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No surcharge on tax in case of search before 1st June, 2002
July, 21st 2006

As per the decision of the Special Bench of the ITAT in the case of Merit Enterprises vs DCIT 101 ITD 1 (Hyd) (SB) it has been held that no surcharge can be levied on tax charged at the rate of 60% under Section 113 in respect of undisclosed income of the block period in the cases where search has been carried out before 1st June, 2002. 

It has been further held that amendment to Section 113 prescribing levy of surcharge is a substantive provision and as such cannot have retrospective effect. 

                                                  ITAT of Hyderabad

                                             Merit Enterprises vs DCIT

IT (SS) A No.31/Hyd/2001, Block Period from 1.4.1989 to 18.11.1999

N.D. Raghavan, Vice President, D. Manmohan, Judicial Member, and J. Sudhakar Reddy, Accountant Member.

26 April 2006

K.V.S. Bhaskar Rao, Advocate for the Appellant
S.R. Ashok, Department's Senior Standing Counsel, with Shri Y.R. Rao, DR-CIT and Shri S. Venkateswarlu, Senior DR for the Respondent

And

INTERVENERS

Sl. No. Name of the Assessee IT (SS) A. No Represented by
1. Shri Shiv Nadar, New Delhi 376/D/04 Shri Ajay Vohra, Advocate
2. Shri Subroto Bhattacharya, NOIDA 323/D/04 Shri Ajay Vohra, Advocate
3. Smt. Priti Bhushan Mehta, Mumbai 520/Mum/04 Shri Ajay Gandhi, CA
4. M/s. Unix Electronics P Ltd Mumbai 403/Mum/04 & 168/Mum/04 Shri Ajay Gandhi, CA
5. Shri M. Yugandhar, Hyderabad 161/Hyd/03 Shri P. Muralikrishna, Adv.

ORDER

Per : J. Sudhakar Reddy, Accountant Member :

This reference arises out of the appeal, against the assessment order passed by the DCIT, Central Circle-I, Hyderabad under S.158 BC of the Income-tax Act for the block period from 1.4.1989 to 18.11.1999, dated Nil, stated in the brief facts of the case by the assessee as completed on 27.4.2001, filed with the Tribunal on 13.12.2001, challenging the levy of surcharge of Rs. 8,65,680 on the tax of Rs. 86,56,800 levied at the special rate of 60%.

2. At the outset, it would be appropriate to refer to the reasons furnished by the Division Bench, which led to the constitution of the Special Bench. Its reasons are extracted below:-

"2 The short issue in this appeal is whether the levy of surcharge in terms of the provisions of the Finance Act, 2002, is valid in a block assessment made under S.158BC of the Income-tax Act. The tax has to be charged in a block assessment in terms of S.159BA(2) of the Income-tax Act read with S.113 of the said Act.

1. The undisclosed income of the Block Period is charged to tax at the rate of 60% stipulated under S.113. S.I13 of the Act reads as under:-

"The total undisclosed income of the block period, determined under section I58BC, shall be chargeable to tax at the rate of sixty per cent."

The following proviso to S.113 was inserted only by the Finance Act, 2002, with effect from 1-6-2002:-

"Provided that the tax chargeable under this section shall be increased by a surcharge, if any, levied by any Central Act and applicable in the assessment year relevant to the previous year in which the search is initiated under section 132 or the requisition is made under section I32A."

It may also be observed that there is no reference to rate of surcharge in S.113. Surcharge is prescribed only in the relevant Finance Act, and it varies from year to year.

.2. In the case before us, after giving effect to the order of the CIT (A), the undisclosed income for the block period 1-4-89 to 18-1-99 has been determined at Rs. 1,44,28,000. Tax was levied thereon at Rs. 86,56,800. Additionally, surcharge was also levied at Rs. 8,65,680. There is no dispute about the quantum of tax levied. The only dispute is about the levy of surcharge of Rs. 8,65,680. The contention of the assessee is that as the proviso to S.113, which authorises the levy of surcharge has no application for the block period in question, the levy of a surcharge in the present case is not valid.

.3. It is pleaded that the charging section in respect of total income in a regular assessment is S.4 of the Income-tax Act, and this section makes a specific reference to the Central Act, which is the annual Finance Act of the year, and so, the levy of surcharge in a regular assessment is valid. But, the position in respect of levy of surcharge in a block assessment is totally different. It is pleaded that Chapter-XIVB is a self-contained code for the computation of undisclosed income and also for bringing it to tax, and as there is no reference at all to any provision of the Finance Act in the Chapter before the insertion of the proviso to S.113, the levy of surcharge for the years falling before 1-6-2002, i.e. the date of insertion of the proviso to S.113, is invalid. It is further pleaded that it is exactly because of this invalidity that the proviso to S.113 has been inserted. But, this proviso has no retrospective effect, and so, the levy of surcharge for the earlier years, in a block assessment, as in the case before us, is invalid.

.4. Our attention has also been invited to certain proposals mooted by the National Conference of Chief Commissioners, which may be seen at pages 49-50 of the Journal Section of ITR Vol. 252. The discussion relating to levy of surcharge in a block assessment is at pages 49 and 50. The conference proposed amendment of S.113 of the Income-tax Act, which ultimately resulted in the insertion of proviso in S.113, Remarks of the conference in this behalf are as under:-

"3. Section 113: Tax on undisclosed income (Levy of Surcharge on tax on undisclosed income.

Section 113 provides for tax on undisclosed income at the rate of 60 per cent. The Finance Act stipulates that the amount of income tax shall be increased by a surcharge, as applicable to the assessee. Levy of surcharge on tax on regular income does not pose a problem since the amount of income-tax is determined with reference to a particular assessment year, as specified in the Finance Act. The basis for levy of such tax on regular income is contained in section 4 of the Income-tax Act, in which the charge of tax is linked to any Central Act and such a Central Act in this case is the Finance Act.

In the case of a block assessment, there are two problems in relation to the levy of surcharge. The first is that section 113 does not mention a Central Act. In the absence of a reference to another Central Act in the charging section, it becomes difficult to justify levy of surcharge. Even if it is assumed that reference in the Finance Act to section 113 is sufficient authority to levy surcharge, the second problem is that the Finance Act levies surcharge on the amount of income-tax of a particular assessment year whereas in the block assessment tax is levied on the undisclosed income of the block period. Absence of a specific assessment year in the block assessment may render the levy suspect. Yet another problem is the rate of surcharge applicable. To illustrate, if the search took place on, say April 4, 1996, whether the rate of surcharge is to be adopted as applicable to the assessment year 1996-97 or the assessment year 1997-98, the rate of surcharge being different for the two years? The provisions of section 113 or the provisions of the Finance Act do not offer any guidance on the issue.

Suggestions:

The foregoing problem indicates that levy of surcharge on undisclosed income is a matter of uncertainty and is prone to litigation. In the circumstances, it is suggested that section 113 may be amended retrospectively in order to provide for levy of surcharge at the rate applicable to the assessment year relevant to the financial year in which the search was conducted."

It is pointed out that though the Conference of the Chief Commissioners recommended that S.113 should be amended retrospectively, it was amended only prospectively, by way of insertion of the proviso to S.113, extracted above, with effect from 1-6-2002. So, it is claimed that even if the original intention has been to levy surcharge even for the earlier years in a block assessment, the legislature ultimately set right the position only prospectively and deliberately ignored the recommendation of the Conference for retrospective amendment of S.113.

.5. The learned Departmental Representative, on the other hand, argued that the annual Finance Acts arc quite clear, and they mandated the levy of surcharge. In this context, he referred to the provisions of annual Finance Act, 1999, Schedule-I, which clearly mandated that the income-tax levied in terms of S.113 shall be increased by a surcharge. It is also contended that the annual Finance Act has as much legal authority as the Income-tax Act, and when it mandates the levy of surcharge, it has to be implemented, even if there is no reference to the levy of surcharge in a block assessment in S. 113. It is also contended that the proviso to S.113 is only of a clarificatory nature, and it applies to all block assessments, and even for earlier years. It is also made out that the proposals made by the National Conference of the Chief Commissioners have no relevance, in the context of statutory interpretation of the provisions, and the Tribunal should not be influenced or bound by extraneous matters like Commissioners' recommendations, remarks of the commentators, etc.

