2008 (1) TMI 396 - SC - Income Tax

Whether, on the facts and circumstances of this case, the Finance Act, 2001 was applicable to block assessment under Chapter XIV-B in respect of the search carried out on January 17, 2001; secondly, whether the proviso inserted in section 113 by the Finance Act, 2002, is clarificatory? Whether Finance Act, 2001 was applicable to block assessment under Chapter XIV-B up to June 1, 2002 Held that - Even without the proviso to section 113 (inserted vide Finance Act, 2002, with effect from June 1, 2002), the Finance Act 2001, was applicable to block assessment under Chapter XIV-B in relation to the search initiated on January 17, 2001, and accordingly surcharge was leviable on the tax amounting to ₹ 97,456 at 17 per cent. amounting to ₹ 16,504. We accordingly answer the above question in favour of the Revenue and against the assessee. Prior to June 1, 2002, in several cases, tax was prescribed sometimes in the 1961 Act and sometimes in the Finance Act and often in both. This made liability uncertain. In the present case, however, the rate of tax in case of block assessment at 60 per cent. was prescribed by section 113 but the year of the Finance Act imposing surcharge was not stipulated. This resulted in the above four ambiguities. Therefore, clarification was needed. The proviso was curative in nature. Hence, the proviso inserted in section 113 merely clarifies that out of the above four dates, the relevant date for applicability of the Finance Act would be the year in which the search stood initiated under section 158BC. The impugned judgment of the High Court dated February 13, 2006, in Tax Appeal No. 1042 of 2005 and, accordingly, we allow the Department s civil appeal

Issues Involved:
1. Applicability of the Finance Act, 2001 to block assessment under Chapter XIV-B.
2. Whether the proviso inserted in section 113 by the Finance Act, 2002, is clarificatory and applicable to searches up to May 31, 2002.

Detailed Analysis:

1. Applicability of the Finance Act, 2001 to Block Assessment under Chapter XIV-B:

The case revolves around the imposition of a surcharge by the Assessing Officer on the tax amount under section 113 of the Income-tax Act, 1961, for a block period. The respondent-assessee challenged the surcharge, which was initially upheld by the Commissioner of Income-tax (Appeals), the Tribunal, and the High Court.

The court examined whether the Finance Act, 2001, was applicable to block assessments under Chapter XIV-B up to June 1, 2002. The court noted that Chapter XIV-B, inserted by the Finance Act, 1995, lays down a special procedure for assessment of undisclosed income found during searches. The assessee argued that Chapter XIV-B is a self-contained mechanism and does not reference the Finance Act for the imposition of surcharge. However, the court found no merit in this argument, citing Article 271 of the Constitution of India and section 4 of the 1961 Act, which allow Parliament to levy a surcharge on income-tax.

The court highlighted that the Finance Act is enacted annually to give effect to the financial proposals of the Central Government, including the imposition of income-tax at different rates. The court emphasized that the Income-tax Act deals with tax on income and that the charge must be a legal charge on the total income of the previous year. The court concluded that the block assessment under Chapter XIV-B retains the concepts of "previous years" and "total income," and thus, section 4 of the 1961 Act is not excluded from the block assessment procedure.

The court noted that section 158BB, which deals with the computation of undisclosed income, incorporates the principle of aggregation of total income of the previous years falling within the block period. The court stated that the Finance Act of the relevant year must be read into the block assessment scheme under Chapter XIV-B, even prior to June 1, 2002. Therefore, the court held that the Finance Act, 2001, was applicable to block assessment under Chapter XIV-B, and the Assessing Officer was correct in imposing a surcharge at 17 per cent.

2. Whether the Proviso Inserted in Section 113 by the Finance Act, 2002, is Clarificatory:

The court addressed whether the proviso inserted in section 113 by the Finance Act, 2002, was clarificatory and applicable to searches up to May 31, 2002. The assessee argued that the proviso could not operate retrospectively and that there was ambiguity regarding the levy of surcharge prior to the amendment.

The court found no merit in the assessee's arguments, stating that the Finance Acts of 2000 and 2001 created a substantive charge for income-tax, including surcharge. The court noted that the proviso inserted in section 113 clarified that the Finance Act of the year in which the search was initiated would apply. The court emphasized that the proviso was curative in nature and aimed to resolve ambiguities regarding the applicable Finance Act for the levy of surcharge.

The court cited the case of Allied Motors (P) Ltd. v. CIT, where it was held that a proviso inserted to remedy unintended consequences and make the provision workable should be treated as retrospective in operation. Therefore, the court concluded that the proviso inserted in section 113 by the Finance Act, 2002, was clarificatory and applicable to searches up to May 31, 2002.

Conclusion:

The court set aside the impugned judgment of the High Court and allowed the Department's civil appeal, holding that the Finance Act, 2001, was applicable to block assessment under Chapter XIV-B, and the proviso inserted in section 113 by the Finance Act, 2002, was clarificatory and applicable to searches up to May 31, 2002.

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