C.I.T.,Jalandhar vs Rajiv Bhatara

Commnr. of Income Tax, ..... Appellant Jalandhar-I

Versus

Shri Rajiv Bhatara ....Respondent

JUDGMENT

Dr. ARIJIT PASAYAT, J

1. Leave granted.

2. Challenge in this appeal is to the judgment of a Division Bench of the

Punjab and Haryana High Court dismissing the appeal filed under Section

260(A) of Income Tax Act, 1961 (in short the `Act'). In the said appeal,

challenge was to the order dated 01.7.2006 passed by the Income Tax

Appellate Tribunal Amritsar Bench, Amritsar (in short the `Tribunal'). The

dispute related to the block period 1.4.1990 to 3.7.2000. The question

which arose for consideration is as follows:

"Whether, on the facts and in the circumstances of the

case, the ITAT was right in law in confirming the CIT

(A)'s order directing not to levy surcharge on the tax

worked out on the undisclosed income as the case

pertains to a search conducted period to 1.6.2002?".

3. Factual position in a nutshell reads as follows:

Search was conducted on 6.4.2000. The Assessing Officer in his

order dated 22.5.2002 imposed surcharge and an application under Section

154 of the Act filed by the assessee for rectification was dismissed vide

order dated 17.9.2003 with the observation that the surcharge was levied as

2 per the provisions of Part I of the Ist Schedule appended to Finance Act,

2000. On the ground that there was no mistake apparent on the record, the

application under Section 154 of the Act was rejected. However, the

Commissioner of Income Tax (Appeals), Ludhiana, (for brevity the CIT

(A)') reversed the order passed by the Assessing Officer and took the view

that surcharge was not leviable in cases where the search has taken place

prior to 1.6.2002. In that regard, reliance was placed on a Division Bench

judgment of this Court in the case of CIT v. Ram Lal Bahu Lal (148 CTR

643).

On further appeal by the Revenue the Tribunal upheld the order dated

12.9.2005 passed by the CIT (A) holding that the search in the present case

took place on 6.4.2000 which was much prior to the date of amendment

made in Section 113. The amendment was incorporated on 1.6.2002 by

inserting proviso to Section 113 by Finance Act, 2002. It was by the

amendment that levy of surcharge on the disclosed income was specifically

provided w.e.f. 1.6.2002. The provision has not been given retrospective

effect, and therefore, the Tribunal held that it applied only to cases where

searches were carried out after 1.6.2002.

3 The High Court dismissed the appeal relying on its decision in the

case of CIT v. Roshan Singh Makkar (2006) 287 ITR 160 and also referred

to two other decisions of the Madras High Court in CIT v. Neotech

Company [(2007) 291 ITR 27] and CIT v. S. Palanivel [(2007) 291 ITR 33].

4. Learned counsel for the appellant submitted that the case at hand is

squarely covered by a decision of this court in Commissioner of Income

Tax, Central II v. Suresh N. Gupta [2008(4) SCC 362].

5. The power to levy a surcharge on income tax is traceable to Article

271 read with Entry 82 of List I of Schedule VII to the Constitution of

India, 1950 (in short the `Constitution'). That power is not traceable to

Section 4 of the Act. Every year the Finance Act is enacted by Parliament to

give effect to the financial proposals of the Central Government. The rate at

which a charge on the total income of the previous year is imposed under

Section 4(1) of the Act is not laid down in the Income Tax Act and,

therefore, the said Section provides that the charge has to be fixed by the

Central Act. It is because of this, that income tax is levied at different rates

under the Finance Act.

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6. In order that the charge should be a legal charge under Section 4, it

must be a tax on the income of the assessee. If the charge is the tax on

anything else, then it would not be a valid charge. That is the only

limitation upon the power or authority of Parliament to fix any rate it

pleases. So long as the charge is on `total income' of the previous year,

there is no limitation upon the power or authority of Parliament to fix any

rate if pleases. The Income Tax Act, therefore, contains an elaborate

machinery for ascertaining "total income" of an assessee. Section 4(1)

prescribes the subject matter of the tax and the rate of that tax is prescribed

by the legislature, either under the Act as in the case of Section 113 or vide

the Finance Act.

