Salaries’ or in which the ‘advance tax’ payable under Chapter XVII-C of the said Act has to be computed, at the rate or rates in force, such income-tax or, as the case may be, ‘advance tax’ shall be so charged, deducted or computed at the rate or rates specified in Part III of the First Schedule and such tax as reduced by the rebate of income-tax calculated under Chapter VIII-A of the said Act shall be increased, –

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

(b) in the cases to which Paragraph E of that Part applies, by a surcharge, calculated in each case in the manner provided therein :

Provided that in cases to which the provisions of Chapter XII or Chapter XII-A or sub-section (1A) of section 161 or section 164 or section 164A or section 167B of the Income-tax Act apply, ‘advance tax’ shall be computed with reference to the rates imposed by this sub-section or the rates as specified in that Chapter or section, as the case may be :

Provided further that the amount of income-tax computed in accordance with the provisions of sections 112 and 113 of the Income-tax Act shall be increased by a surcharge for purposes of the Union or surcharge as provided in Paragraph A, B, C, D or E, as the case may be, of Part III of the First Schedule.” (emphasis1 ours)

111 The case of the Revenue is that it is evident that Parliament has specifically provided for charging of surcharge in respect of the advance tax payable for the year 1999. The corresponding Part-Ill of the First Schedule provided for surcharge. The relevant provision reads as follows :

Paragraph A

In the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, not being a case to which any other Paragraph of this Part applies, –

Rates of income-tax

Surcharge on income-tax

The amount of income-tax computed in accordance with the preceding provisions of this Paragraph or section 112 or section 113 shall, –

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

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

Paragraph B Rates of income-tax

Surcharge on income-tax

The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or in section 112 or section 113, shall, in the case of every co-operative society, be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent. of such income-tax.

Paragraph C Rate of income-tax

Surcharge of income-tax

The amount of income-tax computed at the rate hereinbefore specified or in section 112 or section 113, shall, in the case of every firm, be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent. of such income-tax :

Provided that no such surcharge shall be payable by a non-resident.

Paragraph D Rate of income-tax

Surcharge on income-tax

The amount of income-tax computed at the rate hereinbefore specified or in section 112 or section 113, shall, in the case of every local authority, be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent. of such income-tax:

Paragraph E Rates of income-tax

Surcharge on income-tax

The amount of income-tax computed in accordance with the preceding provisions of item I of this Paragraph, or in section 112 or section 113, shall, in the case of every domestic company, be increased by a surcharge calculated at the rate of ten per cent. of such income-tax.”

112 It was submitted that since the levy has been introduced in Part III, it is not in dispute that the said provision has got to be taken into account for the purpose of computation of “advance tax”, for the financial year commencing from April 1, 1999, in respect of undisclosed income also. The aforesaid provisions which are found in Part III of the Finance Act, 1999, have also been correspondingly introduced in the Finance Act,2000 in Part I so as to make it applicable for the assessment year 2000-01, the corresponding previous year being 1999-2000. It was thus submitted that in view of the specific incorporation of the provisions in the Finance Act, 1999 and due provision being made for levy of surcharge by the Finance Act,2000, it is inescapable to conclude that the surcharge is leviable on undisclosed income of all the assessees from the assessment year 2000-01 (previous year April 1, 1999 to March 31, 2000); of course, domestic companies were liable for surcharge in respect of their undisclosed income for the anterior period also, in view of the relevant Finance Acts of 1995, 1996 and 1997.

113 Before we examine the contentions, a cogent reading of the Income-tax Act on the definitions under section 2(9), i.e., “assessment year”, section 2(34) “previous year”, section 2(37A) “rate or rates in force”, section 2(45) “total income”, section 4(1) i.e., charge of income-tax, section 5, i.e., scope of total income and the Finance Acts makes it clear that the Finance Acts specify rate or rates of income-tax only in relation to total income of a previous year corresponding to an assessment year. The definition of “block period” under section 158B(a) and “undisclosed income” under section 153B(b), computation of undisclosed income of the block period on the basis of evidence found as a result of search under section 158BB, determination of undisclosed income under the procedure for block assessment under section 158BC(c), are not referred to in any of the Finance Acts. These special provisions under Chapter XPV-B, treat “undisclosed income” of a “block period” as distinct from “total income” of a “previous year”. Now the question is, whether the Finance Acts which are enacted to prescribe the rate or rates of income-tax on “total income” of a “previous year”, have also prescribed levy of surcharge on “undisclosed income” of a “block period”.

114 The first limb of the argument of the Revenue is that Chapter XIV-B is not a self-contained code and that the concepts of “assessment year” and “previous year” are not excluded from the scheme of Chapter XIV-B. The decision relied upon is in the case of Venkatagiri Raja 2003 (6) ALD 463. In this case, the hon’ble jurisdictional High Court laid down the proposition that the statutory forms also constitute integral part of the statutory scheme and that it is no longer in dispute and they could be taken as an aid for the purpose of interpreting the statutory provision in the enactment. This proposition has been put forward to state that Form No. 2B prescribed in terms of the Income-tax Rule 12(1A) provides for calculating undisclosed income for each assessment year included in the block period and thus the concepts of “assessment year” and “previous year” have not been given a go-by in Chapter XIV-B. Another argument is that section 113 is outside Chapter XIV-B and that section 158BH applies to all other provisions of the Act. The judgment of the hon’ble Supreme Court in the case of N. M. Vesrappa v. Canara Bank 1988 Indlaw SC 345; 1988 Indlaw SC 345, was relied upon for the proposition that the non obstante clause which appears under section 158BA does not in any way exclude the applicability of the concepts of “assessment year” and “previous year” to block assessment under Chapter XIV-B and that it is a restrictive one and that, at any rate, it cannot give overriding effect to the Finance Act.

115 In the case of N. M. Veemppa v. Canara Bank 1988 Indlaw SC 345, the hon’ble Supreme Court held as follows (page 478) :

“It is now well-settled that the scope and width of the non obstante clause is to be decided on the basis of what is contained in the enacting part of the provision.”

116 Further reliance was placed on the judgment of the hon’ble Supreme Court in the case of State of West Bengal v. Madan Mohan Ghosh 2002 Indlaw SC 290, wherein it was held (pages 181 and 182) :

“6. Learned counsel further contended that the non obstante clause in rule 17 refers only to rules which were in existence at the time when the said rule was brought into force and the same could not be construed as having an overriding effect for all times to come . . .

8. Having heard the learned counsel, we are of the opinion that we need not dilate very much on the finding arrived at by the High Court in regard to the overriding power of rule 17 of the 1993 Rules vis-avis the Order of 2000. We agree with the learned Additional Solicitor-General that the language of rule 17 of the 1993 Rules cannot be construed so as to mean that all future rules and notifications will be subject to such a non obstante clause.”

117 First, we consider whether, as argued by the Revenue, Chapter XIV-B is not a self-contained code for assessing undisclosed income and whether the concepts of “assessment year” and “previous year” as well as “total income” are given a go-by in Chapter XIV-B.

