NEW DELHI, JAN 15, 2008 : ON 17.1.2001 a search under Section 132 of the 1961 Act was carried out at the premises of the respondent-assessee, an individual. The search unearthed an unexplained investment of Rs. 65,000/- being the value of household valuables and Rs. 97,427/- on account of unexplained marriage expenses (undisclosed income). Accordingly, in the block assessment, the A.O. determined the assessee’s undisclosed income at Rs. 1,62,427/-. He computed tax thereon at 60% in terms of Section 113 of the 1961 Act amounting to Rs. 97,456/- on which surcharge was levied at 17%, i.e., Rs.16,504/-. The levy of surcharge was challenged by the assessee in appeal before the CIT(A). The said appeal was allowed. The decision of CIT(A) has been confirmed by the Tribunal and the High Court. Hence, this civil appeal. Points for determination:
Two points arise for determination:
1. Whether on the facts and circumstances of this case, the Finance Act, 2001 (“FA” for short) was applicable to “block assessment” under Chapter XIV-B in respect of the search carried out on 17.1.2001;
2. Whether the proviso inserted in Section 113 by the Finance Act, 2002 is clarificatory?
1. Whether Finance Act, 2001 was applicable to block assessment under Chapter XIV-B up to 1.06.2002:
Section 158 BA deals with assessment of “undisclosed income” as a result of search whereas computation of such income falls under Section 158BB. The procedure for block assessment falls in Section 158 BC. Section 158 BA begins with non obstante clause. It states that nothing contained in any other provisions of the 1961 Act, where search is initiated after 30.6.1995 under Section 132 or in cases of requisition under Section 132A after the cut off date, the AO shall proceed to assess the undisclosed income in accordance with the provisions of Chapter XIV-B.
Relying on Section 158BA(1) assessee claims that Chapter XIV-B is a special procedure for assessment of cases; that it constitutes a self contained mechanism and, hence, it falls outside the scope of Section 4(1) of the Act, particularly when Section 4(1) imposes a charge on the “total income” and not on the “undisclosed income” and, particularly when Section 158 BA(2) is an independent charging section in contrast to Section 4(1) of the 1961 Act, which imposes a charge on the “total income” of the previous year. According to the assessee, the charge under Section 158BA(2) is on the “block period” and not on the total income of the “previous year”. Therefore, according to the assessee, Chapter XIV-B is a self-contained mechanism.
The Supreme Court did not agree and observed,
1. Section 158B defines “block period” to mean the period comprising the previous years relevant to 10/6 assessment years preceding the previous year in which the search was conducted under Section 132.
2. It also includes the period up to the date of commencement of such search or date of requisition.
3. Under Section 4, the subject of charge is the income of the previous year and not the income of the assessment year. Thus, tax is levied on the actual income of the previous year.
4. Each “previous year” is a distinct unit of time for the purposes of assessment.
5. However, when we come to Section 158BA, we find that Parliament has taken the block period to mean the period comprising previous years relevant to 10/6 assessment years preceding the previous year in which the search is conducted.
6. In other words, Parliament has in search cases expanded the unit of time for block assessment purposes from 1 year to 10/6 previous years.
7. However, it is important to note that the unit of time remains constant. It is open to Parliament to treat the unit of time as one year in normal assessment cases and, at the same time, it is also open to Parliament to treat 10/6 previous years as a unit of time for block assessment period.
8. The important thing to be noted is that the block assessment computation in Section 158BB does not exclude the concept of “previous years” as well as the concept of “total income”.
9. The important thing to be noted is that the computation has to be done even under Section 158BB of “undisclosed income” in the manner provided for in Chapter IV of the 1961 Act which deals with “computation of total income”.
10.A bare reading of the provisions of Section 158BA and Section 158BB indicates that the searches conducted by the Department are an important means of unearthing black money. However, undisclosed income has to be related to different years in which the income was earned. The essence of the block assessment procedure, therefore, is a separate single assessment of undisclosed income, detected as a result of a search.