7. The purpose of Chapter XIV is to lay down a special procedure for

assessment of surcharge cases with a view to combat tax evasion and also to

expedite and simplify assessments in search cases. Undisclosed incomes

have to be related in different years in which income was earned under

block assessment. This is because in such cases, the "block period" is for

previous years relevant to 10/6 assessment years and also the period of the

current previous year up to the date of the search. The essence of this new

procedure, therefore, is a separate single assessment of the "undisclosed

5 income", detected as a result of search and this separate assessment has to

be in addition to the normal assessment covering the same period.

Therefore, a separate return covering the years of the block period is a

prerequisite for making block assessment. Under the said procedure,

Explanation is inserted in Section 158-BB, which is computation Section,

explaining the method of computation of "undisclosed income" of the block

period.

8. If the "block period", as defined in Section 158-B(a), comprises

previous years relevant to 10/6 assessment years is treated by Parliament as

one unit of time for assessment purposes, one has to correlate "undisclosed

income" to each of the years in which income was earned by the assessee.

9. Section 158-BB is required to be read with Section 4 of the Act, then

the relevant Finance Act of the year concerned would automatically stand

attracted to the computation under Chapter XIV-B. Section 158-BB looks at

Section 113. That Section fixes the rate of tax.

10. In the present case undisputedly Para A was applicable at the given

point of time. As a general concept, income tax includes surcharge.

6 Reading Section 2(1) of the Finance Act, 2001, it is clear that the term

`income tax' as used in Section 2(1) and proviso to Section 2(3) of the said

Act did not include the amount of surcharge. Surcharge was a separate item

of taxation, different from income tax. This was made clear vide Section 2

(1)(a), proviso to Section 2(3) and Para A of Part I to Schedule I.

11. Section 158-BA(2) read with Section 4 of the Act looks at Section

113 for the imposition rate at which tax has to be imposed in the case of

block assessment. That rate is 60%. That rate is fixed by the Act itself. That

rate has been stipulated by Parliament not with a view to oust the levy of

surcharge but to make the levy cost effective and easy. Therefore, a flat rate

is prescribed. The difficulty in block assessment is that one has to correlate

the undisclosed income to different years in which income is earned, hence,

Parliament has fixed a flat rate of tax in Section 113.

12. Though Parliament was aware of rate of tax prescribed by Section

113 and yet in the various Finance Acts, Parliament has sought to levy

surcharge on the tax in the case of block assessment. In the present case, the

assessing officer has applied the rate of surcharge at 17% which rate finds

place in Para A of Part I of Schedule I to the said Finance Act of 2001,

7 therefore, surcharge leviable under Finance Act was a distinct charge, not

dependent for its leviability on the assessee's liability to pay income tax but

on assessed tax.

13. Therefore, even without the proviso to Section 113 (inserted vide

Finance Act, 2002 w.e.f. 1.6.2002), Finance Act, 2001 was applicable to

block assessment under Chapter XIV-B in relation to the search initiated on

6.4.2000 and accordingly surcharge was leviable on the tax.

14. According to the assessee, prior to 1.6.2002, the position was

ambiguous as it was not clear even to the Department as to whether

surcharge was leviable with reference to the rates provided for in Finance

Act of the year in which the search was initiated or the year in which the

search was concluded or the year in which the block assessment

proceedings under Section 158 BC were initiated or the year in which block

assessment order was passed. To clear that doubt precisely, the proviso has

been inserted in Section 113 by which it is indicated that Finance Act of the

year in which the search was initiated would apply. Therefore, it has to be

held that the proviso to Section 113 was clarificatory in nature. It only

8 clarifies that out of the four dates, Parliament was opted for the date, namely

the year in which the search was initiated, which date would be relevant for

applicability of a particular Finance Act. Therefore, the proviso has to be

read as it stands.

15. The above position was highlighted in Suresh N. Gupta's Case

(supra).

16. There is no appearance on behalf of the Assessee-respondent in spite

of service of notice.

17. In view of what has been stated in the aforesaid case the inevitable

result is that the appeal deserves to be allowed, which we direct. The

impugned order of the High Court in Tax Appeal No.587 of 2006 is set

aside and the departmental Civil appeal is allowed with no order as to costs.

.........................................J. (Dr. ARIJIT PASAYAT)

.........................................J. (Dr. MUKUNDAKAM SHARMA)

9 New Delhi, February 19, 2009

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