118 The legislative intent behind introduction of the special procedure was clarified in the Memorandum explaining provisions of the Finance Bill, 1995 : 1995 (212) ITR 345. Relevant extracts thereof are reproduced hereunder :

“Searches conducted by the Income-tax Department are important means of unearthing black money. However, under the present scheme, valuable time is lost in trying to relate the undisclosed incomes to the different years. Tax evaders generally manage to divert the focus to procedural and legal issues and often invent new evidence to explain undisclosed income. By the time search-related assessments are completed, the effect of search is considerably diluted. Legal battles continue for years to decide which income is assessable in which assessment year. No finality is reached and the seized assets remain with the Department for a long time.

In order to make the procedure of assessment of search cases cost effective, efficient and meaningful, it is proposed to introduce a new scheme of assessment of undisclosed income determined as a result of search under section 132 or requisition under section 132A. Under this scheme, the undisclosed income detected as a result of any search initiated, or requisition made, after June 30, 1995, shall be assessed separately as income of a block of years. Where the previous year has not ended or the due date for filing a return of income for any previous year has not expired, the income recorded on or before the date of search or requisition in the books of account or other documents maintained in the normal course relating to such previous years shall not be included in the block.” (emphasis1 supplied)

119 The Special Bench of the Tribunal in the case of Nawal Kishore & Sons Jewellers v. Deputy CIT 2003 Indlaw ITAT 55; 2003 Indlaw ITAT 55, 432, has held that section 158BC, read with section 158BA are special provisions in search matters. It is settled in jurisprudence that special provisions override the general provisions as per Latin Maxim “Generalia specialibus non derogant” vide Broom’s Legal Maxim, 10th Edn. 2001, page 348. The Tribunal observed (page 98 of [2004] 265 ITR (AT) :

“37. The above discussion reveals that the Legislature has made independent substantive provisions regarding the power to proceed to make assessment under section 143(2) as well as under section 158BC. Section 158BC, read with section 158BA, being special provisions for proceeding to assess the undisclosed income of the assessee in search matters, would override the provisions of section 143(2) as far as power/jurisdiction to proceed to make assessment is concerned inasmuch as it is the settled legal position that special provisions override the general provisions . . .” (emphasis1 supplied)

20 Chapter XIV-B was, thus, introduced as a self-contained Chapter consisting of sections 158B to 158BH of the Act containing provisions which are in the realm of substantive law seeking to levy tax on the undisclosed income of the block period at the rate of 60 per cent. In addition, the Chapter contains procedural provisions for the assessment of “undisclosed income” found during the course of search [refer Special Bench decision in the case of Smt. Mahesh Kumari Batra v. Joint CIT 2005 Indlaw ITAT 43; 2005 Indlaw ITAT 43 (Asr.)].

121 Learned authors of the book titled “Income-tax Law by Chaturvedi and Pithisaria” [Fifth Edition, at pages 5459 and 5460], stated as follows :

“Assessment of undisclosed income of the block period as a result of search.-Sub-section (1) of the newly inserted (with effect from July 1, 1995) section 158BA opens with a non obstante clause, namely, ‘Notwithstanding anything contained in any other provisions of this Act’, and, thus, enacts provisions of overriding nature so as to prevail over any other provisions of the 1961 Act. According to that sub-section (1), whereafter June 30, 1995-

-a search is initiated under section 132 or

-books of account, other documents or any assets are requisitioned under section 132A in the case of any person, then, –

-the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of Chapter XIV-B (containing sections 158B to 158BH)”.

122 A close reading of the above clearly brings out the fact that Chapter XIV-B is a self-contained code and undisclosed income relatable to the block period is different from total income of a previous year relatable to any assessment year. The Legislature had in fact brought in these special provisions to overcome the difficulties that were arising in search cases due to the concepts of “previous year” and “assessment year”. Statutory forms may be an aid to interpretation, but these forms or even rules do not override the Act. “Block Period” as defined in section 158B(a) is different from “previous year” or “assessment year” as defined in section 2(9) and section 2(34) respectively. Even the subsequent enactment i.e., the Finance Act does not change the concept of block assessment. The mention of section 113 in sub-section (2) of section 158BA as well as the provisions of section 158BH are “legislation by incorporation”. Chapter XIV-B has specifically been incorporated with an intention to do away with the requirement of relating a particular income to a particular previous year or to any particular assessment year as the Legislature states that valuable time was lost in relating undisclosed income to different assessment years. Further, Explanation to section 158BA(2) specifically declares, “for the removal of doubts”, that the assessment under Chapter XIV-B (containing sections 158B to 158BH) shall be “in addition to the regular assessment in respect of each previous year included in the block period”. From the above, it transpires that the said clause (a) segregates the gamut of the block assessment from that of regular assessment which relates to total income of a previous year so as to keep each one of them having independent and distinct identity. Thus, we hold that Chapter XIV-B is a self-contained code and undisclosed income of a block period is distinct from total income computed with reference to a previous year. In other words, we hold that the concept of computing total income of a previous year for being assessed in an assessment year as contemplated by section 5 has been given a go-by in the concept of “block assessment”. Statutory forms could be used as an aid to interpretation, but they do not override the Act. When the Act provides that the concept of “previous year” and “assessment year” do not apply to Chapter XIV-B, the statutory forms cannot mean otherwise.

123 This brings us to the question as to whether, de hors the proviso to section 113, it could be said that the Finance Act has levied surcharge on tax on undisclosed income determined under Chapter XIV-B. Elaborate arguments were advanced on whether section 4(1) or the proviso to section 4(1) is applicable in this case. In our considered opinion, the charging section is 158BA(2), which has been extracted in paragraph 12.4 (page 266 supra) above. A plain reading of section 158BA(2) shows that there is no reference to “Central Act” as in section 4(1).

124 If we have to refer to section 4, we have necessarily to hold that sub-section (1) of section 4 is applicable in respect of the total income of the previous year. The proviso to section 4(1) provides an exception to the rule and brings within its ambit all other situations than those situations wherein total income is computed with reference to a particular previous year. As the period for which income is computed in the case of a block assessment is other than for the period of a previous year, in our considered opinion the proviso to section 4(1) only applies. In this proviso, there is no reference to any “Central Act”, unlike in section 4(1).

125 Having held so, we examine as to whether the proviso to section 4(1) and/or section 158BA(2) enables levy of surcharge. The answer, in our considered opinion, is in the affirmative. It is well-settled that “income-tax” includes “surcharge” which is a receipt in the nature of additional income-tax, as held in the case of CIT v. Maharaja Pratapsingh Bahadur of Gidhaur 1960 Indlaw SC 279 (SC). The assessee’s argument that the term “tax” has been defined under section 2(43) and that it includes only income-tax and super-tax and not surcharge, is against the proposition laid down by the hon’ble Supreme Court, as surcharge has been interpreted as nothing but acditional income-tax. The only requirement is that the levy should have been under the Income-tax Act itself as there is no reference to any Central Act in this proviso or in section 158BA(2). Thus, the argument that section 158BA(2) and the proviso to section 4(1) are charging provisions in a block assessment and as they do not refer to surcharge but only to tax, the same cannot be levied under the Income-tax Act, cannot be accepted. At the same time, we find that for the period under consideration, the Income-tax Act prescribes only 60 per cent. rate of tax on block assessments, but it does not authorise levy of surcharge. As there is no reference to the Central Act either in section 158BA(2) or in the proviso to section 4(1), the question of any Central Act prescribing the levy of surcharge under these charging provisions does not arise. The Finance Act has to be examined de hors these two charging sections of theIncome-tax Act, to find out as to whether it levies independently surcharge on undisclosed income of a block period by having an independent and distinct charging section. The charging section in the Finance Act does not authorise the levy in the Finance Act.

