REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.8750 OF 2014 (arising out of SLP (C) No. 540 of 2009) COMMISSIONER OF INCOME TAX (CENTRAL)-I, NEW DELHI ..APPELLANT(S) VERSUS VATIKA TOWNSHIP PRIVATE LIMITED ..RESPONDENT(S) WITH CIVIL APPEAL NO.8764 OF 2014 (arising out of SLP (C) No. 1362 of 2009) CIVIL APPEAL NO.8762 OF 2014 (arising out of SLP (C) No. 1339 of 2009) CIVIL APPEAL NO.8773 OF 2014 (arising out of SLP (C) No. 19319 of 2008) CIVIL APPEAL NO.8763 OF 2014 (arising out of SLP (C) No. 1342 of 2009) CIVIL APPEAL NO.8755 OF 2014 (arising out of SLP (C) No. 31528 of 2008) CIVIL APPEAL NO.8775 OF 2014 (arising out of SLP (C) No. 22444 of 2008) Civil Appeal No.________ of 2014 & connected matters Page 1 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 1 CIVIL APPEAL NO.8779 OF 2014 (arising out of SLP (C) No. 27162 of 2008) CIVIL APPEAL NO.8780 OF 2014 (arising out of SLP (C) No. 27413 of 2008) CIVIL APPEAL NO.8774 OF 2014 (arising out of SLP (C) No. 20855 of 2008) CIVIL APPEAL NO.8765 OF 2014 (arising out of SLP (C) No. 4769 of 2009) CIVIL APPEAL NO.8760 OF 2014 (arising out of SLP (C) No. 1257 of 2009) CIVIL APPEAL NO.8756 OF 2014 (arising out of SLP (C) No. 31537 of 2008) CIVIL APPEAL NO.8759 OF 2014 (arising out of SLP (C) No. 767 of 2009) CIVIL APPEAL NO.8772 OF 2014 (arising out of SLP (C) No. 14204 of 2008) CIVIL APPEAL NO.8777 OF 2014 (arising out of SLP (C) No. 26473 of 2008) CIVIL APPEAL NO.8770 OF 2014 (arising out of SLP (C) No. 13886 of 2008) CIVIL APPEAL NOS.8752-8753 OF 2014 (arising out of SLP (C) Nos. 4842-4843 of 2008) CIVIL APPEAL NO.8754 OF 2014 (arising out of SLP (C) No. 5704 of 2008) CIVIL APPEAL NO.8768 OF 2014 (arising out of SLP (C) No. 6897 of 2008) CIVIL APPEAL NO.8758 OF 2014 (arising out of SLP (C) No. 745 of 2009) Civil Appeal No.________ of 2014 & connected matters Page 2 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 2 CIVIL APPEAL NO.8776 OF 2014 (arising out of SLP (C) No. 24602 of 2008) CIVIL APPEAL NO.8769 OF 2014 (arising out of SLP (C) No. 8901 of 2008) CIVIL APPEAL NO. 1160 OF 2007 CIVIL APPEAL NOS. 8766-8767 OF 2014 (arising out of SLP (C) Nos. 6767-6768 of 2014) JUDGMENT A.K. SIKRI, J. Delay condoned. 2. Leave granted in all these matters. 3. In these batch of appeals, most of which are preferred by Commissioner(s) of Income Tax (hereinafter referred to as 'the Department'), with exception of few appeals filed by assessees, question of law which has fallen for consideration is as to whether proviso appended to Section 113 of Income Tax Act (hereinafter referred to as 'the Act') which was inserted in that Section by Finance Act, 2002 is to operate prospectively or is clarificatory and curative in nature and, therefore, has retrospective operation. Civil Appeal No.________ of 2014 & connected matters Page 3 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 3 Background Facts: 4. This question has been referred to Constitution Bench in Civil Appeal arising out of S.L.P. No.540/2009 and, therefore, to start with, we would be justified in referring to facts of that case. In fact answer to aforesaid question would lead to sealing of fate of all these appeals one way or other. facts in this appeal, which need recapitulation, are that there was search and seizure operation under Section 132 of Act on premises of assessee on 10.02.2001. Notice under Section 158BC of Act was issued to assessee on 18.06.2001 requiring him to file his return of income for block period ending 10.02.2000. In compliance, assessee filed its return of income for block period from 01.04.1989 to 10.02.2000. Block Assessment in this case was completed under Section 158BA on 28.02.2002 at total undisclosed income of Rs.85,18,819/-. After sometime, Assessing Officer, on verification of working of calculation of tax, observed that surcharge had not been levied on tax imposed upon assessee. This was treated as mistake apparent on record Civil Appeal No.________ of 2014 & connected matters Page 4 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 4 by Assessing Officer and accordingly rectification order was passed under Section 154 of Act on 30.06.2003. This order under Section 154 of Act, by which surcharge was levied by Assessing Officer, was challenged in appeal by assessee. said order was cancelled by CIT (Appeals)-I, New Delhi vide order dated 10.12.2003 on ground that levy of surcharge is debatable issue and therefore such order could not be passed taking umbrage under Section 154 of Act. undisclosed income was revised under Section 250BC/158BC by Assessing Officer vide order dated 09.09.2003 to Rs.10,90,000/- to give effect to above order of CIT (Appeals), and thereby removing component of surcharge. 5. As Department wanted surcharge to be levied, Commissioner of Income Tax (Central-I), New Delhi issued notice under Section 263 of Act to assessee and sought to revise order dated 09.09.2003 passed by Assessing Officer by which he had given effect to order of CIT (Appeals) and in process did not charge any surcharge. In opinion of CIT, this led to income having escaped assessment. According to CIT, in view of Civil Appeal No.________ of 2014 & connected matters Page 5 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 5 provisions of Section 113 of Act as inserted by Finance Act, 1995 and clarified by Board Circular No.717 dated 14.08.1995, surcharge was leviable on income assessed. According to CIT charging provision was Section 4 of Act which was to be read with Section 113 of Act that prescribes rate and tax for search and seizure cases and rate of surcharge as specified in Finance Act of relevant year was to be applied. In this particular case search and seizure operation took place on 14.07.1999 and treating this date as relevant, Finance Act 1999 was to be applied. 6. CIT, accordingly, cancelled order dated 09.09.2003 not levying surcharge upon assessee, as being erroneous and prejudicial to interests of revenue. Assessing Officer was directed by CIT to levy surcharge @ 10% and amount of income tax computed and issue revised notice of demand. order covered block period 01.04.1989 to 10.02.2000. This order of CIT under Section 263 of Act was passed on 23.03.2004. assessee filed appeal before Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') against said order of CIT. Civil Appeal No.________ of 2014 & connected matters Page 6 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 6 Tribunal vide its order dated 23.06.2006 allowed appeal of assessee. Tribunal held that insertion of proviso to Section 113 of Income Tax Act cannot be held to be declaratory or clarificatory in nature and was prospective in its operation. Against order of Tribunal dated 23.06.2006 revenue approached High Court of Delhi by way of appeal filed under Section 260 of Act for block period 01.04.1989 to 10.02.2000. This appeal has been dismissed vide order dated 17.04.2007 by High Court. It is this order of High Court which is subject matter of appeal in question. 7. It is clear from aforesaid narration that High Court has taken view that proviso inserted in Section 113 of Act by Finance Act, 2002 was prospective in nature and surcharge as leviable under aforesaid proviso could not be made applicable to block assessment in question of earlier period i.e. period from 01.04.1989 to 10.02.2000 in instant case. Reference Order 8. It so happened that this very issue about said proviso to Civil Appeal No.________ of 2014 & connected matters Page 7 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 7 Section 113, viz., whether it is clarificatory and curative in nature and, therefore, can be applied retrospectively or it is to take effect from date i.e. 01.06.2002 when it was inserted by Finance Act, 2002, attracted attention of this Court and was considered by Division Bench in case of Commissioner of Income Tax, Central II v. Suresh N. Gupta1. Division Bench held that said proviso is clarificatory in nature. When instant appeal came up before another Division Bench on 06.01.2009 for hearing, said Division Bench expressed its doubts about correctness of view taken in Suresh N. Gupta and directed Registry to place matter before Hon'ble Chief Justice of India for constitution of larger Bench. We reproduce order dated 06.01.2009 in its entirety as under: Delay condoned. question which fell for consideration before High Court was as to whether proviso appended to Section 113 of Income Tax Act is clarificatory and/or curative in nature. said provision had come into force with effect from 01.06.2002. It reads as under: Provided that tax chargeable under this section shall be increased by surcharge, if any, levied by any Central Act and applicable in assessment year relevant to previous 1 (2008) 4 SCC 362 Civil Appeal No.