K.L. Swamy v. the Commissioner of Income Tax & Anr.
M. R. SHAH, J.
1. As common question of law and facts arise in this group of
appeals, all these appeals are decided and disposed of together by this
common judgment and order.
2. In all these appeals, the dispute is with respect to levy of interest
under Section 158BFA(1) of the Income Tax Act in respect of assessment
completed under Section 158BD of the Act for belatedly filing the return
of income for the block period and also the levy of surcharg e under
Section 113 of the Income Tax Act.
3. For the sake of convenience Civil Appeal No.3706 of 2012
arising out of the impugned judgment and order passed by the High
Court in ITA No.277 of 2004, is being treated and considered as a lead
matter.
4. The facts leading to the present appeal in nut-shell are as under:
4.1 That the appellant is an individual and Director Partner in
Khoday Group of Company concerns. A search under Section 132 was
conducted in the residential premises of the family members of Khoday
Group and the warrant was issued in the name of M/s. Khod ay India
Limited. The appellant was served with the notice under Section 158BD
to file the return of income for the block period of 01.04.1986 to
13.02.1997. The appellant filed return for the block period in response to
notice under Section 158BD by including the undisclosed income of
Rs.45,00,000/- for the block period. The Assessing Officer levied interest
under Section 158BFA(1) for the period from 18.01.1998 to 19.01.1999
at the rate of 2% per month for 13 months and levie d interest of
Rs.7,12,296/- on the tax amount of Rs.27,49,600/-.
4.2 The appellant being aggrieved by the order of the Assessing
Officer filed an appeal before the learned CIT (A). It was the case on
behalf of assessee that levy of interest under Section 158 BFA(1) was
not justified. The learned CIT (A) held that Section 158BF A provides
for levy of interest for late filing of return of block assessment in response
to the notice under Section 158BC similar to the provisions of Section
234A. The CIT(A) also held that levy of interest under Section 234A is
compensatory in nature and is attracted the moment the re is a default.
The appellant – assessee being aggrieved by the order of CIT(A) filed
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR.
an appeal before the ITAT, Bangalore. Before the ITAT, it was contended
on behalf of assessee that provisions of Section 158BFA(1), the levy of
interest would be attracted only in a case where there was a failure or
delay in filing the return in response to notice under Section 158BC. It
was contended that in absence of any notice under Section 158BC, the
Assessing Officer was not justified in levying interest . It was also
contended that in Section 158BD after the words “that Assessing Officer
shall proceed” the words “under Section 158BC” was inserted w .e.f.
01.06.2002 by the Finance Act, 2002. It was contend ed that the
amendment was specifically brought to cure the anomaly and the fact
that it has been made prospective w.e.f. 01.06.2002 and therefore , the
interest cannot be validly levied under Section 158BFA(1) i n a case
where notice under Section 158BD was issued prior to 31.05.2002 and
in the present case the notice was issued on 28.11.1997. The le arned
ITAT allowed the appeal preferred by the assessee by ob serving that
Section 158BFA(1) inserted w.e.f. 01.01.1997, prescribes levy of interest
and never require to pay the self-assessment tax due along w ith the
return of income. Interest is leviable on undisclosed income determined
with the assessment. It was observed that 140A requiring to pa y self-
assessment tax along with the return of income filed under Se ction
158BC(a) was amended w.e.f. 01.06.1999 only. It was observed that in
the present case the return was filed on 19.01.1999 and at the relevant
point of time there was no provision to pay self-assessment tax along
with the return of income and therefore no interest was leviable unde r
Section 158BFA(1).
4.3 The revenue being aggrieved by the order passed by the ITAT,
filed an appeal before the High Court being ITA No.277 of 2004. By the
impugned judgment and order, the High Court has reversed the decision
of the ITAT. The High Court has observed that the amendment to Section
140A is of no consequence so far as determination of intere st under
Section 158BFA(1) is concerned. The High Court negat ived the
submission on behalf of the assessee that in absence of any specific
notice under Section 158BC, there shall not be any levy of interest under
Section 158BFA(1) on the submission that prior to the amendment by
including Section 158BC within the scope of Section 158BD by Finance
Act, 2002 w.e.f. 01.06.2002. So far as a notice under Section 158BD,
provision of Section 158BFA(1) was not attracted. The High Court has
observed and held that levy of provisions of Section 158BD prior to the
amendment in terms of Finance Act, 2002 i.e. before adding the words
697
“under Section 158BC”, section itself indicates the procedure that was
required to be followed by the Assessing Officer, is only in terms of the
very provisions of Chapter XIV-B of the Act and therefore Section
158BC as well as 158BFA(1) are even otherwise attracted a nd just
because the Legislature thought it fit to add or to mention Section 158BC
by way of amendment through Finance Act, 2002, it would not make
any difference to the earlier provision of Section 158BD which even
otherwise envisages within itself the provisions and applicability of Section
158BD and 158BFA(1). Consequently, the High Court has answered
the questions of law in favour of the revenue and against the assessee
and consequently allowed the said appeal.
4.4 Now so far as the levy of surcharge under Section 113 of the
Income Tax Act, the High Court has held the said question also in favour
of the revenue relying upon the decision of this Court in the c ase of
Commissioner of Income Tax vs. Suresh N. Gupta – (2008) 29 7
ITR 322 (SC).
4.5 Being aggrieved and dissatisfied with the impugned judgment
and order passed by the High Court, the assessee has prefer red the
present appeals.
5. Shri Preetesh Kapur, learned Senior Advocate has appea red
on behalf of the assessee – appellant and Shri Balbir Si ngh, learned
ASG has appeared on behalf of the Revenue.