.6. We find that there are conflicting decisions of the Tribunal on this issue. The first available decision is that of the Bangalore Bench of the Tribunal in the case of Microland Ltd. vs. ACIT (67 ITD 446)-Bang. In this case, the Bangalore Bench observed as under:-

"38. The learned counsel for the assessee also objects to levy of surcharge separately in addition to tax at the rate of 60% on the undisclosed income. We agree with him that as per the provisions of section 113, separate surcharge cannot be levied in respect of search and seizure assessments made under Chapter-XIV-B. However, in view of the fact that we have held the entire assessment to be liable to cancellation, this particular ground becomes academic in nature."

There are two more decisions of the Tribunal in favour of the assessee, which are as under:-

(a) Principal Officer, Builcon Towers (P) Ltd. V/s. ACIT (2000) 113 Taxman 74 (Cal.)

(b) D.G.P. Windsor (India) Ltd. V/s. DCIT (2002) (74 TTJ 291) (Mum.)

There is however, another decision of the Delhi Bench of the Tribunal in Friends Overseas (P) Ltd. vs. DCIT (2001) 73 TTJ 367 (Del.), which is to the contrary effect. In that decision, the Tribunal observed as under:-

"23. The only other ground surviving for our adjudication is the levy of surcharge on the tax computed under S.113 of the IT Act. Learned Counsel's (sic) is that the AO has erred in charging 15 per cent surcharge as income of the block period is liable to be assessed at flat rate of 60 per cent, without taking into account the surcharge as laid down in the Finance Acts. It has been submitted that as per special provisions of s.158BA(2)/113, tax is to be charged @ 60 per cent without any exemption or slab rates. It is further stated that block assessment comprises of 10 years and there being different rate of surcharge and in most of these years there was no surcharge, it is not possible to levy the surcharge. On the other hand, learned Departmental Representative has invited our attention to second proviso to S.2(7) of the Finance Act according to which levy of surcharge on income-tax computed as per provisions of S.113 has been contemplated. It is also submitted that in view of the clear provisions of the Finance Act for levy of surcharge on the taxes as determined under S.113, there is no scope of examining rationale of surcharge or the rates of surcharge applicable to various years covered by the block assessment. We find that second proviso to S. 7(2) of the Finance Act, 1995, specifically provides that "the amount of income-tax computed in accordance with the provisions of S.112 or 113 shall be increased in the case of a domestic company by a surcharge as provided in Para-E of Part-III to First Schedule". It is thus clear that the legislature clearly intended applicability of surcharge even on tax computed under S.113 of the IT Act. In this view of the matter, we see no substance in submissions of the assessee, and accordingly, reject the same.

24. Accordingly, assessee's ground of appeal against levy of surcharge, on income tax computed under S.113 is dismissed."

Thus, there are conflicting decisions of the Tribunal on the point at issue.

.7. The matter is of substantial revenue implication in all search cases. It has wide ramifications, and it required an in depth examination of the position of the annual Finance Acts vis-a-vis the Income-tax Act, 1961, and also an in depth analysis of the principles of statutory interpretation. For these reasons, and as there are conflicting decisions on this issue, we are of the view that the appeal in question is a fit and proper appeal to be heard by a Special Bench, so that at the level of Tribunal, there can be uniformity of approach on this issue."

3. Thus and therefore, this Special Bench has been constituted under sec. 255(3) of the Income-tax Act, 1961, by the Hon'ble the President of the Tribunal on a reference made by the Division Bench at Hyderabad, to answer its following question:-

"Whether on the facts and in the circumstances of the case, the levy of surcharge on the tax charged under S.113 in respect of the undisclosed income of the block period from 1-4-1989 to 18-11-1999, which is prior to insertion of proviso to S.113, is valid in law?"

4.1. The learned counsel Shri K.V.S.Bhaskara Rao, on behalf of the M/s. Merit Enterprises, appellant- assessee submitted THAT:

(a) The charging section for block assessment is sec. 158BA(2) of the Income tax Act, 1961, according to which tax is to be charged at the rate specified in sec. 113

(b) Sec. 113 seeks to levy tax on the undisclosed income of the block period not related to the total income of any particular previous year/assessment year.

(c) There is no provision treating the undisclosed income as that of the current year.

(d) According to sec. 4, which is the charging section, the total income of the previous year is subjected to income-tax and additional income-tax, i.e. surcharge, at the rate prescribed by the Finance Act and thus the levy of surcharge on the tax payable in a block assessment case falls outside the scope of sec. 4 or proviso to sec. 4(1) and, consequently, tax or surcharge cannot be levied by virtue of the Finance Act. Sec. 158BA(2) specifically provides that the tax shall be charged on the "undisclosed income" of the block period (not the total income) at the rate prescribed in sec. 113 irrespective of the fact that it relates to a period other than the previous year mentioned in the proviso to sec. 4(1) of the Act.

(e) 'Total income' is defined in sec. 2(45) and refers to sec. 5 according to which all income which had accrued or arisen or deemed to accrue or arise during the previous year relevant to the assessment year constitutes total income. 'Undisclosed income' is defined in sec. 158B(b) and the concept of undisclosed income is totally different from the concept of total income.

(f) Total income is charged at the rates prescribed by a Central Act, i.e. Finance Act, whereas undisclosed income is charged by sec. 158BA(2) at the rate prescribed in sec. 113 and there is no reference to 'Central Act' in sec. 113 which is the charging section.

(g) According to the definition of 'tax' in sec. 2(43), tax includes income-tax and super tax.

(h) Sec. 158BA(2) refers to 'tax' only.

(i) Surcharge is neither referred to in sec. 158BA(2) nor in sec. 113.

(j) 'Tax' according to sec. 4 includes additional income-tax which is in the nature of a surcharge; Finance Act has the power to levy tax on the total income of the previous year determined in the regular assessment and the power to levy surcharge on the tax determined in regular assessment; the power to levy 60% tax as given in sec. 113 in the case of block assessment does not include the power to levy additional income-tax which is in the nature of surcharge as the Finance Act cannot be made applicable to a block assessment without specific mandate in section 113.

(k) The specific mandate to levy additional income-tax found in sec. 4 is not found in sec. 113 prior to amendment with effect from 1-6-2002.

(l) Earlier to 1-6-2002, the Finance Act had no power to levy surcharge in a block assessment.

(m) The National Conference of Chief Commissioners of Income-tax [(2001) 252 ITR 49(Joumal)] made a suggestion to amend sec. 113 retrospectively, after recognising the difficulty, but despite the specific recommendation, the amendment was brought into force only with effect from 1-6-2002.

4.2 Referring to the stand of the Revenue that Parliament has legislative power which is derived from Entry 82 in the Union List and Articles 265, 270 and 271 of the Constitution of India, and that once it is accepted that the legislature has the competence to introduce a new charge, then it is immaterial whether that power is exercised by incorporating the charge either in the Income-tax Act or any other statute, it should not be lost sight of that the legislative competence of Parliament is not in question at all and that sec. 158BA(2) in Chapter XIVB and sec. 113 in Chapter XII are also provisions in the Income-tax Act, which is enacted by Parliament, and that there is a definite inconsistency or incongruity in the provisions of surcharge in a block assessment as per the Finance Acts, 1999 to 2001. In sections 158BA(2) and 113 of the Act, there was an inconsistency and it was removed by amending sec. 113 with effect from 1-6-2002 after which no dispute is raised at all.