126 We examine the issue as to whether the Finance Act has levied a separate and independent charge de hors the provisions of the Income-tax Act, 1961. At this stage, we once again reiterate that none of counsel for the assessees has canvassed a proposition before us that the Finance Act cannot bring about an independent charge. The assessees’ counsel base their arguments on first principles and argue that there is no charging section in the Finance Act to levy surcharge and that even if it is held that there is a charging section and thus a valid charge, there is ambiguity as to the date and rate applicable and thus the charge fails. Before we go into the issue we extract below the observations of the hon’ble Supreme Court in the case of Govind Saran Ganga Saran v. CST 1985 Indlaw SC 418 (head-note) :

“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. It 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.” (emphasis1 ours)

127 Their Lordships held that there are four components in the concept of tax : (a) the character of imposition, (b) a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, (c) the rate at which the tax is imposed and (d) the measure or value to which the rate will be applied for computing the tax liability. We have now to examine as to whether the Finance Act satisfies all the above components so as to enable us to hold that there is a valid levy.

128 The bedrock of the argument of the Revenue is that the judgment of the hon’ble Supreme Court in the case of Madurai District Central Cooperative Bank Ltd. v. Third ITO 1975 Indlaw SC 330, is applicable to the facts of this case and that the judgment in the case of CIT v. Elphinstone Spinning and Weaving Mills Co. Ltd. 1960 Indlaw SC 350 (SC), does not apply to the facts of this case. The assessee argues on the contrary and distinguishes the judgment in the case of Madurai 1975 Indlaw SC 330 (SC) and submits that the judgment in the case of Elphinstone

129 In the case of Elphinstone Spinning and Weaving Mills Co. Ltd. v. CIT 1955 Indlaw MUM 19, judgment rendered by the hon’ble Bombay High Court, was upheld by the hon’ble Supreme Court in CIT v. Elphinstone Spinning and Weaving Mills Co. Ltd. 1960 Indlaw SC 350. The facts of that case were that the assessee had no taxable income for the assessment year 1951-52. In that very year, the assessee-company declared dividends amounting to Rs. 3, 29, 062 in respect of the year 1950. The contention of the assessee-company was that it had no income at all and thus the question of assessing income at a particular rate would not arise. It was argued that only when there is income which constitutes “total income” within the meaning of the Income-tax Act, the question has to be considered as to the rate at which that income is to be assessed to tax. The hon’ble court brought out legislative intent and observed (page 815) :

“The Legislature was anxious that companies should not act in a spendthrift fashion and should plough back some of its profits into the industry, and therefore a bait, as it were, was held out to companies not to distribute all the profits they made to their shareholders and the bait took the form of giving the companies a certain rebate. If a company did not distribute as dividends more than nine annas of its profits (substantially speaking, as I need not go into the details of the matter), then to the extent that dividends paid were less than that figure of nine annas, a rebate of one anna was given to the company concerned. If the company paid more than nine annas, then not only it lost the rebate but it was also liable to pay an additional income-tax which was provided for in clause (ii) of the proviso, and the additional income-tax was to be calculated by the difference between the rate of five annas per rupee and the rate which the excess dividend had actually borne.”

130 In that case, the undisputed fact was that the sum of Rs. 3, 29, 062, which the company declared as dividend, was undistributed profit of the preceding years and was not out of the income which constitutes total income of the current year. In that context, the hon’ble court observed that additional income-tax must postulate first the total income liable to tax, and secondly an income-tax which has been levied on the total income. As these two essential conditions were absent, that is, there was neither a total income liable to tax nor was there any income-tax which was assessed on the total income, the hon’ble court came to the conclusion that the Department was not justified in taxing the subject. While holding so, the hon’ble court specifically stated that the Finance Act could have provided that in the income of the previous year certain income which was not made or has not accrued in that particular year should be included and that to accede to that contention, they would require much clearer and much stronger language in the Finance Act. Their Lordships went on to observe (page 820) :

“It is always with some reluctance that a court comes to the conclusion which seems to defeat the object of the Legislature. But the rights of a subject under a fiscal statute are equally important, if not more important than giving effect to the object of the Legislature, and if the Legislature uses inappropriate language and fails to bring some income to tax, we must come to the conclusion that the Department is not justified in taxing the subject.”

131 In a separate, but concurring judgment, Tendulkar J., at page 825 of the reported judgment, observed as follows :

“But although there may be no logical reason for this distinction, the function of this court is to interpret the statute as it stands. It may be a case where the Legislature has not succeeded in giving effect to its intentions ; and in any event it appears to me that if the Legislature intended that in the case of a company which has no total income which attracts tax a tax should be levied within the framework of the Income-tax Act as it exists, such an object could only be achieved by providing that the company shall be deemed to have a total income and proceeding to tax such total income.”

132 Upholding this judgment of the hon’ble Bombay High Court, the hon’ble Supreme Court, at page 147 of 40 ITR, held :

“Where there is a total income and there is a payment of dividend either more or less than the limit fixed, one can easily find the figures by which the total income as reduced exceeds or falls short of the dividends and the additional tax that has to be paid. But when the total income is a negative figure and no tax on the total income is levied, the words of the second part of the paragraph, ‘total income’, ‘profits liable to tax’, ‘dividends payable out of such profits’ and ‘an additional income-tax’, cease to have the meaning they were intended to convey.”

133 Their Lordships then referred to the contention of the Commissioner of Income-tax that some of these words should be ignored as being surplusage of drafting error, and after considering a number of decisions, at page 150, observed as follows :

“There is no doubt that if the words of a taxing statute fail, then so must the tax. The courts cannot, except rarely and in clear cases, help the draftsmen by a favourable construction.”

134 The pith and substance of this judgment is that the rate in the proviso is applicable to “total income” and the total income is to be determined in accordance with the Income-tax Act, and that when there is no total income, the second paragraph of the proviso, as it is worded, ceases to be workable. In that case, their Lordships also considered the contention of the Commissioner of Income-tax that this should be treated as an independent charging section and observed (page 153) : “There are no words here making the excess dividend into income or subjecting it to tax independently of the charge to tax on the total income”. In the concluding remarks, it was held (page 154) : “We respectfully agree with the learned Chief Justice that though the interpretation we have placed upon the proviso might lead to some anomalies, it is for the Legislature to avoid the anomalies which, according to us, spring not from our interpretation but from the language employed.” It was further stated (page 154) : “The Income-tax Act creates an assessment year and a corresponding previous year. Assessment to tax in any assessment year can only be in respect of the profits of the immediately preceding previous year.” While observing so, the hon’ble Supreme Court held the fiction in that enactment, which brings profits of back years into the immediately preceding previous years, so that the requirements of the income-tax law may be complied with, cannot be carried further than what it is intended for; it cannot be used to make these profits to take the place of total income.

