1 ITEM NO.95 COURT NO.1 SECTION IIIA SUPREME COURT OF INDIA RECORD OF PROCEEDINGS Petition(s) for Special Leave to Appeal (C)..CC No(s). 5008/2009 (Arising out of impugned final judgment and order dated 16/07/2008 in ITA No. 520/2006 passed by High Court Of Bombay) PRITI BHUSHAN MEHTA Petitioner(s) VERSUS COMMR.OF I.T.1 THANE Respondent(s) (with appln. (s) for c/delay in filing SLP and office report) Date : 29/10/2014 This petition was called on for hearing today. CORAM : HON'BLE CHIEF JUSTICE HON'BLE MRS. JUSTICE RANJANA PRAKASH DESAI HON'BLE MR. JUSTICE A.K. SIKRI For Petitioner(s) Mr. Rana Mukherjee, Adv. Ms. Kasturika Kaumudi, Adv. Mr. Shekhar Kumar,Adv. For Respondent(s)) Mr. Mukul Rohatgi, AG Mr. R.P. Bhatt, Sr. Adv. Mr. Rashmi Malhotra, Adv. Mr. S.A. Haseeb, Adv. Ms. Anil Katiyar, Adv. Mr. B. V. Balaram Das,Adv. UPON hearing counsel Court made following O R D E R Delay condoned. Both sides agree that questions of law raised in this special leave petition are Signature Not Verified identical with questions of law raised and Digitally signed by NEETU KHAJURIA Date: 2014.11.03 17:43:32 IST Reason: considered by this Court in case of Commissioner of Income Tax (Central)-I, New Delhi 2 vs. Vatika Township Private Limited 2014 (10) Scale 510. In said decision Court has observed as under : 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 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 3 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 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 Fina Relevant nce Section of 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% 4 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 Tax1, 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 conceptualisation of tax was rephrased in C.I.T., Bangalore v. B.C. Srinivasa Shetty2, 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 1 155 ITR 144 2 125 ITR 294 5 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 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 6 1997-98, rate of surcharge being different for two years? provisions of section 113 or provisions of Finance Act do not offer any guidance 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 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. 7 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 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.3, Supreme Court clearly acknowledged this basic and long-standing rule of statutory construction: 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. Merriam4, Supreme 3 232 U.S. 261, at p.265, 34 S.Ct. 421 (1914) 4 263 U.S. 179, 44 S.Ct. 69 (1923) 8 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-General5: 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 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 1st June, 2002 . These become epigraphic words, when seen in contradistinction to other amendments 5 (1869) LR 4 HL 100 9 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 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 1 June, 2002. st (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 27th 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 10 Section 113 was made. In this circular, various amendments to Income Tax Act are discussed amply demonstrating as to 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 1st 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 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 11 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 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. Following aforesaid decision, this special leave petition is also disposed of in same terms. (Neetu Khajuria) (Vinod Kulvi) Sr.P.A. Assistant Registrar Priti Bhushan Mehta v. Commr.of I.T.1, Thane