4.3 There are inconsistencies firstly that while Sub-sec. (8) of sec. 2 of the Finance Act, 1999, wherein surcharge is sought to be imposed on the tax determined under sec. 113, appears in Part III relating to advance tax and the tax to be deducted at source under sections 172(4), 175 and 176(2) of the Act, the second proviso requires that tax so chargeable shall be increased by a surcharge on tax levied under sec. 113. As far as advance tax, TDS under sec. 192, tax payable under sections 172(4), 175 and 176(2) are concerned, levy of surcharge cannot be faulted, but it cannot be justified in respect of tax charged under sec. 158BA(2) read with sec. 113, as these provisions do not find a place in sub-sec. (8) or any other provision in the body of the Finance Act. Secondly, even assuming that surcharge should be charged, then the question is as to whether it should be at the rate prescribed in the Finance Act of (i) the year when the search was initiated or (ii) the year in which the notice under sec. 158BC is issued in a subsequent year or the respective years to which the income relates or (iii) the year in which the assessment is made. While under sec. 4(1), the charge of tax arises for the assessment year, there is no indication in sec. 158BA(1) as to when exactly the liability to block assessment arises, i.e. whether initiation of search or the last day of execution of the last warrant of authorisation as recorded in Panchnama or a date when the Assessing Officer is satisfied after receipt of search materials under sec. 132(9A) from the authorised officer and initiates action by issue of notice under sec. 158BC. It could not be the year of initiation of search or the last date of warrant, as the Finance Act, 19995, did not provide for inclusion under Part E of the First Schedule. The problem would arise if the above dates fall in different assessment years. Further, if notice under sec. 158BD is issued at the fag end of time limit specified in sec.158BE(1), then the question is as to whether it would be the year of satisfaction and issue of such notice by the AO or the date of search etc. A question arises posing as to whether there could be different rates in respect of assessments in pursuance of the same search as between cases under sections 158BC and 158BD, though arising out of one search or even with reference to the date of notice or the date of assessment. There is bound to be a time lag involving different assessment years. Reliance is placed on the order of the Calcutta Bench of the Tribunal in the case of Principal Officer, Builcon Towers (P) Ltd. v. ACIT, 113 Taxman (Mag) 74 (Cal), for the proposition that in the definition of 'tax' in sec. 2(43) and 'rate of tax' in sec. 113, there is no reference to 'surcharge' and that there is arbitrary levy of surcharge with reference to date of assessment as the surcharge has been levied at varying rates from year to year. Further reliance is placed on the decision of the Bangalore Bench of the Tribunal in the case of Sathya Bhushan v. DCIT, 84 TTJ (Bang) 165, wherein the Bench took into consideration the speech of the Hon'ble Finance Minister on the floor of Parliament and observed that the rate of 60% fixed in sec. 113 is a consolidated rate and no further levies like interest, penalty etc. are intended. Sec. 113 is a specific legislation and this should prevail over general legislation and that tax cannot be charged over and above the amounts prescribed without amending the section. The CBDT also, in its circular No.8 dated 27-8-2002 [238 ITR (St) 61] clarified that the provision of surcharge came into force only from 1-6-2002 and that this was considered by the Tribunal in the case of Om Prakash Sharma v. DCIT, 83 TTJ 246.

4.4 Revenue's contention is that there is ambiguity as to the rate to be charged and the year to be reckoned, for the levy of surcharge, and it was resolved with reference to the year in which the search took place, as clarified in the proviso to sec. 113 introduced with effect from 1-6-2002, as well as it is retroactive in nature. Reliance is placed on the judgment of the Hon'ble Supreme Court in the case of CWT, Ahmedabad, v. Ellis Bridge Gymkhana, 1998 SCC 120, specifically at page 121, paragraphs 5 and 6. Retroactivity in operation has to be ruled out as the provision increased the tax liability of the assessee. This issue was dealt with exhaustively in the case of Aruna M. Katara v. DCIT, 3 SOT (Pune) (SMC). Tax has to be levied strictly according to the provision and it is not the question of legislative competence. Reliance is placed on the judgment of the Hon'ble Supreme Court in the case of State of Punjab and Others v. Niranjandas Doomra Rice and General Mills, 1998 SCC 537. After analysing the facts of that case, Hon'ble Supreme Court laid down that the cess in question had been imposed without authority of law. There should be consistency in the provisions and that a slight technical flaw would invalidate the levy.

4.5 On the argument of the Department that harmonious construction has to be adopted as otherwise the provision relating to surcharge has to be declared ultra vires or otiose, which cannot be done by the Tribunal, it was never the argument of the assessee that the provision is unconstitutional. It should be enacted in an appropriate manner consistent with other charging provisions and not by making a provision for levy of surcharge in the Finance Act in a highly incongruous and ambiguous way. The provision simply becomes unworkable and incapable of implementation and for this proposition reliance is placed on the decision of the Hon'ble Supreme Court in the case of CIT v. B.S. Srinivasa Setty, 128 ITR 294, specifically at page 299. A comparative chart of the provisions of the Income-tax Act, 1961, other than Chapter XIVB and the provisions of Chapter XIVB is furnished to bring out the ingredients therein, so as to demonstrate that they operate in different fields.

5.1 The learned counsel Shri Ajay Vohra on behalf of Shri Shiv Nadar and Shri Subroto Bhattacharya, assessee-Interveners submitted THAT: The legislative intent behind the introduction of special procedure for assessment of undisclosed, income found during search by introduction of Chapter XIVB by Finance Act, 1995, with effect from 1-7-1995, as well as the findings of the Special Bench of the Tribunal in the case of Nawal Kishore and Sons v. DCIT, 87 ITD 407 (SB) at page 423 = (2005-TIOL-34-ITAT-LKW-SB) may be seen. Chapter XIVB was introduced as a self-contained chapter consisting of sections 158B to 158BH, containing provisions which are in the realm of substantive law seeking to levy tax on undisclosed income of the block period at the rate of 60%. As laid down by the Hon'ble Supreme Court in the case of Govind Saran Ganga Saran vs. CST 155 ITR 144, clearly satisfied by the provisions contained in Chapter XIVB to treat it as self contained code to levy tax, are the four components following:

(a) Character of imposition - On "undisclosed income';

(b) Clear indication of the person on whom the levy is imposed - 'the person subject to search';

(c) Rate at which tax is imposed - 60% of 'undisclosed income';

(d) Value to which the rate is applied - 'undisclosed income' of the block period.

Thus, Chapter XIVB is a self-contained code and that one does not have to traverse beyond computation and assessment of undisclosed income.

5.2. Sec. 158BA of the Income-tax Act, 1961, may be seen for pointing out that by virtue of the non-obstante clause in sec. 158BA, the provisions have overriding effect on other provisions of the Act. Reference may be made to sec. 158B(a) which defines the expression "block period" and the expression "undisclosed income" as defined in sec. 158B(b) as well as sec. 158BB which provides the mechanism to compute the undisclosed income of the block period as well as sec. 158BC which lays down the procedure, for block assessment. Under the scheme of taxation under Chapter XIVB it is not required to pin-point the assessment year to which the income pertains, and on the contrary, the undisclosed income is assessed as income of the block period comprising more than one assessment year which is presently six assessment years and part of the year in which search is conducted, which was earlier 10 years and part of the assessment year in which the search is conducted. The provisions of Chapter XIVB postulate taxing of undisclosed income of a block period as distinct from previous year relevant to an assessment year and that undisclosed income computed for the block period in terms of sub-sec. (2) of sec. 158BA is required to be taxed at a special rate which is specified in sec. 113 of the Act.

5.3 On the applicability of Finance Act, reference to the provisions of Finance Act is not found in the self-contained scheme of undisclosed income in Chapter XIVB. Referring to sec. 4 of the Act, reference to Finance Act is contained in sub-sec. (1) of sec. 4. The proviso to sec. 4(1) carves out an exception to the normal rule in sub-sec. (1) and that it provides that where under any provisions of the Act, income-tax is charged in respect of income of a period other than the previous year, income-tax shall be charged accordingly. Thus, he argued when income-tax is specifically charged on the Income of a period other than the previous year, notwithstanding the provisions of sub-sec. (1) of sec. 4, tax has to be levied as may be specifically provided under such special provisions of the Act. The proviso to sec. 4(1) introduces a caveat to the applicability of the relevant Finance Act and where the case falls under the proviso, the relevant Finance Act does not come into play.

5.4 Thus, under the scheme of taxation under the Income-tax Act, if tax is levied on total income of an assessee, of a previous year, then in terms of sub-sec. (1) of sec. 4, the rate of tax is as specified by the relevant Finance Act, and if tax is levied on the income of an assessee for a period other than the previous year, then in terms of the proviso to sec. 4(1), the levy of tax has to be mandated by the relevant section.