6. Now, so far as the liability to pay the interest – applicability of
Section 158BFA to persons who have not been issued notice under Section
158BC prior to the amendment in Section 158BD by Finance Act, 2002,
it is vehemently submitted by Shri Kapoor, learned Senior Counsel
appearing on behalf of assessee that in the present case adm ittedly the
present assessee was never issued notice under Section 158BC , but
was issued notice only under Section 158BD. It is submitted that in fact
prior to amendment in Section 158BD by Finance Act, 2002, there was
no requirement to issue notice to the “other person” under Section 158BC.
It is submitted that in view of the above factual position, Section 158BFA
applies only where a return “as required by notice under Clause (a ) of
Section 158BC” has not been furnished within time. It is further submitted
that in absence of such notice under Clause (a) of Section 15 8BC, the
fundamental pre-requisite of the section is not fulfilled.
6.1 It is submitted that if on its plain words a section does not
apply then liability under that section cannot be imposed. It is submitted
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
that as consistently being held by this Hon’ble Court that for liability to
be fastened upon the assessee, it must be shown that he unambiguously
falls within the letter of the section. Reliance is placed on the decision of
this Court in the case of Mathuram Agrawal Vs. State of Madhya
Pradesh, (1999) 8 SCC 667 (Paras 13 and 14).
6.2 It is submitted that therefore since Section 158BFA does not
cover a situation where notice has been issued under Section 158BD, no
interest under that section can be recovered from the present assessee.
6.3 It is further submitted that the department’s argument before
the High Court was that amendment in Section 158BD vide Fina nce
Act, 2002, introducing the requirement of issuing notice under Section
158BC to the “other person”, applied even to pending proceedings is
erroneous and against the Constitution Bench decision of this Court in
the case of Commissioner of Income Tax (Central)-I, New Delhi
Vs. Vatika Township Private Limited – 2015 (1) SCC 1 (Para 28),
wherein the Constitution Bench has clearly laid dow n that the
presumption is that every amendment is prospective and the amendment
applies from the assessment year in which it is introduced.
6.4 It is further submitted that in any event, consequence of the
said argument will be that the entire block assessment (not just levy of
interest) would be rendered non-est inasmuch as this Court in the
aforesaid decision has laid down that where a section requires issuance
of notice such notice is a jurisdictional pre-requisite and in the absence
of such notice, the entire proceedings are liable to be quashed. Reliance
is placed on the decision of this Court in the case of Assistant
Commissioner of Income Tax and Anr. Vs. Hotel Blue Moon,
(2010) 3 SCC 259 (Para 22). It is submitted that in other words if the
amendment applied retrospectively, then issuance of notice under Section
158BC was mandatory even to the “other person” (being the as sessee
herein) and in the absence thereof the entire block asses sment would
fail.
6.5 It is submitted that even the submission on behalf of department
that issuance of notice under Section 158BC is a mere formali ty and
that no notice under Section 158BC is required to be issued to “other
person” even after the amendment to Section 158BD vide Finance Act,
2002, is concerned, it is submitted that the said submission is also erroneous
for the following reasons :
699
“(i) The said argument goes against the specific mand atory
language of section 158BD as it stands now namely. “…..and
that Assessing Officer shall proceed [under section 158BC]
against such other person …….”
{As submitted above, in view of the judgment of this Hon’ble
Court in Hotel Blue Moon, the issuance of a notice under the
specified section, would be a jurisdictional pre-requisit e, and
hence the entire block assessments would be rendered non-
est.}
(ii) Furthermore, the argument renders otiose the s pecific
amendment in section 158BD adding the words “under Section
158BC” vide Finance Act, 2002. If the Department’s
contention is correct then this amendment was unnecessary.
(iii) In any event, this argument does not answer the contention
of the assessee that section 158BFA on a plain reading, applies
only where a return “as required by a notice under clause (a)
of section 158BC” has not been furnished within time. In the
present case we are concerned with the limited issue of levy
of interest under section 158BFA. Even if {for the sake of
argument} notice under section 158BC is not mandatory, that
does not change the specific words of section 159BF A and
cannot bring within its net a person who has not been issued
a notice under section 158BC. On the other hand, th e
argument being raised by the assessee ensures that post 20 02
even the “other person” comes within the purview of section
158BFA.
(iv) This argument of the Department also goes again st the
specific pari materia provision namely section 153C. as right ly
pointe d out by the learne d AS G , pos t 31 st May, 2003, in case
of a search, the provisions of 153A to 153C apply an d that
section 153C is pari materia with 158BD.”
6.6 Making above submissions, it is prayed to hold that in absence
of the notice under Section 158BC, served upon the assessee – “ot her
person”, the Assessing Officer was not justified in levying the interest
under Section 158BFA.
6.7 Now, so far as the levy of surcharge under proviso to Section
113 of Income Tax Act is concerned, it is vehemently submitted that as
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
such the said question is now covered in favour of the assessee by the
Constitution Bench decision of this Court in the case of Vatika Township
Private Limited (supra) (Para 37 to 40). It is submitted that the decision
of this Court in the case of Suresh N. Gupta (supra) that has been
relied upon by the High Court in the impugned judgment has been
specifically overruled by the Constitution Bench in Vatika Township
Private Limited (supra) .
6.8 Now, so far as chargeability of interest under Section 158BFA
prior to 01.06.1999 in the case of persons issued notice under Section
158BC is concerned, it is submitted that interest only follows the principal.
