Whether surcharge is applicable on income tax payable under section 113 of the Income Tax Act in search cases?
Undisclosed income detected for a block period under Section 158BB is mandatorily taxed at the flat rate prescribed in Section 113, irrespective of the year to which the income belongs or whether any assessment is pending. Section 113 fixes a 60% tax rate, but confusion has long existed about whether surcharge applies, especially because most Finance Acts did not explicitly mention surcharge on Section 113 tax. While the Finance Act 2003 expressly introduced surcharge for block assessments, it also referenced surcharge provisions normally applicable based on income slabs, leading to two interpretations—one that surcharge applies only where expressly stated, and another that surcharge is inherently applicable because Section 113 itself mandates tax to be “increased by surcharge levied by any Central Act.” Considering legislative intent to levy surcharge on higher-income taxpayers, the absence of year-specific wording may not exempt assessees from surcharge. A CBDT clarification is necessary to settle this ambiguity.
Income Tax Liability on Undisclosed Income:
The total undisclosed income relating to the block period assessed under section 158BB shall be charged to tax at the rate specified under section 113 of the Income Tax Act,1961 as income of the block period irrespective of the previous year/s to which such income relates and irrespective of whether any assessment is pending or not.
Rate of Income Tax under section 113:
The undisclosed income is chargeable to tax at the rate of 60% and increased by surcharge if any levied by any Central Act.
Possible interpretations on applicability of surcharge u/s 113:
In most of the Central Act’s (Finance Act for the respective Assessment Year) the levy of surcharge on income tax liability under section 113 was not specified. Hence, a confusion may arise whether surcharge is applicable on income tax payable under section 113 or not.
In most of the Central Act’s (Finance Act for the respective Assessment Year) the levy of surcharge on income tax liability under section 113 was not specified. Hence, a confusion may arise whether surcharge is applicable on income tax payable under section 113 or not.
However, in the Finance Act 2003, a proviso was specified for levying surcharge on income tax payable u/s 113 of the Income Tax Act, (surcharge for domestic companies at the rate of 2.5%). The Finance Act,2003 has referred to surcharge provisions which are normally applicable based on income slabs for levying the surcharge applicable u/s 113.
Since there is no specific provision for levying surcharge in most of the Finance Act’s, there may be an argument that, the same (surcharge) may not be applicable on income tax payable u/s 113 for those years it was not specified.
On the other hand it may be argued that, since section 113 of the Income Tax Act clearly mentions that income tax shall be increased by surcharge levied by any Central Act, (here “any Central Act” may be referred as respective Finance Act and include Finance Act,2003 for this purpose) and the same must be arrived at the surcharge rates based on income slabs as provided in the respective Finance Act, which are applicable in normal course (say in case of a domestic company for AY 2025-26 for total income Range from Rs.1Cr to 10Cr, surcharge at the rate of 7% and income >10Cr, at the rate of 12%).
Conclusion:
To understand intent of the law on surcharge: As per the provisions of the Income Tax Act, surcharge shall be levied on income upon exceeding certain limits as specified in the Finance Act, to ensure that surcharge is levied on high income assessee’s. Hence, merely surcharge rates not specifically mentioned in respective Finance Act (but mentioned generally u/s 113) for levying surcharge on income tax payable u/s113 may not save from liability for payment of surcharge.
A CBDT circular clarifying the above ambiguity in this regard may help the tax community and assesses.
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