5.5 Reliance is placed on the proviso to sec. 4(1) to point out that it is not, permissible for the Revenue to invoke the Finance Act when the said special provision does not refer to the Finance Act and levy of surcharge as per Finance Act, on the tax on undisclosed income for the block period computed under Chapter XIVB, would be at the cost of doing violence to the language of the said section.

5.6 As there is no reference to the rate prescribed in the Finance Act in sec. 113 or in Chapter XIVB, the levy of surcharge for the period before 1-6-2002 is without authority of law. There is no conflict between the provisions of sec. 4 and the special scheme of assessment under Chapter XIVB and argued that it is a settled canon of interpretation based on the maxim generalia specialibus non derogant that the general provisions must yield in favour of the special provisions. Reliance is placed on the Special Bench decision of the Tribunal in the case of Eicher Tractors Ltd., 84 ITD 49 (Del) (SB), as well as the judgment of the Hon'ble Supreme Court in the case of CWT v. Trustees of HEH Nizam's Family Trust, 108 ITR 555. The provisions of Chapter XIVB are special provisions and the same would override general provisions even of it is assumed that there is a conflict, particularly in the light of the fact that sec. 158BA. the charging provision in the Chapter, contains a non-obstante clause overriding the other provisions of the Act. Referring to the proviso to sec. 113, introduced by Finance Act, 2002, with effect from 1-6-2002, and the argument of the Revenue that the proviso is clarificatory in nature and enables the Revenue to levy surcharge prior to 1-6-2002, it is to be seen that the surcharge is levied in terms of an authority provided under Article 271 of the Constitution of India, to increase any of the duties or taxes imposed. Reference may be had to the decision of the Hon'ble Supreme Court in the case of CIT v. K.Srinivasan, 83 ITR 346, to emphasise that surcharge is in the nature of additional imposition/enhancement of tax, which has all the characteristics of tax. Unlike sec. 4(1), sec. 113 does not speak of additional income-tax and it is not permissible to read such words in sec. 113. Courts cannot supply any ommission in the language of a statute where it is clear and unambiguous. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Elphinstone Spinning and Weaving Mills Ltd., 40 ITR 142, specifically at page 150, to appreciate that it is for the legislature to avoid the anomaly which arises from interpretation of the language employed. The charging provisions of sec. 158BA read with sec. 113 containing the rate of taxation, do not contain a mandate to collect surcharge prior to the amendment by Finance Act, 2002.

5.7 - For the proposition that the charging provision, which imposes tax, must be construed strictly, reliance is placed on the following decisions:-

(a) CWT v. Ellis Bridge Gymkhana, 229 ITR 1 at page 4 (SC)

(b) Associated Cement Co. v. CTO, 48 STC 466, 476, 478 (SC)

(c) Liquor Enterprises v. CTO, 62 STC 88, 98 (AP) (FB)

Reliance is placed on the provisions of sec. 158BA to emphasise that the charge to taxation under the special provisions of Chapter XIVB get attracted once the search is carried out under sec. 132 or books are requisitioned under sec. 132A of the Act and the date of initiation of search or requisition of books is the point of time for application of the provisions of chapter XIVB. Further reliance is placed on the following decisions:-

a) Mahesh Kumari Batra v. JCIT, 95 ITD 152 (Asr.) (SB)

b) Promain Limited v. DCIT, 95 ITD 189 (Del) (SB)

Thus, the law as existing on the date of initiation of search or requisition of books should determine the tax liability of the assessee under Chapter XIVB.

Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Karurntharuvi Tea Estate Ltd. v. State of Kerala, 60 ITR 262.

5.8.Without prejudice to the above arguments, even the provisions of the Finance Act do not independently justify the imposition of surcharge on undisclosed income for the following reasons:-

a) The Finance Act only prescribes the rate for levy of income-tax in respect of the total income of the previous year of every person, and

b) The Finance Act primarily prescribes the rates of income-tax and is not the charging section and in the absence of any other taxing section in the Act for the computation of undisclosed income, there is no scope for imposing surcharge on the basis of the Finance Act.

Reliance is placed on the judgment of the Hon'ble Supreme Court in the case of Elphinstone (supra) to highlight that Their Lordships held that the liability to tax was imposed not by the Finance Act but by the Income-tax Act and also that the proviso prescribes varying rates for varying circumstances and the proviso is not an independent charging section. Reference may be had to the judgment of the Summit Court to appreciate that the ratio of that decision squarely applies to the issue in question.

5.9 Further reliance is placed on the judgment of the Hon'ble Supreme Court in the case of Kesoram Industries and Cotton Limited v. CWT, 59 ITR 767, and in the case of State of Kerala v. Apex George and another, 271 ITR 290, for the following propositions:-

a) The Income Tax Act is a permanent Act while the Finance Acts are passed every year;

b) The function of the Finance Act primarily is to prescribe the rate of tax and the manner of calculation of tax;

c) The Finance Act is not intended to incorporate the entire procedural and substantive law relating to tax;

d) The Finance Act has to be read in consonance with the provisions of the charging section.

The levy of surcharge for the purpose of sec. 113 by the relevant Finance Act is de hors the scheme of the Act and that the imposition of such levy does not mesh in with either proviso to sec. 4(1) or the provisions of sec. 158BA read with sec 113 of the Act. When the Finance Act seeks to impose any additional liability to tax, there must be a mandate under the charging provisions of the Act and that in the absence of the same, no additional liability can be charged by the Finance Act and further the imposition of surcharge independently with reference to the provisions of the Finance Act is not in consonance with the provisions of Sec. 4 of the Act which clearly mandates that the tax shall be levied in accordance with the special provisions governing charge of tax in respect of income of a period other than the previous year.

5.10. Further, the levy of surcharge prior to 1-6-2002 on the basis of the provisions of the Finance Act would be anomalous for the following reasons:

a) Finance Act contains the proposals for the following financial year e.g. Finance Act, 2001 contains the proposals for the Finance year 2001-02. The rates of taxation are further provided in the First Schedule of the Finance Act. Part 1 of the First Schedule refers to rate of taxation for the assessment year beginning or 1st April and preceding the year in respect of which proposals are introduced. So Part I of the Finance Act, 2001 contains rates for the assessment year 2001-02. Further Part III of the same Schedule refers to/contains the rates for the following assessment year. So Part III of the Finance Act, 2001 contains rates for the assessment year 2002-03.

b) Now based on the aforesaid proviso to section 2(3) of the Finance Act, surcharge is to be levied at the rates specified in Part I of the First Schedule. So in case of search initiated/ conducted on 1.08.2001, Department/ Revenue seeks to rely upon proviso to section 2(3) of the Finance Act, 2001 to levy surcharge. Part 1 of the Finance Act, 2001 would contain the rates of tax for the assessment year 2001-02 whereas the search was initiated on 1.08.2001, falling in the previous year 2001-02 and relevant to the assessment year 2002-03. The levy of surcharge, in such circumstance, at the rates specified in Part 1 of First Schedule, i.e. the rate applicable for the assessment year 2001-02 would be clearly illegal since the rates applicable to assessment year 2001-02 could not be applied for the search conduced on 1.08.2001. Such an imposition would be in clear conflict with the decision of the Hon'ble Supreme Court in the case of Karimtharuvi Tea Estate (supra).

c) Further, there is no reason why the surcharge, as prescribed by the Finance Act for the assessment year immediately preceding the previous year in which the search was initiated should be adopted why not the surcharge applicable for the first year of the block period or any year in between or the year in which the search was conducted?

d) Until the amendment in section 113 w.e.f., 1.06.2002 there was inconsistency with regard to levy of surcharge. The question which usually bothered tax authorities was whether surcharge is to be levied with reference to the rates provided for in the Finance Act :

- the year in which search was initiated; or

- the year in which the search was concluded; or

- the year in which the block assessment proceedings under section 158BC were initiated; or

- the year in which the block assessment order was passed.

Further complexity regarding the application of the relevant provisions of the Finance Act used to arise in a case where proceedings were initiated under section 158BD of the Act since there was no time limit initiation of proceedings under that section.

e) Lastly if it is to be held that the surcharge would even be leviable in respect of search carried out on or before 31st May, 2002, the amendment made in section 113 of the Act would be rendered futile/ irrelevant, and such a construction would be against the well accepted principles of interpretation of the statutes.