135 The contention of the Revenue that the judgment in the case of Madurai 1975 Indlaw SC 330 (SC) overrules the judgment in the case of Elphinstone 1960 Indlaw SC 350 (SC) is not correct. In the case of CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. 1960 Indlaw SC 348 (SC), a case which was similar to Elphinstone

“Under section 3 of the Income-tax Act [ Indian Income-tax Act, 1922 ], income-tax is a tax on the income of the previous year and it would not cover something which is not the income of the previous year, or made fictionally so. The Finance Act, 1951, failed in its purpose : the additional tax was not properly laid upon the total income because what was actually taxed was never a part of the total income of the previous year. The Finance Act did not lay down that it should be taxed as part of the total income.” (emphasis1 supplied)

136 In that case, the argument that it was not necessary to look only to section 3 of the Indian Income-tax Act, 1922, (which was the then charging section), but also to the provisions of the Finance Act through which Parliament could impose a new tax, if it so pleased, was not dismissed by the court. The hon’ble Supreme Court approved the opinion of the hon’ble Bombay High Court in the judgment delivered by the hon’ble Chief Justice of the Bombay High Court, which was as follows (page 192) :

“In our opinion, the provision of the Finance Act travels beyond the ambit of section 3, and if Parliament has done so then no effective charge can be made on the total income of the previous year of the assessee under the provisions of the Finance Act which deals with additional tax on excess dividend.”

137 It was further observed by the hon’ble Supreme Court (page 192) :

“These modifications, which were suggested, involve a recasting of the entire relevant paragraph of the Finance Act to make it independent of section 3 of theIndian Income-tax Act, a course which is only open to a Legislature and not to a court.”

138 At page 194 of the Report, it was observed :

“The Finance Act could have gone further, as pointed out by the learned Chief Justice in the extract quoted, and made the profits a part of the total income of the previous year under assessment, but it did not do so. The Finance Act could have also resorted to some other fiction, which might conceivably have met the case ; but it has failed to do so.”

139 Thus, the argument that a Finance Act could independently levy a tax has never been negatived by the hon’ble Supreme Court in the case of Elphinstone1960 Indlaw SC 350 or in the case of Khatau 1960 Indlaw SC 348.

140 Coming to the case of Madurai District Central Co-operative Bank Ltd. 1975 Indlaw SC 330 (SC), the judgment of the hon’ble Madras High Court in Madurai District Central Co-operative Bank Ltd. v. Third ITO 1968 Indlaw MAD 130 was affirmed by the hon’ble Supreme Court. The hon’ble Madras High Court had considered the judgment in the case of Khatau 1960 Indlaw SC 348 (SC) which in turn had considered the judgment in the case of Elphinstone 1960 Indlaw SC 350(SC), and distinguished these judgments in the following words (page 480) :

“The petitioner relies on CIT v. Khatau Makanji Spinning and Weaving Co. Ltd. 1960 Indlaw SC 348 (SC), but we fail to see what assistance it gives to him in the instant case. All that was decided in that case was that, in view of the terms of section 3 of the Indian Income-tax Act, 1922, income-tax was levied on the income of the previous year and not on something which was not the income of the previous year, or made fictionally so. The excess dividend in that case, which was subjected to the additional tax, was not shown or not deemed by the particular Finance Act to be part of the total income of the previous year. In such circumstances, the Supreme Court agreed with the High Court of Bombay that the Finance Act had misfired, because it did not resort to legislation which would have conformed to the subject for which the Finance Act was passed every year. Observed the Supreme Court :

“This fiction, as we have already pointed out, provides only that the dividends shall be deemed to be out of the profits not of the previous year under assessment but of some other years. What the Finance Act fails to do is to make them “total income”, so as to take in the rate which is prescribed for the total income in the proviso. Unless the Finance Act stated that after the working out of the fiction the profits of the back year or years shall be deemed to be a part of the total income of the previous year under assessment, the purpose of the Act clearly fails.’

That was the basis for the decision of the Supreme Court. The position is very different in the case before us, where and this is not actually disputed by counsel for the petitioner-the income which was exempt from tax under section 81 had formed part of the total income of the previous year. There was no need, therefore, for the Finance Act to make any deeming provision making what was not the income of the previous year as such income by a fiction.” (emphasis1 is ours)

141 This proves that there is no conflict in the aforesaid decisions as the position was different in both the cases. In the case of Madurai District Central Co-operative Bank Ltd. 1975 Indlaw SC 330 (SC), the income which was exempt from tax under section 81 of the Income-tax Act, 1961, had formed part of the “total income” of the “previous year”, unlike in the cases of Elphinstone Spinning and Weaving Mills Co. Ltd. 1960 Indlaw SC 350 (SC) and Khatau Makanji Spinning and Weaving Co. Ltd. 1960 Indlaw SC 348 (SC), wherein undistributed profits of earlier years did not form part of “total income” of the “previous year”. Nowhere in this line of judgments it is disputed that the Finance Act cannot introduce a new and distinct charge. In fact, it is clearly laid down that Parliament has legislative competence to introduce a new charge of tax and it may exercise that power either by incorporating the charge in the Income-tax Act or by introducing it in theFinance Act or, for that matter, in any other statute. In the case of Madurai District Central Co-operative Bank Ltd. 1975 Indlaw SC 330 (SC), the question considered was whether the Finance Act, 1963, authorises by its terms the levy of additional surcharge on income which is exempt from tax under the Income-tax Act, 1961, but at the same time, the said income undisputedly constitutes total income of the previous year and the Finance Act prescribed rates for such total income of the previous year. The court was considering a case of levy of additional surcharge on residual income and it did not accept the contention of the assessee that the same cannot be dissociated from the main charge of income-tax. In

(a) Section 2(l)(a)(ii) of the Finance Act, 1963, provided that income-tax shall further be increased by an additional surcharge for the purposes of the Union calculated in the manner provided in the First Schedule.

(b) Clause (c) of Paragraph A prescribes the manner in which the additional surcharge is to be calculated. It was held that clause (c) provides that additional surcharge for purposes of the Union shall be calculated “on the amount of the residual income” at the rates mentioned in that clause.

(c) Thus, both the purpose and concept of the additional surcharge are different from those of income-tax. The additional surcharge is leviable exclusively for purposes of the Union so that the entire proceeds of such surcharge may, under article 271 of the Constitution, form part of the Consolidated Fund of India.

(d) The additional surcharge levied for purposes of the Union is to be calculated not on the total income like the income-tax but it is to be calculated on the residual income, which was in fact part of the total income.

(e) Section 2(8) of the Finance Act, 1963, defines residual income and introduces the concept of residual income on which alone the additional surcharge is payable.