________ of 2014 & connected matters Page 8 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 8 year in which search is initiated under Section 132 or requisition is made under Section 132-A. In this case, search and seizure took place on 06.10.2001. order of block assessment in terms of Section 158BC was made in respect of assessment years 1984 to 2003. surcharge was levied on 30.06.2003. In support of its contention that said proviso was retrospective in nature, learned Additional Solicitor General relies upon Division Bench decision of this Court in Commissioner of Income Tax, Central II v. Suresh N. Gupta, (2008) 4 SCC 362 wherein it has been held: 37. According to assessee, prior to 01.06.2002, position was ambiguous as it was not clear even to Department as to which year's FA would be applicable. To clear this doubt precisely, proviso has been inserted in Section 113 by which it is indicated that FA of year in which search was initiated would apply. Therefore, in our view, said proviso was clarificatory in nature. In taxation, legislation of type indicated by proviso has to be read strictly. There is no question of retrospective effect. proviso only clarifies that out of four dates, Parliament has opted for date, namely, year in which search is initiated, which date would be relevant for applicability of particular FA. Therefore, we have to read proviso as it stands. 38. There is one more reason for rejecting above submission. Prior to 01.06.2002, in 1961 Act and sometimes in FA and often in both. This made liability uncertain. In present case, however, rate of tax in case of block assessment at 60% was prescribed by Section 113 but year of FA imposing surcharge was not stipulated. This resulted in above four ambiguities. Therefore, Civil Appeal No.________ of 2014 & connected matters Page 9 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 9 clarification was needed. proviso was curative in nature. Hence, proviso inserted in Section 113 merely clarifies that out of above four dates, relevant date for applicability of FA would be year in which search stood initiated under Section 158- BC. As said proviso was introduced with effect from 01.06.2002, i.e. with prospective effect and by reason thereof, tax chargeable under Section 135 of Income Tax Act is to be increased by surcharge levied by Central Act, we are of opinion that keeping in view principles of law that taxing statute should be construed strictly and statute, ordinarily, should not be held to have any retrospective effect, it is necessary that matter be considered by larger Bench. We, while issuing notice, direct Registry to place matter before Hon'ble Chief Justice for constitution of larger Bench. 9. three Member Bench was constituted before which matter came up for hearing on 08.04.2010. On that date, said Bench passed following order : Vide order dated 06.01.2009 lead matter was referred to be listed before larger Bench and consequently matter, along with connected matters, were listed before three Judge Bench. After having heard learned counsel on both sides at length, looking to important questions of law involved having wide ramifications and pendency of several matters on same issue before several High Courts and Tribunals, we deem it appropriate to refer matters for being placed before Five Judges Civil Appeal No.________ of 2014 & connected matters Page 10 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 10 Bench. Matter be placed accordingly. 10. This is precisely raison d'etre for hearing matter by present Constitution Bench. We may observe here that after aforesaid reference, other connected appeals raising identical issue have been tagged with direction to be heard along with this appeal. Statutory Provisions 11. Before adverting to submissions of Department, as argued by Mr. P.S. Narsimha, learned Additional Solicitor General and rebuttal thereto given by various counsel appearing for assessees, we deem it apposite to take note of relevant statutory provisions, having bearing over matter, along with proviso to Section 113, which is bone of contention and subject mater of interpretation. As is well known, Section 4 of Act is charging Section in Act. It reads as under: S.4(1) Where any Central Act enacts that income- tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to provisions (including provisions for levy of additional income-tax) of, this Act in respect of total income of previous year of every person : Civil Appeal No.________ of 2014 & connected matters Page 11 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 11 Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of income of period other than previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub- section (1), income-tax shall be deducted at source or paid in advance, where it is so deductible or payable under any provision of this Act. 12. Though, Section 4 of Act is charging Section, it is well known that rate or rates at which income tax is to be charged is specified each year by enacting Finance Act at time of presentation of annual Budget. 13. While Section 4 of Act deals with charge of income tax, Parliament also has power to levy surcharge on income tax. Power to levy surcharge is contained in Article 271 of Constitution of India which read as under: 271. Surcharge on certain duties and taxes for purposes of Union Notwithstanding anything in Articles 269 and 270, Parliament may at any time increase any of duties or taxes referred in those articles by surcharge for purposes of Union and whole proceeds of any such surcharge shall form part Consolidated Fund of India. 14. surcharge on income tax was introduced for first time by Finance Act, 1995, in Section 2 (3) thereof. However, initially, this surcharge was levied only on Civil Appeal No.________ of 2014 & connected matters Page 12 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 12 income of companies i.e. corporate entities incorporated under Indian Companies Act by specified surcharge at rate of 15% in Finance Act, 1996, which was reduced to 7.50% in Finance Act, 1997. In next two Finance Acts i.e. 1998 and 1999, there was no surcharge levied even in cases of companies. However, by Finance Act, 2000, surcharge at flat rate of 10% came to be levied in respect of individuals, HUF, BOI, AOP as well as co-operative societies, partnership firms, local authorities and also companies. In subsequent years, rates at which surcharge is levied on aforesaid entities are of varying nature. tabulated form showing surcharge in respect of different category of assessees in different assessment years, levied under each Finance Act, shall be reproduced at relevant stage. 15. In present case, since we are concerned with surcharge on block assessment, it also becomes imperative to take note of relevant provisions pertaining to block assessment. These provisions are contained in Chapter XIV-B. purpose of this Chapter is to lay down special procedure for assessment of search cases with view to combat tax evasion and also to expedite and simplify Civil Appeal No.________ of 2014 & connected matters Page 13 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 13 assessments in search cases. We reproduce hereinbelow provisions of Section 158B, 158BA, 158BB, 158BC and 158BH of that Chapter, which have bearing on issue at hand: 158B. In this Chapter, unless context otherwise requires,- (a) 'block period' means period comprising previous years relevant to six assessment years preceding previous year in which search was conducted under Section 132 or any requisition was made under Section 132A and also includes period up to date of commencement of such search or date of such requisition in previous year in which said search was conducted or requisition was made. Provided that where search is initiated or requisition is made before 1st day of June, 2001, provisions of this clause shall have effect as if for words "six assessment years" words "ten assessment years" had been substituted. (b) "undisclosed income" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in books of account or other document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for purposes of this Act. 158BA. Assessment of undisclosed income as result of search.- (1) Notwithstanding anything contained in any other provisions of this Act where after 30th day of June, 1995, search is initiated under Section 132 or books of account, other documents or any assets are requisitioned under Section 132A in case of any person, then, Assessing Officer shall proceed to assess Civil Appeal No.