11.There is no conflict between the computation machinery under Chapter XIV- B and normal computation machinery under Chapter IV.
12.The only difference is that Section 4 of the 1961 Act charges the total income of a person of one single previous year (unit of assessment) whereas Section 158BA(2) levies a charge on the income of a person for the block period of previous years relevant to 10/6 assessment years.
“In our view, the word “block period”, as defined in Section 158B (a), comprises previous years relevant to 10/6 assessment years as one unit of time for the purposes of assessment. As stated above,
the object behind enactment of Chapter XIV-B is to assess and compute “undisclosed incomes” relatable to different accounting years in which the income is earned. Therefore, if the block period comprising of 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. It is true that under Chapter XIV-B, computation of regular income and computation of undisclosed income has to be worked out separately. However, to arrive at the figure of Undisclosed Income, the said parallel calculations have to converge in order to work out the difference between the first and the second aggregates of the total incomes/losses of the previous year, in which undisclosed income is taxed under Section 113. Therefore, in our view, the concept of a charge on the “total income” of the previous year under the 1961 Act is retained even under Chapter XIV-B. Therefore, Section 158BB which deals with computation of undisclosed income of the block period has to be read with computation of total income under Chapter IV of the 1961 Act.”
Applicability of the Finance Act, 2001:
Section 2(1) of the Finance Act, 2001 inter alia stated that, subject to the provisions of sub-sections (2) and (3), for the assessment year commencing on 1.4.2001, income-tax shall be charged at the rates specified in Part I of the First Schedule and such tax shall be increased in cases to which paragraphs A, B, C and D of that part applied, by a surcharge for purposes of the Union. Under sub-section (3), it was expressly stated that in cases falling under Chapter XII (which includes Section 113) the tax chargeable shall be determined as provided in that Chapter. By way of proviso to sub-section (3), it was further stipulated that the amount of income-tax computed in accordance with Section 113 shall be increased by a surcharge as provided in Paragraphs A, B, C, D or E, as the case may be of Part I to the First Schedule. In this case, it is not in dispute that Para A was applicable at the given point of time. Reading Section 2(1) of the Finance Act, 2001, it is clear that the term “income- tax” as used in Section 2(1) and as used in the proviso to sub- section (3) of Section 2 of the Finance Act, 2001 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 Paragraph A of Part I to the First Schedule, which stated that the amount of income-tax computed in accordance with the provisions of Section 112 or Section 113 shall be increased by a surcharge calculated at the rate of 17% of such income-tax. Under the provisions of Section 2(1) of the Finance Act, 2001, which is made subject to sub- section (3) of that section, the assessee is entitled to claim that income-tax on his undisclosed income to be calculated by applying the rate or rates as prescribed in the Finance Act, 2001, but he cannot claim that the amount of income-tax so determined should not be increased by addition of the surcharge.
Therefore, the Court held that the AO has rightly imposed surcharge at 17% on the undisclosed income of the assessee in this case, particularly when the search was carried out on 17.1.2001.
Section 158BA(2) read with Section 4 of the 1961 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 1961 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. On the contrary, a bare perusal of various Finance Acts starting from 1999 indicates that 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 AO has applied the rate of surcharge at 17% which rate finds place in Para A of Part I of the First Schedule to the said FA of 2001, therefore, surcharge leviable under the FA was a distinct charge, not dependant for its leviability on the assessee ‘ s liability to pay income-tax but on assessed tax.
So the Supreme Court held that even without the proviso to Section 113 (inserted vide FA 2002 w.e.f. 1.6.2002), the FA 2001 was applicable to block assessment under Chapter XIV-B in relation to the search initiated on 17.1.2001 and accordingly surcharge was leviable on the tax amounting to Rs. 97,456/- at 17% amounting to Rs. 16504/-.
And the Revenue appeal is allowed._,_.___