(f) The residual income is not the same as the business income of a co-operative bank, which is exempt under section 81(i)(a) from income-tax.

142 The apex court concluded that the additional surcharge in that case was a distinct charge not dependant for its leviability on the assessee’s liability to pay income-tax or super tax. In fact, section 2(8) of the Finance Act defined residual income and it was not in dispute that such residual income is part of the total income. The assessee’s contention that income-tax is a single levy, was rejected and it was held that even though the assessee was not liable to pay income-tax or super tax, because of this independent and distinct charge, he would be liable to pay the additional surcharge. The court went on to observe that the interpretation placed by them on the Finance Act, 1963, does no violence to section 4 of the Income-tax Act, 1961.

143 From the above two judgments, the propositions that can be culled out are these :

(a) The Finance Act prescribes rates of income-tax on total income for the previous year.

(b) In the case of Elphinstone Spinning and Weaving Mills Co. Ltd. 1960 Indlaw SC 350 (SC), the income in question did not form part of total income of the previous year, and as the Finance Act has not been worded in a manner that such income other than total income could be brought to tax, the charge fails.

(c) In the case of Madurai District Central Co-operative Bank Ltd. 1975 Indlaw SC 330 (SC), the income in question was in fact part of the total income of the previous year, though exempt, and thus the wording in the Finance Act was sufficient to uphold the levy.

144 In the case on hand, the “undisclosed income” for a “block period” is different from “total income” of a “previous year” and as the Finance Act only refers to the “total income” of a “previous year”, the ratio of the judgment in the case of Elphinstone Spinning and Weaving Mills Co. Ltd. 1960 Indlaw SC 350 (SC) applies on all fours.

145 What has to be seen in this case is whether a distinct and independent charge has been created in the Finance Act de hors the Income-tax Act, that is, proviso to section 4(1) and section 158BA(2), and whether any of the Finance Acts levy surtax on any income, which is expressly not part of “total income” of a “previous year”. A plain reading of the Finance Acts shows that nowhere the concept of “undisclosed income” or “block period” has been mentioned and the rates are only regarding “total income” of a “previous year”.

146 Coming to section 2(8) of the Finance Act, relied upon by learned senior standing counsel of the Revenue, at page 8 of the written submissions, after reproducing the provision, it is stated as follows :

“From the above, it is evident that Parliament has specifically provided for charging of surcharge in respect of the advance tax payable for the year 1999.”

147 Thereafter, Part-III of the First Schedule was extracted. We find that section 2 of the Finance Act is only in relation to “total income” of an “assessment year” and that there is not even a remote reference to “undisclosed income” computed for a “block period”. In fact, in Part-III of the First Schedule under Paragraph “A”, surcharge on income-tax, clause (i) in the case of individuals or HUF’s or AOP’s or BOI’s, the surcharge is not applicable to persons having “total income” below Rs. 60, 000 and rebate of income-tax under Chapter VIII-A is specified. Such rebate under Chapter VIII-A and “total income” below Rs. 60, 000 is contrary to provisions of Chapter XIV-B, as they are not contemplated in Chapter XIV-B. Thus, we have to conclude that there is no independent and separate charge brought about by the Finance Act for levying surcharge on “undisclosed income” of a “block period”. We hold that section 2(8) of the Finance Act, 1999, does not advance the propositions canvassed by the Revenue. The very fact that tax has to be deducted at source on a particular income and the fact that advance tax is required to be paid on a particular income as per section 2(8) of the Finance Act, take the income referable to such TDS or advance tax outside the scope of the definition of “undisclosed income” as contained under section 158B(b). No reasonable person would assume that an asses-see would have suffered TDS and/or would have voluntarily paid advance tax on a particular income with an intention not to disclose such income for the purposes of the Income-tax Act. The courts have laid down that when regular entries have been made in the books of account and when the due date for filing of the return has not expired, and in cases where advance tax and TDS were made on such income, the income relatable to the entries recorded in the books of account and other documents maintained in the normal course on or before the date of search, cannot be considered as undisclosed income for the purposes of Chapter XIV-B and this proposition has been made clear through the amendment by the Finance Act, 2002, with effect from July 1, 1995, by the insertion of clause (c) to section 158BB(1) of the Act as well as from section 158BA(3). This interpretation of law is supported by the case law following :

(a) Asst. CIT v. A. R. Enterprises 2004 Indlaw MAD 396 (Mad) ;

(b) Dr. Mrs. Alaka Goswami v. CIT 2004 Indlaw GUW 32 (Gauhati) ; and

148 The very fact that the proposal to levy surcharge has found a place for the first time in Part-Ill of the First Schedule read with section 2(8) of the Finance Act, clearly demonstrates that the mention of section 113 therein, is in direct conflict with the provisions of Chapter- XIV-B of the Income-tax Act. Such a mention in the Finance Act is against the concept of assessment of “undisclosed income for a block period”. As the question of payment of advance tax on undisclosed income simply does not arise, there is no question of levy of surcharge on such assumed advance tax liability on undisclosed income. This clearly shows that the reference to section 113 in section 2(8) of the Finance Act is unintended and is also a drafting error. Section 2(1) of the Finance Act, 1999, reads as under :

“2.(1) Subject to the provisions of sub-sections (2) and (3), for the assessment year commencing on the 1st day of April, 1999, income-tax shall be charged at the rates specified in Part-I of the First Schedule.” (emphasis1 is ours)

149 Even section 2(8) refers to the liability of an assessee in respect of total income of a previous year and not to undisclosed income in a block period. Thus, both section 2(1) and section 2(8) of the Finance Act, which refer to an assessment year commencing from a particular date, or the previous year relevant to that assessment year, do not provide for a separate and independent levy of a separate tax on “undisclosed income of a block period”. On the contrary a proposal to levy surcharge on advance tax on undisclosed income is in direct conflict with the very concept of “block assessment” and “undisclosed income” contemplated under Chapter XIV-B. It would be ridiculous to take a view that a person would pay advance tax and surcharge thereon, in anticipation of a search taking place at his residence, and that such income which suffered tax would be treated as undisclosed income, and it would not be proper to assume that the Legislature wanted the assessees to pay advance tax on undisclosed income. In the Finance Act, the proviso relating to levy of surcharge was for the first time found under the rates prescribed for advance tax payments, i.e., Part-Ill. It can be safely concluded that it was never the intention of the Legislature to levy surcharge on tax on undisclosed income relatable to a block period for the period under dispute. There is no charging section in the Finance Act with a clear intendment or levy fastened on undisclosed income of a block period. The levy is only on “total income” of a “previous year” as contemplated in section 5 of the Act. The language of the Finance Act does not make the “undisclosed income” of a “block period” to be part of a “total income”.