________ of 2014 & connected matters Page 14 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 14 undisclosed income in accordance with provisions of this Chapter. (2) total undisclosed income relating to block period shall be charged to tax, at rate specified in Section 113, as income of block period irrespective of previous year or years to which such income relates and irrespective of fact whether regular assessment for any one or more of relevant assessment years is pending or not. Explanation- For removal of doubts, it is hereby declared that- (a) assessment made under this Chapter shall be in addition to regular assessment in respect of each previous year included in block period; (b) total undisclosed income relating to block period shall not include income assessed in any regular assessment as income of such block period; (c) income assessed in this Chapter shall not be included in regular assessment of any previous year included in block period. (3) Where assessee proves to satisfaction of Assessing Officer that any part of income referred to in sub-section (1) relates to assessment year for which previous year has not ended or date of filing return of income under sub-section (1) of section 139 for any previous year has not expired, and such income or transactions relating to such income are recorded on or before date of search or requisition in books of account or other documents maintained in normal course relating to such previous years, said income shall not be included in block period. 158BB. Computation of undisclosed income of block period.- (1) undisclosed income of block period shall be aggregate of total income of previous years falling within block period computed, in accordance with provisions Civil Appeal No.________ of 2014 & connected matters Page 15 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 15 of Chapter IV, on basis of evidence found as result of search or requisition of books of account or documents and such other materials or information as are available with Assessing Officer, as reduced by aggregate of total income, or, as case may be, as increased by aggregate of losses of such previous years, determined,- (a) where assessments under section 143 or section 144 or section 147 have been concluded, on basis of such assessments; (b) where returns of income Have been filed under section 139 or section 147 but assessments have not been made till date of search or requisition, on basis of income disclosed in such returns; (c) where due date for filing return of income has expired but no return of income has been filed, as nil; (d) where previous year has not ended or date of filing return of income under Sub-section (1) of Section 139 has not expired, on basis of entries relating to such income or transactions as recorded in books of account and other documents maintained in normal course on or before date of search or requisition relating to such previous years; (e) where any order of settlement has been made under sub-section (4) of section 245D, on basis of such order; (f) where assessment of undisclosed income had been made earlier under Clause (c) of section 158BC, on basis of such assessment. Explanation.- For purposes of determination of undisclosed income, (a) total income or loss of each previous year shall, for purpose of aggregation, be taken as total income or loss computed in accordance with provisions of Chapter IV without giving Civil Appeal No.________ of 2014 & connected matters Page 16 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 16 effect to set off of brought forward losses under Chapter VI or unabsorbed depreciation under sub- section (2) of section 32; (b) of firm, returned income and total income assessed for each of previous years falling within block period shall be income determined before allowing deduction of salary, interest, commission, bonus or remuneration by whatever name called to any partner not being working partner: Provided that undisclosed income of firm so determined shall not be chargeable to tax in hands of partners, whether on allocation or on account of enhancement; (c) assessment under Section 143 includes determination of income under sub-section (1) or sub-section (1B) of section 143. (2) In computing undisclosed income of block period, provisions of sections 68, 69, 69A, 69B and 69C shall, so far as may be, apply and references to financial year in those sections shall be construed as references to relevant previous year falling in block period including previous year ending with date of search or of requisition. (3) burden of proving to satisfaction of Assessing Officer that any undisclosed income had already been disclosed in any return of income filed by assessee before commencement of search or of requisition, as case may be, shall be on assessee. (4) For purpose of assessment under this Chapter, losses brought forward from previous year under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32 shall not be set off against undisclosed income determined in block assessment under this Chapter, but may be carried forward for being set off in regular assessments. Civil Appeal No.________ of 2014 & connected matters Page 17 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 17 158BC. Procedure for block assessment.- Where any search has been conducted under section 132 or books of account, other documents or assets are requisitioned under section 132A, in case of any person, then,- (a) Assessing Officer shall- (i) in respect of search initiated or books of account or other documents or any assets requisitioned after 30th day of June, 1995, but before 1st day of January, 1997, serve notice to such person requiring him to furnish within such time not being less than fifteen days; (ii) in respect of search initiated or books of account or other documents or any assets requisitioned on or after 1st day of January, 1997, serve notice to such person requiring him to furnish within such time not being less than fifteen days but not more than forty-five days, as may be specified in notice return in prescribed form and verified in same manner as return under clause (i) of sub-section (1) of section 142, setting forth his total income including undisclosed income for block period: Provided that no notice under Section 148 is required to be issued for purpose of proceeding under this Chapter: Provided further that person who has furnished return under this clause shall not be entitled to file revised return; (b) Assessing Officer shall proceed to determine undisclosed income of block period in manner laid down in section 158BB and provisions of section 142, sub-sections (2) and (3) of section 143 and section 144 shall, so far as may be, apply; (c) Assessing Officer, on determination of undisclosed income of block period in accordance with this Chapter, shall pass order of Civil Appeal No.________ of 2014 & connected matters Page 18 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 18 assessment and determine tax payable by him on basis of such assessment; (d) assets seized under section 132 or requisitioned under section 132A shall be retained to extent necessary and provisions of section 132B shall apply subject to such modifications as may be necessary and references to 'regular assessment' or 'reassessment' in section 132B shall be construed as references to 'block assessment'. 158BH. Application of other provisions of this Act.- Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter. 16. It would be of some significance to point out at this stage that in so far as rates of tax chargeable in case of block assessment is concerned, that is not provided in Finance Act. Pertinently, provision to this effect has been made in Income Tax Act itself and is contained in Section 113 of Act. This Section, before insertion of proviso thereto, read as under: 113. Tax in case of block assessment of search cases. - total undisclosed income of block period, determined under section 158BC, shall be chargeable to tax at rate of sixty per cent. 17. proviso to Section 113 was inserted by Finance Act, 2002 with effect from June, 2002 and is to following effect: Provided that tax chargeable under this section Civil Appeal No.________ of 2014 & connected matters Page 19 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 19 shall be increased by surcharge, if any, levied by any Central Act and applicable in assessment year relevant to previous year in which search is initiated under section 132 or requisition is made under section 132A. 18. From reading of aforesaid statutory provisions in abstract, particularly relating to surcharge, it is clear that though provision for surcharge under Finance Act has been in existence since 1995, in so far as levy of surcharge for block assessment is concerned, it is introduced by insertion of aforesaid proviso of Section 113. It is in this background, question has arisen as to whether this surcharge on block assessment has been levied for first time by aforesaid proviso coming into effect from 01.06.2002 or it is only clarificatory in nature because of reason that provision for surcharge was made in Finance Act in year 1995 and that covered surcharge on block assessment as well. Judgment in Suresh N. Gupta 19. As already noticed above, this very proviso to Section 113 of Act came up for interpretation in Suresh N. Gupta and Division Bench of this Court took view that this proviso is clarificatory in nature as it simply clarifies date with Civil Appeal No.