For all the aforesaid reasons, imposition of surcharge in respect of search conducted prior to 1.06.2002 would not be in consonance with the Scheme of the Act.

5.11. Reference is also made to the recommendations of the Conference of Chief Commissioners of Income-tax as well as the proviso introduced by Finance Act, 2002, to emphasise that the legislature in its wisdom thought it fit not to bring such proviso to sec. 113 retrospectively as recommended by the Conference. Any amendment made to the statute has prospective effect unless stated otherwise expressly or by necessary implication. For this proposition, reliance is placed on the following case laws:

a) CIT v. H.Baliengerg and others, 193 ITR 49 (Ker)

b) CIT v. Rajasthan Mercantile Co, Ltd., 211 ITR 400 (Del)

c) CIT v. Sree Senhavally Textiles (P) Ltd., 259 ITR 77 (Mad)

d) CIT v. Kerala Electric Lamp Works Ltd., 261 ITR 721 (Ker)

e) Microland Ltd. v. ACIT: 67 ITD 446 (Bang)

f) Builcon Towers P. Ltd. V. ACIT : 113 Taxman (Mag.) 74 (Cal.)

g) Paramount Enterprises Limited V. DCIT: 76 TTJ 127 @ 147 (Del)

h) Om Prakash Sharma V. DCIT: 83 TTJ 246 (JP.)

i) Satyabhushan V. DCIT: 84 TTJ 165 (Bang.)

j) Mrs. Aruna M. Katara V. DCIT: [2004] 3 SOT 289 (Pune) (SMC)

k) Dr. (Mrs.) Sharda Adhalkha: 95 TTJ 643 (Asr.)

Thus and therefore, the prayer is for the question referred to this Special Bench to be answered in the negative and in favour of the assessee.

6. The learned counsel Shri P.Muralikrishna, on behalf of Shri M.Yugandhar, assessee-intervener, submitted THAT: The contentions put forward by both Shri Ajay Vohra and Shri K.V.S.Bhaskara Rao are reiterated. The crux of arguments can be summarised in the following propositions:-

a) 'Rates of tax' normally specified in Chapter II, Section 2 of the Finance Act relating to each of the assessment years have no application to the tax leviable under Section 113 of the Income Tax Act in case of block assessment of search cases.

b) Chapter XIV B is a Special Procedure for assessment of search cases and is a self-contained code for assessment of undisclosed income relating to the block period. Sec. 113 determines the rate of tax for income brought to tax in terms of sec. 158BA(2) Finance Act for each of the assessment years has no application.

c) Prior to the insertion of the proviso to Section 113 of the Income Tax Act 1961, the question of levy of surcharge on the tax computed under Section 113 of the Income Tax Act, 1961, does not even arise for consideration.

d) There has been no valid levy of surcharge under any Central Act/Finance Act during the period 1-7-1995, the date on which Chapter XIV B was first inserted by the Finance Act, 1995, to 1-6-2002 the date on which the proviso was inserted in Section 113 of the Income Tax Act 1961 authorising levy of surcharge, for the reason that neither sub-sec. (8) of sec. 2 of the Finance Act nor the first proviso refers to Chapter XIVB.

e) The language employed in Chapter II of the Finance Act normally specifies the rates of tax applicable for the income of the previous year relevant to the assessment year commencing on the 1st April of the relevant year and these provisions are not applicable to search cases under Chapter XIVB for which the rates are provided in sec. 113.

f) The only provision which, if at ail, has some relevance to a particular assessment year, is the proviso specified in sub-section (3) of Section 2 under Chapter II of the Finance Act, and the provision was inserted in the context of specifying the rates under Section 2 for the assessment year commencing on 1st day of April 2001. The rates are confined only for the assessment year 2001-02. Sub-section (3) of Section 2 only deals with the tax chargeable with reference to the rates imposed under sub-section (1) of Section 2 or to rates specified in that Chapter or Section for a particular assessment year, i.e, 2001-02. Reference to Section 113 in sub-sec. (3) of sec. 2 of the Finance Act does not convey any meaning as in all search cases block assessment period consists of several assessment years. Without specifying the criteria for the purpose of determining the rate of surcharge specified in the Finance Act, it is not possible to levy the surcharge based on the above proviso.

g) Even assuming that the Central Act/Finance Act seeks to levy surcharge on the amount of Income Tax computed in accordance with Section 113 of the Act, it can only successfully do so if it frames a provision appropriate to that end. If the law fails and the taxpayer cannot be brought within its letter, no question of unjustness as such arises.

Reliance is placed on the following decisions:-

a) CIT, Bombay City I, v. Jalgaon Electric Supply Co. Ltd,, 40 ITR 184 (SC), specifically at pages 188 and 189.

b) CIT, Patiala v. Shahzada Nand and Sons and others, 60 ITR 392 (SC), at pages 399 to 401.

(c) ACIT v. Thanthi Trust, 247 ITR 785 (SC)

(d) Vikrant Tyres v. First ITO, 247 ITR 821 (SC),

7. The learned counsel Shri Ajay Gandhi on behalf of Unix Electronics Pvt. Ltd., and Smt. Priti Bhushan Mehta, assessee-interveners submitted THAT: The arguments made by the other interveners as above are reiterated. The main thrust of their argument is that levy of surcharge by applying the provisions of the Finance Act in a search case covered by Chapter XIVB is not feasible and that the reference to sec 113 in the context of surcharge in the Finance Acts was unintended, or a drafting error and that the proviso to sec. 113 inserted by the Finance Act, 2002, was a prospective proviso.

8.1 Learned Senior Standing Counsel of the Department, for the DR(CIT) representing the Revenue, submitted THAT: Though a peripheral view of Chapter XIV-B might give an impression that it is a self-contained code for assessing the undisclosed income, an in depth study of the provisions of the Act make it clear that it is not so. Chapter XIV-B does not even provide for rate of tax leviable on the undisclosed income and Section 158BA(2) looks to Section 113, which is in Chapter XII, for the purpose of rate of tax, on the undisclosed income. This itself proves that Chapter XIVB is not a self-contained code.

8.2, It is not correct to say that, the induction of theory of block period excludes the concept, of assessment year and previous years from the whole scheme of Chapter XIV-B since clause (a) of Section 158B defines "block period" as meaning certain number of assessment years preceding previous year in which search was conducted. This necessarily demonstrates that the concept of assessment year and the income relatable thereto, is not given a go by altogether in Chapter XIV-B. On the other hand, it is only in the context of getting over the possible technical difficulties that might be arising in fixing taxable assessment year, the Parliament, in its wisdom, has provided for integration of the undisclosed income of all the assessment years as relatable to one block period and levying, fixed-rate of tax. That does not necessarily mean that the theory of assessment year has been given a total go by. Form 2B prescribed in terms of the Income Tax Rule 12(la), which is meant to be used for returning income for block assessment, takes into account the break-up of undisclosed income of each of the assessment years included in the block period. The total income including undisclosed income computed U/S.158BB, is expected to be disclosed in Part - II with reference to each of the assessment years, Undisclosed income for the block period is aggregated only towards the end of the form. Relying on the decision of the Hon'ble jurisdictional High Court in Venkatagiri Raja's case (2003(6) ALD 463), he submitted that the statutory forms also constitute integral part of the statutory scheme and they could be looked up for the purpose of interpreting the statutory provision in the enactment. Thus, the concept canvassed by the assessee's counsel that 'assessment year' is divorced from Chapter XIVB is untenable in law. Further, reference may be had to sec. 159BH which provides as follows:-

"Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter."

No part of the Income-tax Act should be excluded in the context of computation of undisclosed income even under Chapter XIVB of the Act. Thus, a fair construction of sec. 158BH shows that Chapter XIVB is given an overriding effect by Sec. 158BH. Thus, where there is a conflict between provision in Chapter XIV-B and rest of the provisions of the Income Tax Act, Chapter XIV-B would prevail and where they co-exist, the rest of the provisions of the Income-tax Act have to be given effect to. The overriding effect conferred on Chapter XIV-B is only against other provisions in the Income Tax Act, but not any other statute and the Finance Act fails outside the purview of overriding effect conferred on Chapter XIV B of the Act.