150 Now we consider the legal propositions on the issue of interpretation of these sections. It is well-settled that the charging provision, which imposes a charge of tax, must be construed strictly. The hon’ble Supreme Court in the case of CWT v. Ellis Bridge Gymkhana 1997 Indlaw SC 1610, held as follows (as per headnote) :

“The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all.” (emphasis1 is ours)

151 In the case of CIT v. Shahzada Nand and Sons 1966 Indlaw SC 236, at 399 to 401, the hon’ble Supreme Court observed as follows :

“Mr. Palkhivala, learned counsel for the respondents, answered this criticism thus. In a taxing Act one has to look merely at what is clearly stated and, if the interpretation is open to doubt, the construction most beneficial to the subject must be adopted. Section 34(1)(a), before it was amended in 1956, provided for the genus out of which, by the Income-tax (Amendment) Act, 1959, the species of section 34(1A) was carved out. While section 34(1) (a) was a general provision, section 34(1A) was a special provision. On the principle of generalia specialibus non derogant the field covered by section 34(1A) should be excluded from that covered by section 34(1)(a). If that was the legal position before the 1956 amendment, the argument proceeded, the same position would continue thereafter, as Parliament retained section 34(1A), along with its provisos, as it stood before the amendment and amended only section 34(1)(a). The lifting of the bar of limitation, therefore, should, on the basis of the said doctrine, be confined to the field covered by section 34(1) (a) before the amendment. If Parliament intended to do away with the period of limitation in respect of the escaped incomes during the war period, it would not have retained section 34(1A) on the statute book ; for, in that event, it would serve no purpose. It would be wrong to say that it ceased to be operative after April 1, 1956, for the period of limitation would still apply to proceedings in respect of escaped incomes of the war years. Sub-section (4) added in section 34 in the year 1959 and section 34(1B), as amended in 1956, would not throw any light on the question, but in a way would support the view that they were concerned only with the escaped incomes covered by section 34(1) (a), excluding therefrom those covered by section 34(1A). The argument based on the alleged anomaly led nowhere and indeed the retention of section 34(1A) on the statute book was intentionally done, as Parliament, having already placed a particular class of assessees under a special and heavy burden, did not think fit to make any provision which was likely to harass them further. The ambiguity in the section, if any, should go for the benefit of the taxpayer and not the tax-gatherer. This argument was accepted by the Madhya Pradesh and the Gujarat High Courts in Rustomji v. ITO 1963 Indlaw MP 23 (MP) and Mathurdas Govinddas v. G. N. Gadgil, ITO 1963 Indlaw GUJ 31.

Before we advert to the said arguments, it will be convenient to notice the relevant rules of construction. The classic statement of Rowlatt J. in Cape Brandy Syndicate v. Inland Revenue Commissioners 1970 Indlaw SC 14, 71 still holds the field. It reads :

‘In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.’

To this may be added a rider : in a case of reasonable doubt, the construction most beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the same for all statutes, whether fiscal or otherwise. The underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the court as to what is just or expedient. The expressed intention must guide the court. Another rule of construction which is relevant to the present enquiry is expressed in the maxim, generalia specialibus non derogant which means that when there is a conflict between a general and a special provision, the latter shall prevail. The said principle has been stated in Craies on Statute Law, 5th edition, at page 205, thus :

‘The rule is, that whenever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative, and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply’.

But this rule of construction is not of universal application. It is subject to the condition that there is nothing in the general provision expressed or implied, indicating an intention to the contrary : see Maxwell on the Interpretation of Statutes, 11th edition, at pages 168-169. When the words of a section are clear, but its scope is sought to be curtailed by construction, the approach suggested by Lord Coke in Hey don’s case [1584] 3 Rep. 7b yields better results.

‘To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act; to consider according to Lord Coke ; 1. What was the law before the Act was passed ; 2. What was the mischief or defect for which the law had not provided ; 3. What remedy Parliament has appointed ; and 4. The reason of the remedy.’ (emphasis1 supplied by us)

152 In the case of Vikrant Tyres Ltd. v. First TTO 2001 Indlaw SC 20991 at 826, the hon’ble Supreme Court held as follows :

“It is settled principle in law that the courts while construing revenue Acts have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning thereby that no tax or levy can be imposed on a subject by an Act of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject. In this process, the courts must adhere to the words of the statute and the so-called equitable construction of those words of the statute is not permissible. The task of the court is to construe the provisions of the taxing enactments according to the ordinary and natural meaning of the language used and then to apply that meaning to the facts of the case and in that process if the taxpayer is brought within the net he is caught, otherwise he has to go free. This principle in law is settled by this court in India Carbon Ltd. v. State of Assam 1997 Indlaw SC 2083 (SC);1997 Indlaw SC 2083 wherein this court held (page 464) ‘Interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf. A Constitution Bench of this court speaking through one of us (S. P. Bharucha J.) in the case of V. V. S. Sugars v. Government of A. P. 1999 Indlaw SC 374; 1999 Indlaw SC 374 reiterated the proposition laid down in the India Carbon Ltd.’s case 1997 Indlaw SC 2083(SC);

153 Applying the above ratio decidendi to the case on hand, we have to hold that as neither section 2(1) nor section 2(8) of the Finance Acts brings to tax, by way of a distinct and separate charge, the undisclosed income of a block period computed as per Chapter XIV-B and as levy of surcharge in block assessments cannot be brought within the ambit of these charging sections, the levy has to fail. The charging section has to be construed strictly. The proviso to section 4 and section 158BA(2), which are charging sections for undisclosed income of a block period computed under Chapter XIV-B, do not authorise levy of surcharge or even tax by any Central Act. The Finance Acts deal with only total income of a previous year. Thus, unless there is a distinct and separate levy under the Central Act, on undisclosed income of a block period which satisfies the tests laid down by the hon’ble Supreme Court in the case of Govind Saran Ganga Saran 1985 Indlaw SC 418, the levy cannot be upheld.

154 The Revenue relied on the judgment of the hon’ble Supreme Court in the case of CIT v. Hindustan Bulk Carriers 2002 Indlaw SC 1574; 2002 Indlaw SC 1574 at page 74, paragraphs 14 to 21, wherein it was stated as follows (page 464) :

“14. A construction which reduces the statute to a futility has to be avoided. A statute or any enacting provision therein must be so construed as to make it effective and operative on the principle expressed in the maxim utres magis valeat quam pereat i.e., a liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect the intention of the parties [See Broom’s Legal Maxims (10th Edn.), page 361, Crazes on Statutes (7th Edn.), page 95 and Maxwell on Statutes (11th Edn.), page 221].

15. A statute is designed to be workable and the interpretation thereof by a court should be to secure that object unless crucial omission or clear direction makes that end unattainable. (see Whitney v. Commissioners of Inland Revenue [1926] A.C. 37 (HL) at page 52 referred to in CIT v. S. Teja Singh 1958 Indlaw SC 54(SC) and Gur-sahai Saigal v. CIT 1962 Indlaw MUM 41.

16. The courts will have to reject the construction which will defeat the plain intention of the Legislature even though there may be some inexactitude in the language used (see Salmon v. Duncombe [1886] 11 A.C. 627 at page 634, Curtis v. Stovin 1889 (22) QBD 513 referred to in S. Teja Singh case 1958 Indlaw SC 54(SC)).