In this case the principal being the tax payable. I t is submitted that in
other words the liability to pay interest cannot arise if there was no
liability to pay the tax itself along with the return, at the relevant point of
time. It is submitted that interest only being an element to compensate
the revenue for having been deprived of the tax, interest can start running
only once a liability to deposit tax arises.
6.9 It is submitted that in the present case it is clea r that neither
Section 158BC nor Section 158BFA require the assessee to p ay tax
along with the return. It is submitted that this liability to deposit the tax
along with return arises only under Section 140A. However, at the relevant
point of time Section 140A did not apply to Section 158BC and hence
there was no liability to deposit tax along with the return. It is submitted
that this lacuna was noticed by Parliament and by the Finance Act, 1999,
the words “Section 158BC” have been inserted in Section 140A w.e.f.
01.06.1999. It is submitted that for the period prior to 01.06.1999 th e
submission on behalf of the department that Section 158BFA is to be
seen independently from Section 140A may not be accepte d. It is
submitted that therefore at the relevant point of time the re being no
liability to deposit tax along with the return, there ca n be no levy of
interest” on that tax for mere failure to file return.
6.10 Making above submissions, it is prayed to allow the present
appeals and answer the issues / questions of law in favour of the assessee
and against the revenue.
7. All these appeals are vehemently opposed by Shri Balbir Singh,
learned ASG appearing on behalf of the revenue.
7.1 It is submitted that the present appeals arise out of s earch
conducted on 13.02.1997 in the Khoday Group of companies. All appeals
701
raised one common question regarding the levy of interest under Section
158BFA on the undisclosed income of the assessee. It is submitted that
pursuant to the search conducted on 13.02.1997, Section 158BD notice
was issued to the assessee (“other person”) to file retur n for the block
period 1987-88 to 1997-98, whereafter the Assessing Officer p assed
the order of assessment under Section 158BD and determined the income.
The Assessing Officer also levied interest under Section 158BFA(1) for
different periods, depending on the date of filing of return in each case.
It is submitted that pursuant to the notice issued to file return, there was
delay in filing return and Section 158BFA(1) being mandatory in nature
as per which the interest became payable and was liable to be paid by
the assessee after the due date stipulated in the notice and the date of
actual filing of return.
7.2 It is submitted that the interest under Section 158BFA(1) of
the Act is levied to compensate the government for dela y in filing or
non-filing of return by the assessee pursuant to determination under
Section 158BC / 158BD of the Act.
7.3 It is further submitted that subsequently, Section 140A (1) of
the Income Tax Act was amended by the Finance Act, 1999, w.e.f.
01.06.1999 incorporating Section 158BC making the assessee liable to
pay tax before furnishing return under Section 158BC and also file the
proof of payment along with return. By insertion of Section 158BC i n
Section 140A, the Legislature casts an additional onus on the assessee
to pay self-assessment tax under Section 140A (1) of the Inc ome Tax
Act when the return of income was filed in response to the notice under
Section 158BC. It is submitted that therefore it is very clear that when
the return was filed by the assessee for the block period under Section
158BC, there was no requirement to pay tax under Section 140A (1) of
the Income Tax Act and the entire liability was limited to period of delay
and not be delayed in payment of tax.
7.4 It is submitted that Chapter XIV-B of the Income Tax i s a
special provision with respect to “searched person” and “othe r than
searched person”. It is submitted that the scope and intent behind
introduction of Chapter XIV-B has been explained in detail by the Kerala
High Court in the case of P.P.Umerkutty Vs. ACIT – (2005) 279
ITR 213 Kerala . It is submitted that as explained by the Kerala High
Court in the aforesaid decision, the provision relating to block assessment
under Chapter XIV-B are self-contained note, providing for variation of
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
the manner in which the liability for payment of tax is dete rmined and
covering a situation where undisclosed income relatable to the block
period had not suffered tax only due to non-disclosure coming to light in
course of certain search proceedings etc.
7.5 It is submitted that the scheme of block assessment introduced
under Chapter XIV-B has been explained and consider ed by the
Constitution Bench of this Court in the case of Vatika Township Private
Limited (supra) . It is submitted that as observed by this Court, Chapter
XIV-B of the Act deals with block assessment which lays down a special
procedure for search cases. It is submitted that as obse rved, the main
reason for adding this provision in the Act was to curb tax evasion and
expedite as well as simplify the assessment in such searched cases. It is
submitted that even as observed and held by this Court in the aforesaid
decision Chapter XIV-B is a complete code in itself providing for self-
contained machinery for assessment of undisclosed income for the block
period of ten years or six years as the case may be.
7.6 It is submitted that the levy of interest under Section 158BFA(1)
is linked to the period of filing of return and that period al one is to be
taken into consideration particularly as the levy of interest being only for
delayed period of filing return. It is submitted that delay of interest is not
linked to delay in payment of taxes but due to delay in filing the return.
7.7 Insofar as the submission on behalf of the assessee that in
absence of any notice under Section 158BC to the “other person” prior
to the amendment in Section 158BD vide Finance Act, 2002 and thereby
entire block assessment would be rendered non-est and the submission
on behalf of the assessee that the amendment vide Finance Act, 2002 in
Section 158BD adding the words “under Section 158BC” would become
otiose it is vehemently submitted that the said contentions are without
any merit. Relying upon Notes of Clauses appended to Clause 64 of the
Finance Bill, 2002, whereby said words “under Section 158BC” was
inserted it is submitted that the words “under Section 158BC” in Section
158BD has been inserted so as to clarify that Assessing Of ficer shall
proceed against such “other person” under Section 158BC. It is further
submitted that Chapter XIV-B prescribes a special p rocedure for
computation of income for the block period in search and seizure cases.