8.3 As regard the scope of the non-obstante clause, reliance is placed on the judgment of the Hon'ble Supreme Court in the case of N. M.Veerappa v. Canara Bank and Others (1998) 2 SCC 317, to emphasise that the scope and width of the non-obstante clause is to be decided on the basis of what is contained in the enacting part of the provision. Further, reliance is placed on the judgment of the Hon'ble Supreme Court in the case of State of West Bengal and Another v. Madan Mohan Ghosh and Others, (2002) 9 SCC 177, to enlighten that it was held that non-obstante clause was intended to confer primacy only to the statutory provisions in existence as on that date and that primacy would not extend to future laws. The non-obstante clause figuring in sec. 158BA(1) is a restrictive one and it cannot be given wider effect as it gives primacy to Chapter XIVB over the other provisions of the Act and, at any rate, does not confer overriding effect over the provisions of the Finance Act. Even if it is to be assumed that surcharge in Finance Act, 1999, is inconsistent with sec. 158BA(2) read with sec. 113, Finance Act, 1999, being a subsequent enactment, the same has to be given effect to and the question of Finance Act, 1999, yielding to sec. 158BA(2) of the Act does not arise.

8.4. Even otherwise, when there is a conflict between prior law and subsequent law, if is the latter that prevails. For this proposition, reliance is placed on the decision of the Hon'ble Supreme Court reported in AIR 1977 SC 265 at page 275, para 23. Thus, the Parliament, being fully conscious of the existence of Chapter XIVB and especially sec. 158BA(1) with non obstante clause, provided for levy of surcharge by Finance Act, 1999, in the case of all assessees and Finance Acts of 1996 to 1998 provide for levy of surcharge on non-domestic companies.

8.5. Furthermore, it is one of the elementary rules of interpretation that there should be harmonious construction of the statutes. The Court's duty is to construe the provisions of the various statutes as to harmonize them, so that the purpose of the statutes may be given effect to. For proposition reliance is placed on the judgment of Hon'ble Supreme Court in the case of Sultana Begum v. Premchand Jain, (1997) 1 SCC 373 at Page 382 Para 15. Thus, the aim of interpretation should be to construe harmonously the provisions of the Income-tax Act as well as the Finance Act, but not to nullify either of them. Reference may be made to the relevant provisions of the Finance Act, 1999, to highlight that a plain reading of these provisions clearly Indicate that Parliament has specifically provided for charging of surcharge with reference to advance tax payable in the year 1999 and corresponding Part III of First Schedule of the Finance Act, 1999, provides for surcharge. Since the levy has been introduced in Part III of First Schedule, it is not in dispute that the said provision has to be taken into account for the purpose of computation of advance tax for the financial year commencing on 1-4-1999 in respect of undisclosed income also. The provisions which are found in Part III of First Schedule of the Finance Act, 1999, have also been correspondingly introduced in the Finance Act, 2000, in Part I of the First Schedule, so as to make it applicable to assessment year 2000-2001 which corresponds to previous year 1999-2000.

8.6. In view of the specific incorporation of the provisions of Finance Act, 1999, and due provision having been made for levy of surcharge in Finance Act, 2000, it is inescapable to conclude that the surcharge is leviable on undisclosed income of all assessees from the assessment year 2000-2001 (previous year 1-4-1999 to 31-3-2000) and for domestic companies, in respect of undisclosed income for the interior period in view of the relevant provisions of Finance Acts of 1995, 1996 and 1997. The submission of the assessees that surcharge is not leviable for the period anterior to 1-6-2002 can not be accepted as that would be making the relevant Finance Acts to the extent of levy of surcharge as dead letters and that such an interpretation cannot be termed as a harmonious construction. It amounts to ignoring the relevant piece of legislation, which is found in the statute book, specifically when the assessees have not argued that the said provisions of the relevant Finance Act to the extent of levy of surcharge are ultra vires the Constitution of India and, in law, such an issue cannot be raised before this Tribunal. If the proviso to sec. 113 introduced by the Finance Act, 2002, is construed prospectively and is made inapplicable to period before 1-6-2002, it would tantamount to ignoring the provisions in the Finance Acts of 1995, 1996, 1997, 1998, 1999 and 2000, which is not permissible in law. Reliance is placed on the judgment of the Hon'ble Supreme Court in the case of CIT v. Hindustan Bulk Carriers (2003) 3 SCC 57 at page 74, paragraphs 14 to 21. The intention to levy surcharge, especially under sec. 113 of the Income-tax Act, 1961, was made explicit in the Finance Act, 1999, and hence the same cannot be allowed to fail.

8.7 While Parliament's power to levy surcharge on income-tax is traceable to its power under Article 271 read with Entry 82 of List I of VII Schedule to the Constitution of India, the power of Parliament to levy surcharge is not traceable to sec. 4 of the Income-tax Act, 1961, Sec. 4, according to the learned Senior Standing Counsel of the Revenue, only stipulates that income-tax shall be charged at the rates that may be specified by any Central Act, for varying periods, and for the working of income-tax one has to look into the relevant Finance Act. Thus, one need not look into sec. 4 of the Income-tax Act as Parliament has got the prerogative to levy tax on all incomes other than agricultural income, by reason of Entry 82 to List I of VII Schedule of the Constitution and that the surcharge has been levied in accordance with this power. Therefore, the submissions of the assessees that levy of surcharge is inconsistent with sec. 4 cannot be countenanced.

8.8. The assessee's contention that the Finance Act is intended only to stipulate the rate and that charge cannot be created by Finance Act, is a palpably erroneous proposition which deserves to be rejected in view of Full Bench (three judges) decision of Hon'ble Supreme Court in the case of Madurai District Central Co-operative Bank Ltd. v. Third Income-tax Officer Madurai, 101 ITR 24. Pages 29 to 31 and 36 of that judgment may to know that in view of this binding precedent, it is inescapable to conclude that parliament has got the power to levy surcharge through Finance Act.

8.9. On the decision of the Hon'ble Supreme Court in the case of CIT vs Elphinstone Spinning and Weaving Mills Co. Ltd., 40 ITR 142, relied upon by the assessee, it does not really advance the case of the assessee as the Hon'ble Supreme Court found relevant provisions as lacking in creation of charge and this was also admitted by the Department. That judgment is distinguishable for the reason that the Department having admitted lack of creation of charge, the Commissioner of Income-tax canvassed for the proposition that the surcharge is leviable by virtue of the Finance Act even if there is no income, which was, however, rejected by the Supreme Court. Accepting the Revenue's contention in the Elphinstone case, would have resulted in divesting of certain of the expressions found, viz., "total income", "profits liable to tax", "dividends payable out of such profits" and "an additional income-tax", of their natural and real meaning. Fully being conscious of the said state of legal position, some of those words may be ignored as being surplusage or a drafting error, and accordingly prayed the Hon'ble Supreme Court to accept Revenue's interpretation, by construing the said expressions as surplusage. This contention of the revenue did not find favour with the Supreme Court (page 148 of the report).

8.10. The comparison sought to be made between Elphinstone's case on the one hand and the present case on the other, is not warranted. In Elphinstone's case specific provision was made under sec. 3 of the Finance Act, 1963, with a non obstante clause only because the Parliament was levying surcharge on certain items of income, which otherwise were not assessable to income-tax. It is on account of this, a specific provision in Sec.3 was made with a non obstante clause. Merely because such a section with similar language has not been found in all these Finance Acts, it does not mean that those Finance Acts have not created charge.

8.11. While there is no controversy with regard to the proposition of the assessee that if the charge fails the question of taxing the assessee does not arise, the Hon'ble Supreme Court in Elphinstone's case construed the relevant provisions as amounting to not creating a charge and that decision turned on the peculiar facts of that case and it cannot be treated as an authority for the proposition that surcharge cannot be levied by a Finance Act. While Elphinstone's case was decided by a Division Bench (of two judges), the case of Madurai District Co-operative Central Bank Ltd. was decided by a Full Bench ( of three judges) and thus the latter constitutes the binding decision.