________ of 2014 & connected matters Page 20 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 20 reference to which rate of surcharge is payable, namely, surcharge levied by Central Act and applicable in assessment year relevant to previous year in which search is initiated. It would be advisable to take note of reasons which prevailed with Bench to come to aforesaid conclusion, inasmuch as it is ratio of this judgment which was doubted by Bench making reference to larger Bench. 20. Court in Suresh N. Gupta formulated two points for consideration, viz.; 1. Whether on facts and circumstances of this case, Finance Act, 2001 was applicable to block assessment under Chapter XIVB in respect of search carried out on January 17, 2001? 2. Whether proviso inserted in Section 113 by Finance Act, 2002, is clarificatory? Dealing with first question, Court noted contention of assessee that Chapter XIVB, which was inserted by Finance Act, 1995 with effect from July 1, 1995 was self-contained chapter as it lays down special procedure for assessment of undisclosed income found during search for block Civil Appeal No.________ of 2014 & connected matters Page 21 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 21 period . It was argued by assessee that this Chapter contains charging section (158BA), computation section (158BB), procedural section for block assessment (158BC), limitation provision for completion of block assessment (158BE) and provisions for imposition of interest and penalty (158BFA). It was also argued that scheme of assessment of undisclosed income under Chapter XIV-B is different from scheme of assessment of total income of any person in terms of Section 4(1) of Act. In support of this argument, it was submitted that whereas Chapter XIV-B deals with assessment of undisclosed income , Section 4 of Act relates to assessment of total income . Moreover, block period mentioned in Chapter XIV-B was different from assessment of income of previous year under Section 4(1) of Act. Even rate of tax at which undisclosed income is assessed is different inasmuch as it is 60% as specified in Section 158BA(2) read with section 113 of Act, in contradistinction to taxation of normal income which is at rates specified in Civil Appeal No.________ of 2014 & connected matters Page 22 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 22 relevant Finance Act. In nutshell, it was argued that block assessment falls in Chapter XIV-B for which charging section was section 158BA and for assessment of block period, charging section was not section 4(1) of Act. On that basis, assessee wanted Court to hold that it was not open to Assessing Officer to levy surcharge prior to June 1, 2002, i.e. before insertion of proviso to Section 113 of Act. 21. This argument was rejected by Court. Bench took note of Article 271 of Constitution along with Entry 82 of List 1 of Seventh Schedule to Constitution of India and Section 4 of Act which is charging section. It held that power to levy surcharge on income tax is traceable to Article 271 read with Entry 82 and not to Section 4 of Act. rate at which charge on total income on previous year is imposed is not laid down in Income Tax Act but in Finance Act indicated every year by Parliament to give effect to financial proposals of Central Government. It further held that since Income Tax Act Civil Appeal No.________ of 2014 & connected matters Page 23 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 23 deals with tax on income and nothing else, nor with charge should be legal charge under Section 4, it must be tax on income of assessee. Therefore, Section 4(1) of Act was charging section and rate of tax is prescribed under that very Act i.e. Section 113. As long as charge is on total income of previous year and so long as rate relates to subject matter of tax, there is nothing to prevent Parliament from fixing date. What is to be seen is that rate is applied to total income and tax which assessee has to pay must be at rate in respect of total income of previous year. 22. Bench was of view that concepts of previous years as well as total income in Chapter XIV-B were retained. Therefore Section 158BB was to be read with Section 4 of Act implying thereby that Section 4 remains charging section. procedure contained in Section 4 was not ruled out from block assessment procedure even in case of assessment of block period. It was, nevertheless, assessment on total income of previous years falling within Civil Appeal No.________ of 2014 & connected matters Page 24 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 24 block period including returned/assessed incomes as per regular returns and regular assessment. As fortiori, provisions of relevant Finance Act have got to be read into block assessment scheme under Chapter XIV-B, even prior to June 1, 2002. As sequential, even without proviso to section 113, which was inserted by Finance Act, 2002 with effect from June 1, 2002, Finance Act 2001, was applicable to block assessment under Chapter XIV-B and accordingly surcharge was leviable. 23. Adverting to second question formulated by Bench, namely, whether insertion of proviso in section 113 by Finance Act, 2002 was applicable to search of earlier period as well i.e. upto May 31, 2002, Court pointed out that in view of its answer to first question, second question did not even require any examination. It, however, proceeded to answer this question as well having regard to submission of assessee that before said proviso, there was inconsistency with regard to levy of surcharge and position was ambiguous as it was not clear even to Civil Appeal No.________ of 2014 & connected matters Page 25 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 25 Department as to which year's Finance Act would be applicable. Brushing aside this argument, Court held that to clear this very doubt precisely, proviso had been inserted in section 113 and therefore it was only clarificatory in nature. Court specifically noted that before proviso was inserted, there was some doubts in mind of Department and taxpayers about date with reference to which rate at which surcharge is payable. confusion was as to whether surcharge was leviable with reference to rates provided for in Finance Act of year in which search was initiated or year in which search was concluded or year in which block assessment proceedings under Section 158BC were initiated or year in which block assessment order was passed. Court opined that proviso only clarifies that out of aforesaid 4 dates, Parliament has opted for date in which search is initiated, as date relevant for applicability of particular Finance Act. 24. Aforesaid were reasons to arrive at conclusion that proviso was clarificatory and/or curative in nature. Civil Appeal No.________ of 2014 & connected matters Page 26 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 26 25. It would be our duty to point out at this stage that another Division Bench in case of CIT v. Sanjiv Bhatara2, has followed aforesaid judgment by giving same reasons in support. 26. It is not necessary to take note of arguments advanced by learned ASG for Department and various counsel who appeared for assessees in these appeals, in detail. reason for making these remarks by us is that Mr. Narasimha, learned ASG, had argued on same lines which formed basis of rendering decision of Division Bench in Suresh N. Gupta that have already been summarised above. Of course, it was his incessant effort with all effervescence, to persuade this Court to accept conclusion arrived at in said judgment. Learned counsel for assessees also emphasised those very submissions advanced in that case which did not find favour with Division Bench. In addition, these counsel articulated some more arguments with all enthusiasm and temerity, reference to which would be made while giving our analysis to various provisions leading up to answer to issue involved. 2 (2009) 310 ITR 105 (SC) Civil Appeal No.________ of 2014 & connected matters Page 27 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 27 Scheme of Chapter XIVB 27. Before we proceed to answer question, it would be necessary to keep in mind scheme of block assessment introduced in Chapter XIVB to Finance Act, 1995 w.e.f. 1st July, 1995. As already mentioned in brief by us, Chapter XIVB of Act which deals with block assessment lays down special procedure for search cases. main reason for adding these provisions in Act was to curb tax evasion and expedite as well as simplify assessments in such 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, block period is for previous years relevant to 10/6 assessment years and also period of current previous year up to date of search, i.e., form April 1, 2000, to January 17, 2001, in this case. essence of this new procedure, therefore, is separate single assessment of undisclosed income , detected as result of search and this separate assessment has to be in addition to normal Civil Appeal No.