2006 (4) TMI 202 - AT - Income Tax

Block Assessment in search case - Levy of surcharge, is valid in a block assessment made u/s 158BC ? - block assessment in terms of section 158BA(2) r/w section 113 - whether there is a charging section under Finance Act to levy surcharge on undisclosed income of a block period - HELD THAT - In the case of search initiated/conducted on 1-8-2001, 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 1-8-2001 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 (12) TMI 35 - SUPREME COURT . 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 1-9-1957, and did not have any retrospective effect. 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 XIVB, 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 XIVB 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. 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, u/s 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 1-4-1989, 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 the Income-tax Act, 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 lax in relation to undisclosed income determined in a block assessment. Thus, we conclude that the levy of surcharge, prior to introduction of proviso to section 113 with effect from 1-6-2002, is riddled with complexity to the extent of making it unworkable and impossible to harmonise and, therefore, the levy fails. 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 assessee. 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.

Summary

Issues Involved:
1. Validity of the levy of surcharge under the Finance Act, 2002, in a block assessment made under section 158BC of the Income-tax Act.
2. Interpretation and application of section 113 of the Income-tax Act and its proviso.
3. Applicability of the Finance Act to block assessments and the concept of "undisclosed income" and "block period."
4. Legislative competence and retrospective application of amendments.
5. Harmonious construction of statutes and the principles of statutory interpretation.
6. Specific versus general provisions in the context of tax legislation.

Detailed Analysis:

1. Validity of the Levy of Surcharge:
The core issue was whether the levy of surcharge under the Finance Act, 2002, is valid in a block assessment made under section 158BC of the Income-tax Act. The Tribunal concluded that the levy of surcharge prior to the insertion of the proviso to section 113 with effect from 1-6-2002 is invalid. The Tribunal emphasized that the Finance Act, 2002, did not have retrospective effect and thus could not apply to block assessments for periods before its enactment.

2. Interpretation and Application of Section 113:
Section 113 of the Income-tax Act stipulates that the total undisclosed income of the block period shall be chargeable to tax at the rate of sixty percent. The proviso to section 113, inserted by the Finance Act, 2002, with effect from 1-6-2002, states 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. The Tribunal held that this proviso is neither retrospective nor declaratory and thus does not apply to block assessments for periods before its enactment.

3. Applicability of the Finance Act:
The Tribunal examined whether the Finance Act independently levied a surcharge on the undisclosed income of a block period. It concluded that the Finance Act did not provide a distinct and independent charge for levying surcharge on undisclosed income of a block period. The Finance Act's provisions were found to be ambiguous and unworkable concerning the levy of surcharge on such income.

4. Legislative Competence and Retrospective Application:
The Tribunal acknowledged the legislative competence of Parliament to impose a new levy or surcharge through the Finance Act. However, it emphasized that any such levy must be explicitly stated and cannot be applied retrospectively unless expressly provided by the legislation. The Tribunal cited various judicial precedents to support the principle that a tax provision imposing liability is governed by the normal presumption that it is not retrospective.

5. Harmonious Construction of Statutes:
The Tribunal discussed the principles of statutory interpretation, including the need for harmonious construction of statutes. It emphasized that a construction that reduces a statute to futility must be avoided. However, it also noted that if a taxing statute fails to reflect its intendment clearly, courts cannot help the draftsmen by a favorable construction.

6. Specific Versus General Provisions:
The Tribunal highlighted the principle of "generalia specialibus non derogant," which means that special provisions override general provisions. It concluded that Chapter XIVB of the Income-tax Act, which deals with block assessments, is a self-contained code and overrides the general provisions of the Act. The Tribunal held that the special provisions of Chapter XIVB must be applied independently of the general provisions of the Finance Act.

Conclusion:
The Tribunal concluded that the levy of surcharge on the tax charged under section 113 in respect of the undisclosed income of the block period from 1-4-1989 to 18-11-1999, which is prior to the insertion of the proviso to section 113, is not valid in law. The Tribunal emphasized the need for clear legislative intent and explicit provisions for the imposition of any new levy or surcharge.