8.12. Reliance is placed on the judgment of Hon'ble Supreme Court in the case of CIT v. Srinivasan, 83 ITR 346, in which the Apex Court ruled that the word "income-tax" in sec. 2(2) of the Finance Act, 1964, includes surcharge and additional surcharge. Reference may be made to Finance Act, 1999 (No.27 of 1999), and sec. 2 thereof. It states that income-tax shall be charged at the rates specified in Part I of the First Schedule and also stipulates increase of income-tax by levy of surcharge, by making appropriate provisions in Sec. 2(8) read with Part III of Schedule A of the Finance Act and that sec. 2 of the Finance Act, 2000 also correspondingly stipulates that income-tax shall be charged at the rates specified in Part I of First Schedule. Thus, he submitted that in view of the specific provisions found in sec. 2 of Finance Act, 1999 and in Finance Act, 2000, it is clear that the charge has been created and that "income-tax" in sec, 2(2) includes "surcharge" and "additional surcharge". There is sufficient language employed in sec. 2 of the relevant Finance Act providing for levy of surcharge on the relevant assessee and in the instant case, therefore, it cannot be said that the charge had failed. The contentions of the assessee that the Revenue relied only on sec. 2(3) of the Finance Act apart from paras 1 and 3 appended to the Finance Act, are heavily disputed. Reliance is placed on sec. 2 of the Finance Act which provides for levy of surcharge in other words, sec. 2 of the Finance Act is the relevant charging section for levy of surcharge in a block assessment.

8.13. The proviso to sec. 113 introduced by the Finance Act, 2002, is a piece of declaratory legislation and is applicable to all assessment years anterior to 1-6-2002. In effect, the said proviso to Section 113 is nothing but a proviso to each of the Finance Acts, which introduced levy of surcharge on the income taxable under sec.113 of the Act. As seen from the Finance Acts of 1995 to 1997 (in the case of domestic companies) and Finance Acts of 1999 and 2000 (in the case of all assessees), the Parliament provided for levy of surcharge on the incomes assessable under sec.113 of the Act, but did not stipulate the rate of surcharge perhaps because the Parliament opined that it was not specifically required to be returned. The assessee's counsel rightly pointed out that since the search is the triggering point for the ensuing assessments under Chapter XIV-B, it is the law as on the date of search that should be applied for all aspects including rate of tax and surcharge. Thus, whatever rate of surcharge that subsisted as on the date of search would govern the assessees concerned. While admitting that the issue is capable of debate, Parliament intervened to make a declaratory law, clarifying that the surcharge shall be levied at the rate prevalent on the date of search. Thus, his case is that Parliament only clarified the pre-existing legal position and has not made any new provision, much less did it enhance the liability. Thus, it is wrong to argue that surcharge has been introduced for the first time in respect of undisclosed income by Finance Act, 2002, by introducing proviso to sec. 113 of the Income-tax Act, 1961 and it was contemplated by the various Finance Acts.

8.14. Reliance is placed on the judgment of the Hon'ble Supreme Court in the case of Hindustan Ideal Insurance Co. Ltd. v. Life Insurance Corporation of India, AIR 1963 SC 1083, paragraphs 28 to 30. There can be declaratory proviso meant for the purpose of clarifying the statutory implication. Reliance is also placed on the observations made by the House of Lords in 1897 Appeal Cases 647 to highlight that the proviso to sec. 113 is in effect on declaratory piece of legislation. Instead of placing a declaratory proviso in each of the Finance Acts, Parliament, in its wisdom, incorporated such proviso in sec. 113 of the Income-tax Act, 1961, which is only intended to clarify the relevant provisions of the Finance Act concerned.

8.15. Even if the proviso to sec. 113 introduced by the Finance Act, 2002, is to be excluded from consideration, the same consequence would follow as, on a fair interpretation of the relevant provisions of the Finance Act de hors the proviso to sec. 113 of the Income-tax Act, 1961, the surcharge could be levied only at the rate prevalent on the date of search as per settled legal position. The plea of the assessee that levy of surcharge on the tax payable on undisclosed income is inconsistent and incongruous, is untenable as the argument that if advance tax had been paid, it would cease to be undisclosed income, is neither here nor there. Parliament, while enacting the relevant provisions of the Finance Act, has only indicated that undisclosed income surfacing as a result of search would not only be exigible to tax payable under sec. 113, but it would also be exigible to surcharge, and the contrary theory developed by me assessee is peripheral and does not deserve serious consideration. While reiterating that de hors sec. 113, the Finance Act has impliedly levied surcharge, the theory of retrospectivity does not come to the rescue of the assessee and also that the declaratory legislation can be made by a proviso to avert a possible ambiguity. For this proposition, reliance is placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Shelly Products, 261 ITR 367. In that case, Hon'ble Supreme Court has held that the real meaning of the original provision in the statute was implicit and the same was made explicit by the declaratory legislation. Extending these principles to the case on hand, the proviso to sec. 113 is only a declaratory piece of legislation intended to remove obscurity, if any, found in the relevant Finance Acts.

8.16 Regarding the reliance placed by the assessee on the resolutions passed at the Chief Commissioners' conference, the National Conference of Chief Commissioners of Income-tax cannot be said to have any statutory authority under the Income-tax Act, nor is it vested with any power or jurisdiction to interpret the provisions of the Income-tax Act. There is no provision in the Income-tax Act constituting such a body, much less vesting with it any power to make any suggestion, and that the doubts expressed in that conference or suggestions made there, cannot be taken as an aid to the interpretation of statutes. Reliance is placed on the judgment of the Hon'ble Supreme Court reported in AIR 1983 SC 239, wherein it was held that once the statute leaves the Parliament House, it is not open to even government to interpret the law and it is only for the courts to state what Parliament meant to say and none else. Even otherwise, the theory of "contemporaneous exposition" cannot be applied to ongoing statutes and the understanding of the Chief Commissioners of Income-tax cannot be looked at as an aid for construction of the statutes. Thus, the suggestions of the National Conference of Chief Commissioners of Income-tax are not relevant in this context.

8.17 Reference may be had to the decisions of various Benches of the Tribunal which are distinguishable. Reliance is placed on the decision of Calcutta Bench of the Tribunal in the case of Raghunandan Modi v. ACIT, in I.T.A. (S.S.) No.46/K/04 dated 19-10-2004, Madras Bench of the Tribunal in the case of Mr. Raya R. Govindarajan v. ACIT, (2005) 3 SOT 192 (Chennai) and Calcutta Bench of the Tribunal in the case of ACIT v. Sri Subhash Kumar Bhunia, I.T.A (S.S) No. 19/Kol/03 dated 18-10-2004. The Calcutta Bench has correctly appreciated the decision of the Hon'ble Supreme Court in the case of Madurai District Central Co-operative Bank (supra) and has come to the right conclusion which is the perfect position of law.

8.18. Regarding the argument of Shri Ajay Vohra, learned counsel for Shri Shiv Nadar assessee-Mntervener-I the assumption on the part of the assessee that the Revenue conceded that the relevant date for imposition of surcharge might be considered to be in doubt is incorrect as it is the case of the Revenue that the date of search is relevant and the rate of surcharge as on the date of search would apply. Regarding the submission of Shri P. Muralikrishna, the learned counsel for Shri M.Yugandhar, assessee-intervener-II, the Revenue has not conceded that there is ambiguity as to the rate of surcharge.

9.1. In his rejoinder, the learned counsel Shri Ajay Vohra, on behalf of Shri Shiv Nadar and Shri Subroto Bhattacharya, assessee-interveners submitted THAT:

a) The assessee is not at all challenging the legislative competence in enacting any provision for imposing fresh levy by way of income-tax or by way of a Central Act.

b) It is also not disputed that such imposition can be effected by amendment either in the provisions of the Act or by way of amendment in the Finance Act or any other Central enactment.

c) There is no mandate in the Finance Act to impose surcharge in respect of search conducted prior to 1-6-2002 and that the provisions in the Finance Act do not justify imposition of surcharge.

d) The Revenue has quoted the judgment of the Summit Court in the case of Madurai District Central Co-operative Bank (supra). Reliance placed by the Revenue on this judgment is totally out of context. The ratio of the decision should be read in the context of, and with reference to the facts on which such decision was based, and not otherwise. It is well settled that it is neither desirable nor permissible to pick out a word or a sentence from the judgement, divorced divorced from the context of the question under consideration and treat it to be complete law. In this regard, reliance is placed on the following judgment. :-

a) Sun Engineering Works (P) Ltd., 198 ITR 297 (SC).

b) Padmasundara Rao, 255 ITR 147 (SC). c)

(c) J.T. (India) Exports v. UOI, 262 ITR 269 (Del) (FB).