________ of 2014 & connected matters Page 28 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 28 assessment covering same period. Therefore, separate return covering years of block period is pre-requisite for making block assessment. Under said procedure, Explanation is inserted in section 158BB, which is computation section, explaining method of computation of undisclosed income of block period. It is now well accepted that this Chapter is complete code in itself providing for self-contained machinery for assessment of undisclosed income for block period of 10 years or 6 years, as case may be. In case of regular assessments for which returns are filed on yearly basis, Section 4 of Act is charging section. However, at what rate income is to be taxed is specified every year by Parliament in Finance Act. In contradistinction, when it comes to payment of tax on undisclosed income relating to block period, rate is specified in Section 113 of Act. It remains static at 60% of undisclosed income which is categorical stipulation in Section 113 of Act. Section 158BA(2) of Act clearly states that total undisclosed income relating to block period Civil Appeal No.________ of 2014 & connected matters Page 29 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 29 shall be charged to tax at rates specified under Section 113 as income of block period irrespective of previous year or years. Under Section 113 of Act, undisclosed income is chargeable to tax at rate of 60%. 28. From above, it becomes manifest that Chapter XIVB comprehensively takes care of all aspects relating to block assessment relating to undisclosed income, which includes Section 156BA(2) as charging section and even rate at which such income is to be taxed is mentioned in Section 113 of Act. No doubt, Section 4 of Act is also charging section which is made applicable on 'total income of previous year'. As per Section 2 (45), 'total income' means total amount of income referred to in Section 5, computed in manner laid down in Act. Section 5 of Act enumerates scope of total income and prescribes, inter alia, that it would include all income which is received or is deemed to receive in India in any previous year by or on behalf of person who is Resident. No doubt, undisclosed income referred to in Chapter XIVB Civil Appeal No.________ of 2014 & connected matters Page 30 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 30 is also income which was received but not disclosed, therefore, in first blush, argument of Department that undisclosed income referred to in Chapter XIVB is also part of total income and consequently Section 4 becomes charging section in respect thereof as well. However, little closer scrutiny leads us to conclude that that is not position as per scheme of Chapter XIVB. In first place, income referred to in Section 5 talks of total income of any 'previous year'. As per Section 2 (34) of Act, 'previous year' means previous year as defined in Section 3. Section 3 lays down that previous year means 'the financial year immediately preceding assessment year'. Undisclosed income referred to in Chapter XIVB is not relateable to previous year. On contrary, it is for block period which may be 6 years or 10 years, as case may be. Consequently, as already mentioned, while analyzing scheme of Chapter XIVB, such Chapter is complete code in respect of assessments of 'undisclosed income'. Not only it defines what is undisclosed income, it also lays down block period Civil Appeal No.________ of 2014 & connected matters Page 31 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 31 for which undisclosed income can be taxed. Further, it also lays down procedure for taxing that income. It is very pertinent to note at this stage that for this purpose, specific provision in form of Section 158BA(2) is inserted making it charging section. Thus, diagnostic of Chapter XIVB of Act leads to irresistible conclusion that it contains all provisions starting from charging section till completion of assessment, by prescribing special procedure in relation thereto, making it complete Code by itself. Looking it from this angle, character and nature of 'undisclosed income' referred to in Chapter XIVB becomes quite distinct from 'total income' referred to in Section 5. It is of some significance to observe that when separate charging section is introduced specifically, to assess undisclosed income, notwithstanding provision in nature of Section 4 already on statute book, this move of legislature has to be assigned some reason, otherwise, there was no necessity to make provision in form of Section 158BA(2). It could only be that for assessing undisclosed income, charging provision is Civil Appeal No.________ of 2014 & connected matters Page 32 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 32 Section 158BA(2) alone. 29. Notwithstanding aforesaid position clarified with us, we are of opinion that dehors this discussion, in any case on application of general principles concerning retrospectivity, proviso to Section 113 of Act cannot be treated as clarificatory in nature, thereby having retrospective effect. To make it clear, we need to understand general principles concerning retrospectivity. General Principles concerning retrospectivity 30. legislation, be it statutory Act or statutory Rule or statutory Notification, may physically consists of words printed on papers. However, conceptually it is great deal more than ordinary prose. There is special peculiarity in mode of verbal communication by legislation. legislation is not just series of statements, such as one finds in work of fiction/non fiction or even in judgment of court of law. There is technique required to draft legislation as well as to understand legislation. Former technique is known as Civil Appeal No.________ of 2014 & connected matters Page 33 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 33 legislative drafting and latter one is to be found in various principles of Interpretation of Statutes . Vis- - vis ordinary prose, legislation differs in its provenance, lay-out and features as also in implication as to its meaning that arise by presumptions as to intent of maker thereof. 31. Of various rules guiding how legislation has to be interpreted, one established rule is that unless contrary intention appears, legislation is presumed not to be intended to have retrospective operation. idea behind rule is that current law should govern current activities. Law passed today cannot apply to events of past. If we do something today, we do it keeping in view law of today and in force and not tomorrow s backward adjustment of it. Our belief in nature of law is founded on bed rock that every human being is entitled to arrange his affairs by relying on existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward Civil Appeal No.________ of 2014 & connected matters Page 34 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 34 not backward. As was observed in Phillips vs. Eyre3, retrospective legislation is contrary to general principle that legislation by which conduct of mankind is to be regulated when introduced for first time to deal with future acts ought not to change character of past transactions carried on upon faith of then existing law. 32. obvious basis of principle against retrospectivity is principle of 'fairness , which must be basis of every legal rule as was observed in decision reported in L Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co.Ltd4. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach new disability have to be treated as prospective unless legislative intent is clearly to give enactment retrospective effect; unless legislation is for purpose of supplying obvious omission in former legislation or to explain former legislation. We need not note cornucopia of case law available on subject because 3 (1870) LR 6 QB 1 4 (1994) 1 AC 486 Civil Appeal No.________ of 2014 & connected matters Page 35 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 35 aforesaid legal position clearly emerges from various decisions and this legal position was conceded by counsel for parties. In any case, we shall refer to few judgments containing this dicta, little later. 