17. If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, we should avoid a construction which would reduce the legislation to futility, and should rather accept the bolder construction, based on the view that Parliament would legislate only for the purpose of bringing about an effective result (See Nokes v. Doncaster Amalgamated Collieries Ltd. [1940] A.C. 1014; [1940] A.C. 1014 (HL) referred to in Pye v. Minister for Lands for New South Wales [1954] 3 All E.R. 514; [1954] 1 W.L.R. 1410 (PC)). The principles indicated in the said cases were reiterated by this court in Mohan Kumar Singhania v. Union of India, 1991 Indlaw SC 814.

18. The statute must be read as a whole and one provision of the Act should be construed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute . . .

21. The provisions of one section of the statute cannot be used to defeat those of another unless it is impossible to effect reconciliation between them. Thus a construction that reduces one of the provisions to a ‘useless lumber’ or ‘dead letter’ is not a harmonised construction. To harmonise is not to destroy.” (emphasis1 supplied by underlining)

155 The Revenue further relied upon the judgment of the hon’ble Supreme Court in the case of Sultana Begum v. Prem Chand Jain 1996 Indlaw SC 1760, at 381, para. 15, in which it was held :

“On a conspectus of the case law indicated above, the following principles are clearly discernible :

(a) It is the duty of the courts to avoid a head-on clash between two sections of the Act and to construe the provisions which appear to be in conflict with each other in such a manner as to harmonise them.

(b) The provisions of one section of a statute cannot be used to defeat the other provisions unless the court, in spite of its efforts, finds it impossible to effect reconciliation between them.

(c) It has to be borne in mind by all the courts all the time that when there are two conflicting provisions in an Act, which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This is the essence of the rule of ‘harmonious construction’.

(d) The courts have also to keep in mind that an interpretation which reduces one of the provisions as a ‘dead letter’ or ‘useless lumber’ is not harmonious construction.

(e) To harmonise is not to destroy any statutory provision or to render it otiose.”

156 It is true that a construction which reduces a statute to a futility, has to be avoided. But, if the taxing statute fails in reflecting its intendment clearly, courts cannot help the draftsmen by a favourable construction, as observed by the apex court in the case of Elphinstone 1960 Indlaw SC 350 at page 150. In the instant case, the language in the Finance Act, 1999, unhesitatingly goes to show that it was a drafting error and levy of surcharge on undisclosed income of a block period was not levied by a charging section and even if it is held otherwise the levy is not workable. As explained in the earlier paragraphs, the concept of “undisclosed income” of a block period was intended to be applicable to persons who have never intended to disclose either whole or a part of their taxable income and such persons would have obviously not paid advance tax or deducted tax at source. If the plain language of the Finance Act has to be given effect to, it has to be assumed that the Legislature intended such assessees to pay advance tax on which surcharge is also payable, but such interpretation would affect the very purpose of Chapter XIV-B. The crucial omission in the charging sections and ambiguity makes the object of harmonisarion, liberal construction, unattainable. On the other hand, we hold that the plain intention of the Legislature was never to levy surcharge on undisclosed income of a block period prior to June 1, 2002, when the statute is read as a whole. When there is no charge, there cannot be a levy. The imposition of such a levy by the Finance Act does not mesh in with either the proviso to section 4(1) or the provisions of section 158BA(2), read with section 113 of the Act or Chapter XIV-B itself. Our interpretation does not destroy any statutory provision, as there is no charging section in the Finance Act. When there is no charge, the question of rendering it otiose does not arise. When there was no intention on the part of the Legislature to levy surcharge, either expressly or by implication and as there is no charging or procedural provision for levying the same, the question of making any provision a “dead letter” or a “useless lumber” does not arise. There is no clash between any two Acts or sections. The only question is as to whether there is a charging section under the Finance Act to levy surcharge on undisclosed income of a block period.

157 The Revenue also relied on the judgment of the hon’ble Supreme Court in Sarwan Singh v. Kasturi Lal, 1976 Indlaw SC 424, wherein it was held as follows (page 275) :

“The argument of implied repeal has also no substance in it because our reason for according priority to the provisions of the Delhi Rent Act is not that the Slum Clearance Act stands impliedly repealed pro tanto. Bearing in mind the language of the two laws, their object and purpose, and the fact that one of them is later in point of time and was enacted with the knowledge of the non obstante clauses in the earlier law, we have come to the conclusion that the provisions of section 14A and Chapter IIIA of the Rent Control Act must prevail over those contained in sections 19 and 39 of the Slum Clearance Act.”

158 This proposition was relied upon for submitting that the Finance Acts being subsequent laws, as section 158BA(1) was introduced by the Finance Act, 1995, whereas the levy of surcharge was introduced by the Finance Acts, 1996 to 1998, and hence the subsequent laws have to be given effect to. This contention of the Revenue cannot be accepted for the reason that it was by the Finance Act, 1995, that Chapter XIV-B of the Income-tax Act, 1961, was introduced and it is in the same Finance Act, under section 2(7) reference to section 113 has appeared for the purpose of payment of advance tax as well as deduction of tax at source. Thus, the Finance Act though a subsequent legislation, it does not have independent charging sections and thus the argument that subsequent legislation overrides earlier legislation does not hold water. No doubt the Income-tax Act does not override the Finance Act. Even otherwise, we have found that there is no distinct charge in the Finance Act for levy of the impugned surcharge. Thus, the argument that the interpretation which holds that the levy of surcharge prior to June 1, 2002, amounts to ignoring a relevant piece of legislation which is admittedly found in the statute book, does not hold water. There is no such valid levy in the statute book. In fact, the Revenue, in its written submissions, at page 12 paragraph 19, stated as follows :

“19. In Elphinstone’s case 1960 Indlaw SC 350 the hon’ble Supreme Court construed the relevant provision as amounting to not creating a charge. There is no controversy with regard to proposition that if the charge fails, question of taxing the assessee, does not arise.” (emphasis1 supplied)

159 Our finding in this case is that in the Finance Act, there is no distinct and independent charge whereby surcharge can be said to have been levied on undisclosed income determined for a block period under Chapter XIV-B.

160 Even otherwise, we find that the Finance Act (s), prior to amendment in section 113 of the Act, did not satisfy the four components which enter into the concept of tax and some of these components are not clearly and definitely ascertainable, in order to be treated as an independent and distinct levy/charge which is workable and practicable as explained hereunder :

(a) The levy of surcharge was totally dependent on the assessee’s liability to pay tax on “undisclosed income” for the “block period” ;

(b) The rate for imposition of surcharge was unknown since the relevant date for imposition of surcharge, as admitted by standing counsel during the course of hearing, was in doubt. It was not known as to which date was relevant for determining the imposition of surcharge as there are different rates for different dates. There was ambiguity as it was not known which of the following rates would apply :

(i) The rate applicable for the year in which search was initiated ; or

(ii) The rate applicable for the year in which search was concluded ; or

(iii) The rate applicable for the year in which the block assessment proceedings under section 158BC were initiated ; or

(iv) The rate applicable for the year in which the block assessment order was passed ;

(v) As a block period consists of an aggregate of several previous years and as each previous year had a separate rate of surcharge, whether the rate most favourable to the assessee was to be adopted.