Section 158BD indicates the procedure that was required to be followed
by Assessing Officer when any person other than a person with respect
to whom search was made. It is submitted that even bereft of clarificatory
703
amendment brought in vide Finance Act, 2002, Section 158BD provided
that provision of Chapter-XIV-B of the Act would apply accordi ngly
and therefore the provision of Section 158BC and 158BFA was attracted.
It is submitted that insertion of “under Section 158BC” only ma kes it
clear what was always existing under Section 158BD.
7.8 It is submitted that if the contention of the assessee that Section
158BFA would not be attracted unless notice under Section 158B C is
provided then for the period prior to the clarificatory amendment brought
in prior to Finance Act, 2002, is accepted, in that case, the provision of
Section 158BD will be rendered nugatory qua Section 158BFA. It is
submitted that such an interpretation will result in absurdity and the whole
intention behind Section 158BD being on the statute book will be lost.
7.9 Now so far as the chargeability of interest under Section
158BFA prior to 01.06.1999 in case of persons issued notice under Section
158BC and the submission on behalf of assessee that since the interest
only follows principal, the liability of payment of interest does not arise
as there was no liability to pay tax along with return, since at the relevant
point of time, Section 140A did not apply to Section 158BC , there was
no liability to deposit tax along with return, hence, there can be no levy
of interest on that tax for mere failure to file return, it is submitted that
the said contention runs contrary to the mandatory and compensat ory
language of Section 158BFA(1). Reliance is placed on Notes on Clauses
and the memorandum explaining amendment to Section 140A of the Act
more particularly Clause 63 by which it was sought to amend Se ction
140A of the Income Tax Act. It is submitted that a conjoint reading of
the Note on Clauses and the memorandum it is very clear that Legislature
originally intended to make assessee liable to pay taxes and interest
when the return was filed under Section 139 or under Section 142 o r
under Section 148. It is submitted by virtue of amendment the Legislature
proposed to make those assessees who are filing return unde r Section
158BC also liable to pay tax and interest under Section 140A. It is
submitted that memorandum explaining the provisions of Fin ance bill
further makes it clear that the existing provisions of Section 140A are
not applicable to Chapter XIV-B relating to assessme nt of income of
block period in search and seizure cases. The said memorandum also
recognizes that the admitted tax declared in return cannot be coll ected
till the assessment is completed. Therefore, the Legislature intended to
amend Section 140A by incorporating Section 158BC so as to make
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
liable those persons who are filing return under Section 158BC also.
Thus, by virtue of the amendment, a new class of assessee was brought
to the statute book whose income are subject to the asse ssment under
Chapter XIV-B, in Section 140A compelling them to pay self-assessment
tax. It is submitted that therefore if the Legislature wanted to apply the
provisions of Section 140A, they would have expressly stated so. The
very fact that there is no provision in Chapter XIV-B for applying provision
of Section 140A, clearly shows that Legislature never intended to apply
the provisions of Section 140A before 01.06.1999. This was also made
clear in the memorandum explaining the Finance Bill, 1999, by saying
that there is no corresponding provision in Chapter XIV-B for payment
of self-assessment tax at the time of filing the return. It is submitted that
therefore interest under Section 158BFA is leviable on stand-alone basis
for non-filing of return which ceases on the day return is fi led. It is
submitted that said provision is similar to Section 234A.
7.10 It is submitted that in the impugned judgment and order the
High Court has explained the rationale behind introduction of Section
158BC in Section 140A and has specifically held that “the liabi lity of
payment of interest does not stop merely on filing of return but it is
attracted in terms of Section 140A in payment of tax in terms of Section
and even now the provision of Section 158BFA(1) and 140A operate
independently”. It is submitted that in view of the same, the submission
on behalf of assessee to refute its liability to pay interest under Section
158BFA deserves to be negatived.
7.11 Now insofar as the levy of surcharge under proviso to Section
113 of the Income Tax Act is concerned Shri Balbir Singh, learned ASG
appearing for revenue has fairly conceded that the said issue has been
decided in favour of the assessee in terms of the decision of this Court in
the case of Vatika Township Private Limited (supra) .
8. Heard the learned counsels appearing on behalf o f the
respective parties at length. The questions of law posed for the
consideration of this Court in the present appeals are:(i) levy of interest
under Section 158BFA(1) of the Income Tax Act for late filing of the
return for the block period in absence of any notice under Section 158BC
of the Act and for the period prior to 01.06.1999? and (ii) the levy of the
surcharge under proviso to Section 113 of the Income Tax Act.
9. Now insofar as the levy of the surcharge under proviso to
Section 113 of the Income Tax Act is concerned, the said issue is now
705
not res integra in view of the decision of this Court in the case of Vatika
Township Private Limited (supra) . In paragraphs 37 to 40, 44 and
45, it is observed and held as under:
“Answer to the reference
37. When we examine the insertion of the proviso in Section 113
of the Act, keeping in view the aforesaid principles, our irresistible
conclusion is that the intention of the legislature was to make it
prospective in nature. This proviso cannot be treat ed as
declaratory/statutory or curative in nature.
38. There are various reasons for coming to this conclusion which
we enumerate hereinbelow.
Reasons in support
39. The first and foremost poser is as to whether it was possible
to make the block assessment with the addition of l evy of
surcharge, in the absence of proviso to Section 113? In Suresh N.