33. We would also like to point out, for sake of completeness, that where benefit is conferred by legislation, rule against retrospective construction is different. If legislation confers benefit on some persons but without inflicting corresponding detriment on some other person or on public generally, and where to confer such benefit appears to have been legislators object, then presumption would be that such legislation, giving it purposive construction, would warrant it to be given retrospective effect. This exactly is justification to treat procedural provisions as retrospective. In Government of India & Ors. v. Indian Tobacco Association5, doctrine of fairness was held to be relevant factor to construe statute conferring benefit, in context of it to be given retrospective operation. same doctrine of fairness, 5 (2005) 7 SCC 396 Civil Appeal No.________ of 2014 & connected matters Page 36 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 36 to hold that statute was retrospective in nature, was applied in case of Vijay v. State of Maharashtra & Ors.6 It was held that where law is enacted for benefit of community as whole, even in absence of provision statute may be held to be retrospective in nature. However, we are confronted with any such situation here. 34. In such cases, retrospectively is attached to benefit persons in contradistinction to provision imposing some burden or liability where presumption attaches towards prospectivity. In instant case, proviso added to Section 113 of Act is not beneficial to assessee. On contrary, it is provision which is onerous to assessee. Therefore, in case like this, we have to proceed with normal rule of presumption against retrospective operation. Thus, rule against retrospective operation is fundamental rule of law that no statute shall be construed to have retrospective operation unless such construction appears very clearly in terms of Act, or arises by necessary 6 (2006) 6 SCC 286 Civil Appeal No.________ of 2014 & connected matters Page 37 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 37 and distinct implication. Dogmatically framed, rule is no more than presumption, and thus could be displaced by out weighing factors. 35. Let us sharpen discussion little more. We may note that under certain circumstances, particular amendment can be treated as clarificatory or declaratory in nature. Such statutory provisions are labeled as declaratory statutes . circumstances under which provision can be termed as declaratory statutes is explained by Justice G.P. Singh7 in following manner: Declaratory statutes presumption against retrospective operation is not applicable to declaratory statutes. As stated in CRAIES and approved by Supreme Court : For modern purposes declaratory Act may be defined as Act to remove doubts existing as to common law, or meaning or effect of any statute. Such Acts are usually held to be retrospective. usual reason for passing declaratory Act is to set aside what Parliament deems to have been judicial error, whether in statement of common law or in interpretation of statutes. Usually, if not invariably, such Act contains preamble, and also word 'declared' as well as word 'enacted'. But use of words 'it is declared' is not conclusive that Act is declaratory for these 7 Principles of Statutory Interpretation, 13th Edition 2012 published by LexisNexis Butterworths Wadhwa, Nagpur Civil Appeal No.________ of 2014 & connected matters Page 38 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 38 words may, at times, be used to introduced new rules of law and Act in latter case will only be amending law and will not necessarily be retrospective. In determining, therefore, nature of Act, regard must be had to substance rather than to form. If new Act is 'to explain' earlier Act, it would be without object unless construed retrospective. explanatory Act is generally passed to supply obvious omission or to clear up doubts as to meaning of previous Act. It is well settled that if statute is curative or merely declaratory of previous law retrospective operation is generally intended. language 'shall be deemed always to have meant' is declaratory, and is in plain terms retrospective. In absence of clear words indicating that amending Act is declaratory, it would not be so construed when pre-amended provision was clear and unambiguous. amending Act may be purely clarificatory to clear meaning of provision of principal Act which was already implicit. clarificatory amendment of this nature will have retrospective effect and, therefore, if principal Act was existing law which Constitution came into force, amending Act also will be part of existing law. above summing up is factually based on judgments of this Court as well as English decisions. Constitution Bench of this Court in Keshavlal Jethalal Shah v. Mohanlal Bhagwandas & Anr.8, while considering nature of amendment to Section 29(2) of Bombay Rents, Hotel and Lodging House Rates Control Act as amended by Gujarat Act 18 of 1965, observed as follows: amending clause does not seek to explain any pre-existing legislation which was 8 (1968) 3 SCR 623 Civil Appeal No.________ of 2014 & connected matters Page 39 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 39 ambiguous or defective. power of High Court to entertain petition for exercising revisional juris-diction was before amendment derived from s. 115, Code of Civil Procedure, and legislature has by amending Act attempted to explain meaning of that provision. explanatory Act is generally passed to supply obvious omission or to clear up doubts as to meaning of previous Act. 36. It would also be pertinent to mention that assessment creates vested right and assessee cannot be subjected to reassessment unless provision to that effect inserted by amendment is either expressly or by necessary implication retrospective. (See Controller of Estate Duty Gujarat-I v. M.A. Merchant9. We would also like to reproduce hereunder following observations made by this Court in case of Govinddas v. Income-tax Officer10, while holding Section 171 (6) of Income- Tax Act to be prospective and inapplicable for any assessment year prior to 1 st April, 1962, date on which Income Tax Act came into force: 11. Now it is well settled rule of interpretation hallowed by time and sanctified by judicial decisions that, 9 1989 Supp (1) SCC 499 10 (1976) 1 SCC 906 Civil Appeal No.________ of 2014 & connected matters Page 40 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 40 unless terms of statute expressly so provide or necessarily require it, retrospective operation should not be given to statute so as to take away or impair existing right or create new obligation or impose new liability otherwise than as regards matters of procedure. general rule as stated by Halsbury in Vol. 36 of Laws of England (3rd Edn.) and reiterated in several decisions of this Court as well as English courts is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospectively and retrospective operation should not be given to statute so as to affect, alter or destroy existing right or create new liability or obligation unless that effect cannot be avoided without doing violence to language of enactment. If enactment is expressed in language which is fairly capable of either interpretation, it ought to be constued as prospective only. 37. In case of C.I.T., Bombay v. Scindia Steam Navigation Co. Ltd.11, this Court held that as liability to pay tax is computed according to law in force at beginning of assessment year, i.e., first day of April, any change in law affecting tax liability after that date though made during currency of assessment year, unless specifically made retrospective, does not apply to assessment for that year. Anwer to Reference 11 1962 (1) SCR 788 Civil Appeal No.________ of 2014 & connected matters Page 41 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 41 38. When we examine insertion of proviso in Section 113 of Act, keeping in view aforesaid principles, our irresistible conclusion is that intention of legislature was to make it prospective in nature. This proviso cannot be treated as declaratory/statutory or curative in nature. There are various reasons for coming to this conclusion which we enumerate hereinbelow: Reasons in Support 39. (a) first and foremost poser is as to whether it was possible to make block assessment with addition of levy of surcharge, in absence of proviso to Section 113? In Suresh N. Gupta itself, it was acknowledged and admitted that position prior to amendment of Section 113 of Act whereby proviso was added, whether surcharge was payable in respect of block assessment or not, was totally ambiguous and unclear. Court pointed out that some assessing officers had taken view that no surcharge is leviable. Others were at loss to apply particular rate of surcharge as they were not clear as to which Finance Act, prescribing such Civil Appeal No.