(vi) If the Revenue’s contention that the concept of previous year and assessment year are to be applied to block assessments, is to be accepted, then, whether the rate of surcharge of a particular assessment year is to be applied to the undisclosed income relatable to that particular assessment year in a block period, thereby applying different rates of surcharge to undisclosed income after apportioning it to different assessment years ?

Further, in the case of proceedings under section 158BD of the Act it was ambiguous whether either of the above rates was relevant or rate applicable on the date of initiation of the proceedings under that section or on the date on which block assessment order was passed under that sec-ion was relevant. Since the relevant date for imposition of surcharge was in doubt, the relevant rate for imposition of surcharge was also in doubt prior to amendment in section 113 of the Act.

(c) There was contradiction in basis in the provisions of the Finance Act(s) inasmuch as both Part I of the First Schedule and Part III of the First Schedule referred to levy of surcharge.

161 The applicability of either of the rates would have resulted in absurdity as explained hereunder :

A Finance Act contains proposals for the following financial year e.g. Finance Act, 2001 contains the proposals for the finance year 2001-02. Every Finance Acthas the First Schedule, which comprises three Parts as under :

-Part I of the First Schedule refers to rate of taxation for the assessment year beginning on 1st April and preceding the year in respect of which proposals are introduced. So Part I of the Finance Act, 2001 contains rates for the assessment year 2001-02 ;

-Part II of First Schedule refers/contains rates for deduction of tax at source during the current year ;

-Part III of the First Schedule refers/contains the rates for the following assessment year. So Part III of the Finance Act, 2001 contains rates for the assessment year 2002-03.

162 The relevant Finance Act(s) from 1996 to 2001 referred to surcharge in the context of section 113 as under :

Vinnnrp Act	Relevant section of the Finance Act	“A”	“B”	Relevant section of the Finance Act	“C”	“D”
Finance (No. 2) Act, 1996	First proviso to section 2(3) refers to rate in Fart I	15%	Nil	Second proviso to section 2(8)refers to rate in Part III	7.5%	Nil
Finance Act, 1997	First proviso to section2(3) refers to rate in Fart I	7.5%	Nil	Nil	N.A.	N.A.
Finance (No. 2) Act, 1998	Nil	N.A.	N.A.	Nil	N.A.	N.A
Finance Act, 1999	Nil	N.A.	N.A.	Second proviso to section 2(8)	10%	10%
Finance Act, 2000	First proviso to section2(3) refers to rate in Part I	10%	10%	Second proviso to section 2(8) refers to rate in Part III	10%	10%/15%
Finance Act, 2001	First proviso to section rate in Part I	13%	12%/17%	Second proviso to section 2(8) refers to rate in Part III	2%	2%

“A”-Rates for companies as per Part I

“B”-Rates for individuals as per Part I

“C”-Rates for companies as per Part III

“D”-Rates for individuals as per Part III

163 From the above, it will be noticed that as per the proviso to section 2(3) of the Finance Act, 2001, surcharge is to be levied at the rates specified in Part I of the First Schedule. In some years the second proviso to section 2(8) referred to Part III of the First Schedule.

164 In the case of search initiated/conducted on August 1, 2001, the Revenue relies upon the proviso to section 2(3) of the Finance Act, 2001 to levy surcharge, which refers to Part I of the First Schedule. Part I of the Finance Act, 2001, contains the rates of tax for the assessment year 2001-02, whereas the assessment year relevant to the date August 1, 2001, is 2002-03. In such circumstances, the levy of surcharge as per the rate specified in Part I of the First Schedule is clearly illegal as held by the hon’ble Supreme Court in the case of Karimtharuvi Tea Estate Ltd. v. State of Kerala 1965 Indlaw SC 357. In that case, the assessee-company was assessed to agricultural income-tax under the Kerala Agricultural Income-tax Act, 1950, for the assessment year 1957-58. In the assessment, a surcharge at the rate of 5 per cent. on the agricultural income-tax and super-tax was also levied and collected from the company under the provisions of the Kerala Surcharge on Taxes Act, 1957 (XI of 1957). The company objected to the imposition of surcharge on the ground that the law in force on April 1, 1957, should be the law applicable to the assessment for 1957-58. The Surcharge on Taxes Act came into force only from September 1, 1957, and did not have any retrospective effect. Their Lordships of the Supreme Court observed as under (page 264) :

“Now, it is well-settled that the Income-tax Act, as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force. . . .

In the instant case, there is no escape from the conclusion that the Surcharge Act not being retrospective by express intendment, or necessary implication, it cannot be made applicable from April 1, 1957, as the Act came into force on September 1 of that year.

The Surcharge Act having come into force on September 1, 1957, and the said Act not being retrospective in operation, it could not be regarded as law in force at the commencement of the year of assessment 1957-58. Since the Surcharge Act was not the law in force on April 1, 1957, no surcharge could be levied under the said Act against the appellant in the assessment year 1957-58.” (emphasis1 supplied)

165 Even if the argument of the Revenue that the concepts of “previous year”, “assessment year” as well as “determination of income for each of the previous years” are not disturbed by the scheme of Chapter XIV-B, is to be accepted, then it would logically follow that in such a situation, the total income determined in each of the previous years should be subject to levy of surcharge at the rates applicable to those very previous years only. Such a construction is against the proposition sought to be put forward by the Revenue that the date of search is the triggering event for the applicability of Chapter XIV-B and that it was clarified in the proviso to section 113 introduced by the Finance Act, 2002, that the rate of surcharge applicable for the date of search should be the rate that should be applied.

166 It may not be out of context to mention, at this juncture that the Legislature, whenever desired, specifically made a mention of the tag of surcharge accompanying the leviable tax in specific instances. For example, under sections 161 to 164A of the Income-tax Act, incomes of certain assessees, in certain circumstances were subject to tax at maximum marginal rate. The term “maximum marginal rate” has been defined in section 2(29C), brought on to the statute book, by the Direct Tax Laws (Amendment) Act, 1987 with effect from April 1, 1989, as “the rate of income- tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year”. Prior to insertion of section 2(29C), the said term “maximum marginal rate” was defined on the very same lines, under the relevant provisions of sections 161 to 164A itself. Similarly, even in the matter of quantification of penalties for concealment of income, etc. leviable under theIncome-tax Act, the Department goes by only the tax sought to be evaded and for that purpose does not take into account the tag of surcharge in relation to such tax sought to be evaded. The Department, which is very correctly going by the wording of the statute while, quantifying the penalties for concealment of income leviable under the Act, is unjustifiably seeking to add the levy of surcharge while computing the tax in relation to undisclosed income determined in a block assessment.

167 Thus, we conclude that the levy of surcharge, prior to introduction of the proviso to section 113 with effect from June 1, 2002, is riddled with complexity to the extent of making it unworkable and impossible to harmonise and, therefore, the levy fails.

168 In the result, the question referred to us by the hon’ble President is answered in the negative, against the Revenue and in favour of the asses-see;.

169 Now, the matter shall go back to the concerned Division Bench to dispose of the appeal in the light of the above answer to the question referred to this Special Bench.