Gupta [ CIT v. Suresh N. Gupta , (2008) 4 SCC 362] itself, it was
acknowledged and admitted that the position prior t o the
amendment of Section 113 of the Act whereby the proviso was
added, whether surcharge was payable in respect of block
assessment or not, was totally ambiguous and unclear. The Court
pointed out that some assessing officers had taken the view that
no surcharge is leviable. Others were at a loss to apply a particular
rate of surcharge as they were not clear as to which Finance Act,
prescribing such rates, was applicable. It is a matter of common
knowledge and is also pointed out that the surcharge varies from
year to year. However, the assessing officers were indeterminative
about the date with reference to which rates provided for in the
Finance Act were to be made applicable. They had four dates
before them viz.: ( Suresh N. Gupta case [ CIT v. Suresh N.
Gupta , (2008) 4 SCC 362], SCC p. 379, para 35)
(i) Whether surcharge was leviable with reference to the rates
provided for in the Finance Act of the year in which the search
was initiated; or
(ii) the year in which the search was concluded; or
(iii) the year in which the block assessment proceedings under
Section 158-BC of the Act were initiated; or
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
(iv ) the year in which block assessment order was passed.
39.1. The position which prevailed before amending Section 113
of the Act was that some assessing officers were not levying any
surcharge and others who had a view that surcharge is pay able
were adopting different dates for the application of a parti cular
Finance Act, which resulted in different rates of surcharge in the
assessment orders. In the absence of a specified date, it was no t
possible to levy surcharge and there could not have be en an
assessment without a particular rate of surcharge. As stated above,
in Suresh N. Gupta [ CIT v. Suresh N. Gupta , (2008) 4 SCC 362]
itself, the Court has pointed out four different dates which were
bothering the assessees as well as the Department. The choi ce
of a particular date would have material bearing on the payment
of surcharge. Not only the surcharge is different for different
years, it varies according to the category of assessees and for
some years, there is no surcharge at all. This can be seen from
the following table prescribing surcharge for different assessment
years:
39.2. The rate at which tax, or for that matter surcharge is to b e
levied is an essential component of the tax regime. In Govind
Saran Ganga Saran v. CST [1985 Supp SCC 205 : 1985 SCC
(Tax) 447 : (1985) 155 ITR 144], this Court, while explaining the
conceptual meaning of a tax, delineated four components therein,
as is clear from the following passage from the said judgmen t:
(SCC pp. 209-10, para 6)
707
“6. 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 eve nt
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. If 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.”
It is clear from the above that the rate at which the tax is to be
imposed is an essential component of tax and where the rate is
not stipulated or it cannot be applied with precision, it would be
difficult to tax a person. This very conceptualisation of ta x was
rephrased in CIT v. B.C. Srinivasa Setty [(1981) 2 SCC 460 :
1981 SCC (Tax) 119 : (1981) 128 ITR 294], in the following manner:
(SCC p. 465, para 10)
“10 . … The character of computation of provisions in
each case bears a relationship to the nature of the char ge.
Thus the charging section and the computation provisions
together constitute an integrated code. When there is a cas e
to which the computation provisions cannot apply at all, it is
evident that such a case was not intended to fall within the
charging section.”
39.3. In absence of certainty about the rate, because of
uncertainty about the date with reference to which the rate is to
be applied, it cannot be said that surcharge as per the exis ting
provision was leviable on block assessment qua undisclos ed
income. Therefore, it cannot be said that the proviso adde d to
Section 113 defining the said date was only clarificatory in nature.
From the aforesaid table showing the different rates of surcharge
in different years, it would be clear that choice of date has to be
formed as in some of the years, there would not be any surcharge
at all.
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
40. Pertinently, the Department itself acknowledged and
admitted this fact which is clear from the manner the is sue was
debated in a Conference of Chief Commissioners which was held
sometime in the year 2001. In this Conference, some proposals
relating to simplification and rationalisation of procedures a nd
provisions were noted in respect of block assessmen t. The
foofaraw made in the Conference by those who had to apply the
provision, was not without substance because of the garboil [ Ed. :
From the French word gérable: meaning a confused disordered
state; turmoil.] situation which this provision had created and is
amply reflected in the proposals which were submitted in the
following terms:
“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 the Finance Act to Section 113 is a suffici ent
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, 4-4-1996, whether the rat e of
surcharge is to be adopted as applicable to the assessme nt
year 1996-1997 or the assessment year 1997-1998, 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.”
709
The Chief Commissioners accepted the position, in no uncertain
terms, that as per the language of Section 113, as it existed, it was
difficult to justify levy of surcharge. It was also acknowl edged
that even if Section 113 empowered to levy surcharge, since block
assessment tax is levied on the undisclosed income of the block
period, absence of specific assessment year in the block
assessment would render the levy suspect.
XXXXXXXXXXXX
44. The Finance Act, 2003, again makes the position clear
that surcharge in respect of block assessment of undiscl osed
income was made prospective. Such a stipulation is contained in
the second proviso to sub-section (3) of Section 2 of the Finance
Act, 2003. This proviso reads as under:
“Provided further that the amount of income tax
computed in accordance with the provisions of Section 113
shall be increased by a surcharge for purposes of the Union as
provided in Paras A, B, C, D or E, as the case may be, of Part
III of the First Schedule of the Finance Act of the year in
which the search is initiated under Section 132 or requisition is
made under Section 132-A of the Income Tax Act:”
Addition of this proviso in the Finance Act, 2003 further makes it
clear that such a provision was necessary to provide for surcharge
in the cases of block assessments and thereby makin g it
prospective in nature. The charge in respect of the surcharge ,
having been created for the first time by the insertion of the proviso
to Section 113, is clearly a substantive provision and hence is to
be construed prospective in operation. The amendment neither
purports to be merely clarificatory nor is there any mat erial to
suggest that it was intended by Parliament. Furthermore, an
amendment made to a taxing statute can be said to be intended to
remove “hardships” only of the assessee, not of the Department.