________ of 2014 & connected matters Page 42 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 42 rates, was applicable. It is matter of common knowledge and is also pointed out that surcharge varies from year to year. However, assessing officers were in-determinative about date with reference to which rates provided for in Finance Act were to be made applicable. They had four dates before them viz.: (i) Whether surcharge was leviable with reference to rates provided for in Finance Act of year in which search was inititated; or (ii) year in which search was concluded; or (iii) year in which block assessment proceedings under Section 158 BC of Act were initiated; or (iv) year in which block assessment order was passed. position which prevailed before amending Section 113 of Act was that some Assessing Officers were not levying any surcharge and others who had view that surcharge is payable were adopting different dates for application of particular Finance Act, which resulted in different rates of surcharge in assessment orders. In absence of specified date, it was not possible to Civil Appeal No.________ of 2014 & connected matters Page 43 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 43 levy surcharge and there could not have been assessment without particular rate of surcharge. As stated above, in Suresh N. Gupta itself, Court has pointed out four different dates which were bothering assessees as well as Department. choice of particular date would have material bearing on payment of surcharge. Not only surcharge is different for different years, it varies according to category of assessees and for some years, there is no surcharge at all. This can be seen from following table prescribing surcharge for different assessment years: PART I Relevant Section of Finance Act Finance Act Para - Para B Para C Para D Para - E IND, HUF, Co-operative Local BOI, AOP Society Firm Authority Companies 1995 Section 2 (3) - - - - 1996 Section 2 (3) - - - - 15% 1997 Section 2 (3) - - - - 7.50% 1998 Section 2 (3) - - - - - 1999 Section 2 (3) - - - - - 2000 Section 2 (3) 10% 10% 10% 10% 10% 2001 Section 2 (3) 12% or 17% 12% 12% 12% 13% 2002 Section 2 (3) 2% 2% 2% 2% 2% Civil Appeal No.________ of 2014 & connected matters Page 44 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 44 2003 Section 2 (3) 5% 5% 5% 5% 5% Rate at which tax, or for that matter surcharge is to be levied is essential component of tax regime in Govindasaran Gangasaran v. Commissioner of Income Tax12, this Court, while explaining conceptual meaning of tax, delineated four components therein, as is clear from following passage from said judgment : components which enter into concept of tax are well known. first is character of imposition known by its nature which prescribes taxable event attracting levy, second is clear indication of person on whom levy is imposed and who is obliged to pay tax, third is rate at which tax is imposed, and fourth is measure or value to which rate will be applied for computing tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that levy exists in point of law. Any uncertainty or vagueness in legislative scheme defining any of those components of levy will be fatal to its validity. It is clear from above that rate at which tax is to be imposed is essential component of tax and where rate is not stipulated or it cannot be applied with precision, it would be difficult to tax person. This very 12 155 ITR 144 Civil Appeal No.________ of 2014 & connected matters Page 45 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 45 conceptualisation of tax was rephrased in C.I.T., Bangalore v. B.C. Srinivasa Shetty13, in following manner: character of computation of provisions in each case bears relationship to nature of charge. Thus, charging section and computation provisions together constitute integrated code. When there is case to which computation provisions cannot apply at all, it is evident that such case was not intended to fall within charging section. In absence of certainty about rate because of uncertainty about date with reference to which rate is to be applied, it cannot be said that surcharge as per existing provision was leviable on block assessment qua undisclosed income. Therefore, it cannot be said that proviso added to Section 113 defining said date was only clarificatory in nature. From aforesaid table showing different rates of surcharge in different years, it would be clear that choice of date has to be formed as in some of years, there would not be any surcharge at all. (b) Pertinently, Department itself acknowledged and admitted this fact which is clear from manner issue 13 125 ITR 294 Civil Appeal No.________ of 2014 & connected matters Page 46 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 46 was debated in Conference of Chief Commissioners which was held sometime in year 2001. In this Conference, some proposals relating to simplification and rationalisation of procedures and provisions were noted in respect of block assessment. foofaraw made in Conference by those who had to apply provision, was not without substance because of garboil situation which this provision had created and in amply reflected in proposals which was submitted in following terms: In case of block assessment, there are two problems in relation to levy of surcharge. first is that Section 113 does not mention Central Act. In absence of reference to another Central Act in charging section, it becomes difficult to justify levy of surcharge. Even if it is assumed that reference in Finance Act to section 113 is sufficient authority to levy surcharge, second problem is that Finance Act levies surcharge on amount of income-tax on income of particular assessment year whereas in block assessment tax is levied on undisclosed income of block period. Absence of specific assessment year in block assessment may render levy suspect. Yet another problem is rate of surcharge applicable. To illustrate, if search took place on, say, April 4, 1996, whether rate of surcharge is to be adopted as applicable to assessment year 1996-97 or assessment year 1997-98, rate of surcharge being different for two years? provisions of section 113 or provisions of Finance Act do not offer any guidance Civil Appeal No.________ of 2014 & connected matters Page 47 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 47 on issue. Suggestions : foregoing problem indicates that levy of surcharge on undisclosed income is matter of uncertainty and is prone to litigation. In circumstances, it is suggested that section 113 may be amended retrospectively in order to provide for levy of surcharge at rate applicable to assessment year relevant to financial year in which search was concluded. Chief Commissioners accepted position, in no uncertain terms, that as per language of Section 113, as it existed, it was difficult to justify levy of surcharge. It was also acknowledged that even if Section 113 empowered to levy surcharge, since block assessment tax is levied on undisclosed income of block period, absence of specific assessment year in block assessment would render levy suspect. (c) We would like to embark on discussion on some basic and fundamental concepts, which would shed further light on subject matter. No doubt, there is no scope for accepting Libertarian theory which postulates among others, no taxation by State as it amounts to violation of individual liberty and advocates minimal interference by State. Libertarianism propounded by Civil Appeal No.________ of 2014 & connected matters Page 48 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 48 Australian-born economist philosopher Friedrich A. Hayek and American economist Milton Friedman stands emphatically rejected by all civilised and democratically governed States, in favour of strongly conceptualised welfare state . To attain welfare state is our constitutional goal as well, enshrined as one of its basic feature, which runs through our Constitution. It is for this reason, specific provisions are made in Constitution, empowering legislature to make laws for levy of taxes, including income-tax. rationale behind collection of taxes is that revenue generated therefrom shall be spent by governments on various developmental and welfare schemes, among others. At same time, it is also mandated that there cannot be imposition of any tax without authority of law. Such law has to be unambiguous and should prescribe liability to pay taxes in clear terms. If concerned provision of taxing statute is ambiguous and vague and is susceptible to two interpretations, interpretation which favours subjects, as against there revenue, has to be preferred. This is well established principle of Civil Appeal No.________ of 2014 & connected matters Page 49 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 49 statutory interpretation, to help finding out as to whether particular category of assessee are to pay particular tax or not. No doubt, with application of this principle, Courts make endeavour to find out intention of legislature. At same time, this very principle is based on fairness doctrine as it lays down that if it is not very clear from provisions of Act as to whether particular tax is to be levied to particular class of persons or not, subject should not be fastened with any liability to pay tax. This principle also acts as balancing factor between two jurisprudential theories of justice Libertarian theory on one hand and Kantian theory along with Egalitarian theory propounded by John Rawls on other hand. Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of tax. In Billings v. U.S.14, Supreme Court clearly acknowledged this basic and long-standing rule of statutory construction: 14 232 U.S. 261, at p.265, 34 S.Ct. 421 (1914) Civil Appeal No.________ of 2014 & connected matters Page 50 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 50 Tax Statutes . . . should be strictly construed, and, if any ambiguity be found to exist, it must be resolved in favor of citizen. Eidman v. Martinez, 184 U.S. 578, 583; United States v. Wigglesworth, 2 Story, 369, 374; Mutual Benefit Life Ins. Co. v. Herold, 198 F. 199, 201, aff'd 201 F. 918; Parkview Bldg. Assn. v. Herold, 203 F. 876, 880; Mutual Trust Co. v. Miller, 177 N.Y. 51, 57. Again, in United States v. Merriam15, Supreme Court clearly stated at pp. 187-88: On behalf of Government it is urged that taxation is practical matter and concerns itself with substance of thing upon which tax is imposed rather than with legal forms or expressions. But in statutes levying taxes literal meaning of words employed is most important, for such statutes are not to be extended by implication beyond clear import of language used. If words are doubtful, doubt must be resolved against Government and in favor of taxpayer. Gould v. Gould, 245 U.S. 151, 153 As Lord Cairns said many years ago in Partington v. Attorney-General16: As I understand principle of all fiscal legislation it is this : If person sought to be taxed comes within letter of law he must be taxed, however great hardship may appear to judicial 15 263 U.S. 179, 44 S.Ct. 69 (1923) 16 (1869) LR 4 HL 100 Civil Appeal No.________ of 2014 & connected matters Page 51 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 51 mind to be. On other hand, if Crown, seeking to recover tax, cannot bring subject within letter of law, subject is free, however apparently within spirit of law case might otherwise appear to be. (d) There are some other circumstances which reflect legislative intent. problem which was highlighted in Conference of Chief Commissioners on rate of surcharge applicable is noted above. In view of aforesaid difficulties pointed out by Chief Commissioners in their Conference, it becomes clear that as per provisions then enforced, levy of surcharge in block assessment on undisclosed income was difficult proposition. It is for this reason retrospective amendment to Section 113 was suggested. Notwithstanding same, legislature chose not to do so, as is clear from discussion hereinafter. Notes on Clauses appended to Finance Bill, 2002 while proposing insertion of proviso categorically states that this amendment will take effect from 1 st June, 2002 . These become epigraphic words, when seen in Civil Appeal No.________ of 2014 & connected matters Page 52 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 52 contradistinction to other amendments specifically stating those to be clarificatory or retrospectively depicting clear intention of legislature. It can be seen from same notes that few other amendments in Income Tax Act were made by same Finance Act specifically making those amendments retrospectively. For example, clause 40 seeks to amend S.92F. Clause iii (a) of S.92F is amended so as to clarify that activities mentioned in said clause include carrying out of any work in pursuance of contract. This amendment takes effect retrospectively from 01.04.2002. Various other amendments also take place retrospectively. Notes on Clauses show that legislature is fully aware of 3 concepts: (i) prospective amendment with effect from fixed date; (ii) retrospective amendment with effect from fixed anterior date; and (iii) clarificatory amendments which are retrospective in nature. Thus, it was conscious decision of legislature, even when legislature knew implication thereof and took note of reasons which led to insertion of Civil Appeal No.________ of 2014 & connected matters Page 53 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 53 proviso, that amendment is to operate prospectively. Learned counsel appearing for assessees sagaciously contrasted aforesaid stipulation while effecting amendment in Section 113 of Act, with various other provisions not only in same Finance Act but Finance Acts pertaining to other years where legislature specifically provided such amendment to be either retrospective or clarificatory. In so far as amendment to Section 113 is concerned, there is no such language used and on contrary, specific stipulation is added making provision effective from 1st June, 2002. (e) There is yet another very interesting piece of evidence that clarifies provision beyond any pale of doubt, viz. understanding of CBDT itself regarding this provision. It is contained in CBDT circular No.8 of 2002 dated 27 th August, 2002, with subject Finance Act, 2002 Explanatory Notes on provision relating to Direct Taxes . This circular has been issued after passing of Finance Act, 2002, by which amendment to Section 113 was made. In this circular, various amendments to Income Tax Act are discussed amply demonstrating as to Civil Appeal No.________ of 2014 & connected matters Page 54 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 54 which amendments are clarificatory/retrospective in operation and which amendments are prospective. For example, explanation to Section 158BB is stated to be clarificatory in nature. Likewise, it is mentioned that amendments in Section 145 whereby provisions of that section are made applicable to block assessments is made clarificatory and would take effect retrospectively from 1st day of July, 1995. When it comes to amendment to Section 113 of Act, this very circular provides that said amendment along with amendments in Section 158BE, would be prospective i.e. it will take effect from 1 st June, 2002. (f) Finance Act, 2003, again makes position clear that surcharge in respect of block assessment of undisclosed income was made prospective. Such stipulation is contained in second proviso to sub-section (3) of Section 2 of Finance Act, 2003. This proviso reads as under: Provided further that amount of income- tax computed in accordance with provisions of section 113 shall be increased by surcharge for purposes of Union as provided in Paragraph A, B, C, D or E, as case may be, of Part III of First Schedule of Finance Act of year in which search is initiated under section 132 or Civil Appeal No.________ of 2014 & connected matters Page 55 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 55 requisition is made under section 132A of income-tax Act. Addition of this proviso in Finance Act, 2003 further makes it clear that such provision was necessary to provide for surcharge in cases of block assessments and thereby making it prospective in nature. charge in respect of surcharge, having been created for first time by insertion of proviso to Section 113, is clearly substantive provision and hence is to be construed prospective in operation. amendment neither purports to be merely clarificatory nor is there any material to suggest that it was intended by Parliament. Furthermore, amendment made to taxing statute can be said to be intended to remove 'hardships' only of assessee, not of Department. On contrary, imposing retrospective levy on assessee would have caused undue hardship and for that reason Parliament specifically chose to make proviso effective from 1.6.2002. 40. aforesaid discursive of ours also makes it obvious that Civil Appeal No.________ of 2014 & connected matters Page 56 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 56 conclusion of Division Bench in Suresh N. Gupta treating proviso as clarificatory and giving it retrospective effect is not correct conclusion. Said judgment is accordingly overruled. 41. As result of aforesaid discussion, appeals filed by Income Tax Department are hereby dismissed. Appeals of assessees are allowed deleting surcharge levied by assessing officer for this block assessment pertaining to period prior to 1st June, 2002. ......................................CJI. (R.M. Lodha) ......................................J. (Jagdish Singh Khehar) ......................................J. (J. Chelameswar) ......................................J. (A.K. Sikri) ......................................J. (Rohinton Fali Nariman) New Delhi; September 15, 2014. Civil Appeal No.________ of 2014 & connected matters Page 57 of 57 (arising out of S.L.P. (C) Nos. 540 of 2009) Page 57 Commissioner of Income-Tax v. Vatika Township P. Ltd