On the contrary, imposing a retrospective levy on the asses see
would have caused undue hardship and for that reason Parliament
specifically chose to make the proviso effective from 1-6-2002.
45. The aforesaid discursive of ours also makes it obvious
that the conclusion of the Division Bench in Suresh N.
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
Gupta [ CIT v. Suresh N. Gupta , (2008) 4 SCC 362] treating the
proviso as clarificatory and giving it retrospective effect is not a
correct conclusion. The said judgment is accordingly overruled.”
9.1 While passing the impugned judgment and order, the High
Court has relied upon earlier decision of this Court in the case of Suresh
N. Gupta (supra) . However, the said decision has been specifically
overruled by this Court in the case of Vatika Township Private Limited
(supra) .
9.2 In view of the above, the question of law with respect to levy
of the surcharge under proviso to Section 113 of the Income Tax is held
in favour of the assessee and against the revenue. It is obse rved and
held that in the present case the assessee is not liable to pay the surcharge
under proviso to Section 113 of the Income Tax Act. To that extent the
impugned judgment and order passed by the High Court and the
assessment order qua the surcharge under proviso to Section 113 of the
Income Tax Act deserves to be quashed and set aside.
10. Now so far as levy of the interest under Section 158BFA(1)
of the Income Tax Act in absence of any notice served upon the assessee
under Section 158BC of the Act and the liability to pay the interest under
said provision for the period prior to 01.06.1999 is concerned, whil e
considering the issue the reason for adding Chapter XIV-B for the block
assessment is required to be considered. The reason, object and purpose
of Chapter XIV-B has been adequately dealt with and consider ed by
this Court in the case of Vatika Township Private Limited (supra) .
It is observed and held that Chapter XIV-B which deals wi th block
assessment lays down a special procedure for searched cases. The main
reason for adding the said provisions in the Act was to curb tax evasion
and expedite as well as simplify the assessment in such searched cases.
It is observed and held that the essence of the new procedur e under
Chapter XIV-B is a separate single assessment of the “ undisclosed
income”, detected as a result of search and this separat e assessment
has to be in addition to the normal assessment covering the said period.
Therefore, a separate return covering the years of the block period is a
pre-requisite for making block assessment. It is observed and held that
Chapter XIV-B is a complete code in itself providing for self-contained
machinery for assessment of undisclosed income for the block period of
10 years or 6 years as the case may be. In paragraphs2 2 to 25, it is
observed and held as under:
711
“Scheme of Chapter XIV-B
22. Before we proceed to answer the question, it would be
necessary to keep in mind the scheme of block assess ment
introduced in Chapter XIV-B to the Finance Act, 1995 w.e.f. 1-7-
1995.
23. As already mentioned in brief by us, Chapter XIV-B of the
Act which deals with block assessment lays down a spec ial
procedure for search cases. The main reason for adding these
provisions in the Act was to curb tax evasion and expedite as well
as simplify the assessments in such search cases:
23.1. 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 ye ars
relevant to 10/6 assessment years and also the period of the current
previous year up to the date of the search i.e. from 1-4-2000 to
17-1-2001, in this case. The essence of this new procedur e,
therefore, is a separate single assessment of the “undiscl osed
income”, detected as a result of search and this se parate
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, the Explanation is inserted in Section
158-BB, which is the computation section, explaining the method
of computation of “undisclosed income” of the block period. It is
now well accepted that this Chapter is a complete code in itself
providing for self-contained machinery for assessme nt of
undisclosed income for the block period of 10 years or 6 years, as
the case may be.
23.2. In case of regular assessments for which returns are file d
on yearly basis, Section 4 of the Act is the charging secti on.
However, at what rate the income is to be taxed is specified every
year by Parliament in the Finance Act. In contradistinction, when
it comes to payment of tax on the undisclosed income relating to
the block period, the rate is specified in Section 113 of the Act. It
remains static at 60% of the undisclosed income which is the
categorical stipulation in Section 113 of the Act. Section 158-BA(2)
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
of the Act clearly states that the total undisclosed income relating
to the block period “shall be charged to tax” at the rates specified
under Section 113 as income of the block period irrespective of
previous year or years. Under Section 113 of the Act , the
undisclosed income is chargeable to tax at the rate of 60%.
24. From the above, it becomes manifest that Chapter XIV-B
comprehensively takes care of all the aspects relating to the block
assessment relating to undisclosed income, which includes Section
156-BA(2) as the charging section and even the rate at whic h
such income is to be taxed is mentioned in Section 113 of the Act.
No doubt, Section 4 of the Act is also a charging section which is
made applicable on “total income of previous year”. As per Section
2(45), “total income” means the total amount of income referred
to in Section 5, computed in the manner laid down in the Act.
Section 5 of the Act enumerates the scope of total incom e and
prescribes, inter alia, that it would include all income whic h is
received or is deemed to be received in India in any previous year
by or on behalf of a person who is a resident. No doubt, undisclosed
income referred to in Chapter XIV-B is also an income whi ch
was received but not disclosed, therefore, in the first blush, t he
argument of the Department that undisclosed income referred to
in Chapter XIV-B is also a part of total income and consequently
Section 4 becomes the charging section in respect thereof as well.
However, a little closer scrutiny leads us to conclude that that is
not the position as per the scheme of Chapter XIV-B. In the first
place, income referred to in Section 5 talks of total income of any
“previous year”. As per Section 2(34) of the Act, “previous year”
means previous year as defined in Section 3. Section 3 lays down
that previous year means “the financial year immediately preceding
the assessment year”. Undisclosed income referred to in Chapter
XIV-B is not relatable to the previous year. On the contrary, it is
for the block period which may be 6 years or 10 years, as t he
case may be.
25. Consequently, as already mentioned, while analysing the
scheme of Chapter XIV-B, such chapter is a complete code in
respect of assessments of “undisclosed income”. Not only it
defines what is undisclosed income, it also lays down the bl ock
period for which undisclosed income can be taxed. Further, it also
713
lays down the procedure for taxing that income. It is very pertinent
to note at this stage that for this purpose, specific provision in the
form of Section 158-BA(2) is inserted making it a charging section.
Thus, a diagnostic of Chapter XIV-B of the Act leads to irresistible
conclusion that it contains all the provisions starting from charging
section till the completion of assessment, by prescribing a special
procedure in relation thereto, making it a complete code by itself.
Looking at it from this angle, the character and na ture of
“undisclosed income” referred to in Chapter XIV-B becomes quite
distinct from “total income” referred to in Section 5. It is of some
significance to observe that when a separate charging section is
introduced specifically, to assess the undisclosed income,
notwithstanding a provision in the nature of Section 4 already on
the statute book, this move of the legislature has to be as signed
some reason, otherwise, there was no necessity to make a provision
in the form of Section 158-BA(2). It could only be t hat for
assessing undisclosed income, the charging provision is Section
158-BA(2) alone.”
10.1 Thus, with respect to assessment of undisclosed income for
the block period including the filing of the return etc ., the normal
assessment proceedings including under Section 140 of the Income Tax
Act shall not be applicable. Therefore, the submission on behalf of the
assessee that interest under Section 158BFA for the peri od prior to
01.06.1999 in view of insertion of the words “Section 158BC” in Section
140A w.e.f. 01.06.1999, shall not be chargeable, cannot be accepted. At
this stage, it is required to be noted that it is the case on behalf of the
assessee that the interest only follows the principal and in this case the
principal being the tax payable, there was no liability to pay the tax along
with the return prior to 01.06.1999 which came to be introduced by
insertion of the words “Section 158BC” in Section 140A and therefore
the liability to pay interest cannot arise if there was no liability to pay the
tax itself along with the return at the relevant time, has no substance. At
this stage, it requires to be noted that neither Section 158BC nor Section
158BFA required the assessee to pay tax along with the return. Liability
to deposit the tax along with return arises only under Secti on 140A.
However, at the relevant point of time Section 140A did not apply to
Section 158BC and hence there was no liability to deposit tax along with
the return. The said lacunae was noticed by the Parliament and by the
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
Finance Act, 1999, the words “Section 158BC” have been inserted in
Section 140A w.e.f. 01.06.1999. That does not mean that interest under
Section 158BFA would not be leviable in case of late fili ng of return.
The return under Section 158BC was required to be filed as per Chapter
XIV-B and on the delay in filing the return, there shall be liability to pay
interest leviable under Section 158BFA(1).
10.2 At this stage, the Notes on Clauses and the memorandum
explaining the said provision which is reported in (1999) 236 ITR (St)
141 and 187 are required to be considered and reproduced, which read
as under:
“Clause 63 seeks to amend section 140A of the Income T ax
Act relating to self-assessment.
Under the existing provisions, if any tax is payabl e on the
basis of any return required to be furnished under section
139 of section 142 or section 148, the assessee shall be li able
to pay such tax along with interest payable under t he Act
before furnishing the return and the return shall b e
accompanied by proof of payment of such tax and interes t.
It is proposed to provide that any person before filing of the
return under section 158BC shall also be liable to pay tax
and interest in accordance with the provisions contai ned in
sub-section (1) of section 140A.
It is further proposed to provide that after a block assess ment
under section 158BC has been made, any amount paid under
sub-section (1) of section 140A shall be deemed to have been
paid towards the block assessment under section 158BC.
These amendments will take effect from 01.06.1999.”
Further, the Memorandum Explaining the Provisions r eads
as follows,
“Under section 140A of the Income Tax Act, the assessee is
required to pay tax on the basis of income declared in the
return and such tax is required to be paid before the return is
furnished and the return is accompanied by the proof of such
payment. The existing provisions of section 140A ar e not
715
applicable to Chapter XIV-B relating to the assessment of the
income of the block period in search and seizure cases. There
is also no corresponding provision in Chapter XIV-B for
payment of self-assessment tax at the time of filing the return.
Therefore, the tax on the admitted income declared in the return
cannot be collected till the assessment is completed. In vie w
of the above, it is proposed to amend section 140A of Income
Tax Act to provide for the requirement of payment o f self-
assessment tax at the time of filing the return under section
158BC relating to block assessment of search cases.”
10.3 Thus, on conjoint reading of the above Notes on Clauses and
Memorandum, it is very clear that the Legislature originally intended to
make the assessee liable to pay taxes and interest when the retur n was
filed under Section 139 or under Section 142 or Section 148. By virtue of
the amendment, the Legislature thus proposed to make those assessees
who are filing the return under Section 158BC also liable to pay tax and
interest under Section 140A. The memorandum explaining the provisions
of the Finance Bill further makes it clear that the existing provisions of
Section 140A were not applicable to Chapter XIV-B r elating to
assessment of income of the block period in search and seizure cases. It
further recognizes that the admitted tax declared in the return cannot be
collected till the assessment is completed. Therefore , the Legislature
intended to amend Section 140A by incorporating Section 158BC so as
to make liable those persons who are filing return under Section 158BC
also. Thus, by virtue of the amendment, a new class of assessee was
brought onto the statute-book whose income are subject to be assessed
under Chapter XIV-B, in section 140A compelling them to pay s elf-
assessment tax. Thus, the interest under Section 158BFA is leviable on
standalone basis for late or non-filing of return, which ceases on the day
return is filed. In the impugned judgment and order, the High Court has
elaborately and comprehensively explained the ration ale behind
introduction of Section 158BC in Section 140A and has specifically
observed and held that the liability of payment of interest does not stop
merely on filing of the return but is attracted in terms of Section 140A till
payment of tax in terms of the section and even now the provisi ons of
Section 158BFA(1) and Section 140A operate independently. We are in
complete agreement with the view taken by the High Court.
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
10.4 Now so far as the main submission on behalf of the assessee
that in absence of any notice under Section 158BC served upon the
concerned assessee and in view of insertion of the wor ds “Section
158BC” in Section 158BD inserted vide Finance Act, 2002, there shall
not be any liability to pay interest under Section 158BFA is concerned,
the aforesaid submission is absolutely erroneous and has no substance.
It is required to be noted that prior to amendment in Section 158BD
vide Finance Act, 2002 and even thereafter, the provisions of Sec tion
158BC would be applicable in case of “searched persons”. Section 158BD
would be applicable in case of persons “other than searched persons”.
Therefore, in case of a person “other than searched person”, no noti ce
under Section 158BC which is required to be issued in case of “searched
persons” was required to be issued. For a person “other than searched
person”, notice under Section 158BD is sufficient.
10.5 Now so far as the submission on behalf of the assessee that
the words “under Section 158BC” has been inserted in Section 158BD
vide Finance Act, 2002 and therefore, in absence of any notic e under
Section 158BC prior to the amendment, there shall not be any liability to
pay interest under Section 158BFA is concerned, a perusal of the Notes
on Clauses appended to Clause 64 of the Finance Bill, 2002, it appears
that the same is clarificatory in nature.
Clause 64 of the Finance Bill 2002, provides that:-
“In section 158BD of the Income-tax Act, after the words “that
Assessing Officer shall proceed”, the words, figures and letters
“under Section 158BC” shall be inserted with effect from the
1st day of June, 2002.”
The Notes on Clauses appended to Clause 64 of the Finance Bill
2002 states the following:-
“It is proposed to insert the words “under section 1 58BC”
after the words “that Assessing Officer shall proceed” so as
to clarify that the Assessing Officer shall proceed against
such other person under section 158BC”.
10.6 At this stage, it is required to be noted that as obser ved by
this Court in the case of Vatika Township Private Limited (supra) ,
Chapter XIV-B prescribes a special procedure for computation of income
717
for the block period in search and seizure cases. Section 158BD shall be
applicable in case of any person other than a person with re spect to
whom search was made. As observed Chapter XIV-B is a compl ete
code in itself providing for self-contained machinery for assessment of
undisclosed income for the block period. Therefore, in case of the person
other than searched person the notice under Section 158BD would b e
required/sufficient and in case of late filing of the return under Section
158BC, the interest will be leviable under Section 158BFA. Any other
interpretation would lead to Section 158BD nugatory. It can be seen that
by inserting the words “under Section 158BC” in Section 158BD, the
Parliament intended to clarify that the assessment for the block period in
case of the persons other than searched persons would als o be as per
the procedure under Section 158BC of the Income Tax Act. At thi s
stage, it is required to be noted that in the present cas e as such M/s.
Khoday India Limited, and M/s. Khoday Breweries Limited – the persons
searched were issued notice under Section 158BC and in case of
K.L.Swamy, who is the “other person”, the notice under Section 158BD
has been issued.
10.7 Therefore, the submission on behalf of the assessee that i n
absence of any notice under Section 158BC served upon the assessee –
persons other than searched persons for the period prior to the amendment
in Section 158BD vide Finance Act, 2002, there shall not be any liability
to pay interest under Section 158BFA, has no substance and the same is
required to be rejected and the said question is required to be answered
in favour of the revenue and against the assessee.
11. In view of the above and for the reasons stated above, t he
present appeals succeed in part. It is observed and held that the respective
assessees are not liable to pay the surcharge under proviso t o Section
113 of the Income Tax Act. The impugned judgment and order passed
by the High Court is required to be modified to the aforesaid extent. So
far as the liability to pay the interest under Section 158BFA of the Income
Tax Act for late filing of the return under Section 158BC of the Income
Tax Act, in absence of any notice under Section 158BC upon the assessee
– persons other than searched persons, the said question is held in favour
of the revenue and against the assessee. The impugned judgment and
order passed by the High Court is hereby confirmed and it is observed
and held that the assessee – persons other than searched persons shall
be liable to pay the interest on late filing of the return under Section
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR. [M. R. SHAH, J.]
158BC even in absence of a notice under Section 158BC of the Income
Tax Act and even for the period prior to 01.06.1999. To that extent, the
impugned judgment and order passed by the High Court is he reby
confirmed. Present appeals are accordingly disposed of in terms of the
above. There shall be no orders as to costs.
Nidhi Jain Appeals partly allowed.
(Assisted by : Tamana, LCRA)