9.2. The judgment of the Hon'ble Supreme Court in the case of Madurai District Central Co-operative Bank (supra) may be seen.

(a) The court in that case was concerned only with the levy of 'additional surcharge' and not with 'surcharge' and 'special surcharge',

(b) To determine the validity of imposition of such additional surcharge, enquiry must first be made as regards the scope of a Finance Act and then as regards the interpretation of the Finance Act of 1963, and

(c) The court has concluded that a new and independent charge could be validly introduced by the Finance Act.

Kind attention of the Bench is drawn to the observations of the Hon'ble Supreme Court at pages 30, 32, 34 and 35 of the report. The court has concluded that the Finance Act provided for levy of a new and independent charge and the additional surcharge was a distinct charge which is not dependent for its levy on the assessee's liability to pay income-tax and super tax. The ratio of the decision in that case is summarised as follows:-

a) Legislature is competent to impose a new/ fresh levy;

b) Such levy can be introduced through the Finance Act;

c) The relevant provisions in the Finance Act created an independent and separate levy by way of additional surcharge' inasmuch as the Finance Act provided

(i) the basis of levy

(ii) the manner of levying such additional surcharge, and

(iii) the value on which the additional surcharge was levied. Such independent charge created by the Finance Act, independent of the provisions of the Act, must be enforced;

d) The additional surcharge, contra distinguished with surcharge on income, was not dependent on the assessee's liability to pay tax;

e) The imposition of such 'additional surcharge' was in consonance with the provisions of section 4 of the Act.

9.3. The provisions of the various Finance Acts, which sought to levy surcharge on the tax payable on income of the block period, did not lay down an independent and separate charge. In this context, the propositions laid down by the Hon'ble Supreme Court in the case of Govind Saran Ganga Saran v. CST, 155 ITR 144 may be seen. The stand of this intervener on the Finance Act is summarised as follows:-

(a) The levy of surcharge was totally dependent on the assessee's liability to pay tax on undisclosed income' for the ' block period';

(b) The rate for imposition of surcharge was unknown since the relevant date for imposition of surcharge, as admitted by the Revenue's Standing Counsel during the course of hearing, was in doubt. It was not known as to which date was relevant for determining the imposition of surcharge.

(c) In the case of proceedings under sec. 158BD, there was ambiguity in so far as it was not known as to what was the rate of surcharge that was applicable, in addition to the ambiguity that was already existing in the case of proceedings under sec. 158BD. The ambiguity as to the rate applicable was as follows:

(i) The rate applicable for the year in which the search was initiated; or

(ii) The rate applicable for the year in which search was concluded; or

(iii) The rate applicable for the year in which the block assessment proceedings under section 158BC were initiated; or

(iv) The rate applicable for the year in which the block assessment order was passed,

(v) There was contradiction in the provisions of the Finance Act(s) inasmuch as both Part I of First Schedule and Part III of First Schedule referred to levy of surcharge. The applicability of either of the rates would have resulted in absurdity.

9.4 Rates referred in Part III of First Schedule could not apply to undisclosed income' since the said part contains rates for payment of advance tax. Part III could have no application in any situation since on undisclosed income' no advance tax is paid. In fact, if advance tax has been paid on certain income, it cannot be held to be 'undisclosed income'. In this regard, reference can be had to the following decisions wherein it has been held that if advance tax had been paid but no return was filed, such income could not be regarded as 'undisclosed income':

(a) ACIT vs. A.R. Enterprises: 274 ITR 110 (Mad.)

(b) Dr. Mrs Alaka Goswami vs. CIT 268 ITR 178 (Gau.)

(c) CIT V. Mrs. Kumkum Kohli: 276 ITR 589(Del.)

(d) Nilesh R. Shah V. ACIT: 253 ITR 34 (Chen) (AT)

The application of rates contained in Part I of the First Schedule would also not be in consonance with the scheme of provisions relating to imposition of tax as explained hereunder:

In case of search initiated/ conducted on 1.08.2001, the Deapartment/ Revenue relies upon proviso to section 2(3) of the Finance Act, 2001 to levy surcharge, which refers to Part I of First Schedule. Part I of the Finance Act, 2001 would contain the rates of tax for the assessment year 2001-02. However, the search, it will be appreciated, was initiated on 1.08.2001, i.e. falling in the previous year 2001-02 and relevant to the assessment year 2002-03.

The levy of surcharge, in such circumstance, at the rates specified in Part I of First Schedule, i.e. the rate applicable for the assessment year 2001-02, would be clearly illegal since the rates applicable to assessment year 2001-02 could not be applied for the search conduced on 1.08.2001, Such an imposition would be in clear conflict with the decision of the Supreme Court in the case of Karimtharuvi Tea Estate Limited: 60 ITR 262.

Based on the above, prior to amendment in section 113, the provisions of the Finance Act did not impose an independent charge for levying surcharge since the prerequisite components for a valid imposition were non-existent.

9.5 The levy of surcharge prior to amendment in sec. 113 was not in consonance with the provisions of the Income-tax Act, especially proviso to sec. 4. The decision in the case of Madurai District Central Co-operative Bank (supra), relied upon by the Revenue, is not applicable to the facts of this case and that, on the other hand, the judgment of the Hon'ble Supreme Court in the case of Elphinstone Spinning and Weaving Mills Co. Ltd. (supra) is very much applicable. The judgments of the Tribunal in the cases of Raya R. Govindarajan (supra), Raghunandan Modi (supra) and Shri Subhas Kumar Bhunia (supra) are distinguishable. They do not lay down the correct position of law. The Department was wrong in submitting that the amendment to sec. 113 would operate retrospectively and that Chapter XIVB is not a self-contained code.

10.1 The learned counsel Shri P.Muralikrishna, on behalf of Shri M.Yugandhar, assessee-intervener in his rejoinder submitted THAT: The replies of the learned counsel Shri Ajay Vohra for the assessee-intervener-I, Shri Shiv Nadar, are adopted. The decisions quoted by the learned Senior Standing Counsel for the Revenue reveal that most of the judgments are not relevant to the issue under consideration. Reference may be had to Hindustan Ideal Insurance Co. Ltd. v. LIC, AIR 1973 SC 1083, at paragraph 28 of that judgment. The proviso in the Finance Act does not convey the meaning that the surcharge is leviable on the tax payable under sec. 113 as the main provisions of the Finance Act refer to the rates for the assessment years commencing on the first day of April and not block assessment and that proviso cannot expand the scope of the main section. This decision of the Hon'ble Supreme Court in fact supports the case of the assessee. As regards the judgment in D. Sanjeevayya v. Election Tribunal, AP, and others in AIR 1967 SC 1211, reference to paragraph 4 thereof is made. The proposition therein is not: applicable to the facts of this case as it is impossible to interpret the provisions contained in sub-sec. (3)/(8) of sec. 2 of the Finance Act as the provisions levying surcharge pertain to block assessment. In this case, no such reconciliation is possible. The propositions in the decision in M.V Javali v. Mahajan Borewell and Co. and others, (1997) 8 SCC 72, are that in construing the provisions of a statute, courts should be slow to adopt a construction which tends to make part of the statute meaningless or ineffective and that an attempt must always be made so to reconcile the relevant provisions as to advance the remedy intended by the statute and in such a case, it is legitimate and even necessary to adopt the rule of liberal construction whereby meaning is given to all parts of the provisions.

10.2 The provisions of sec. 158BA read with sec. 113 have to be construed strictly and they do not provide for levy of surcharge on the tax determined on undisclosed income and that the specific provisions governing he computation of tax in block assessment hold the field. The judgment of the Hon'ble Supreme Court has no application to the facts of the case on hand. Regarding the decision in Shyam Sunder and Others v. Ram Kumar and Another (2001) 8 SCC 24, at paragraph 37 thereof, Hon'ble Supreme Court has clearly stated that "a statute which affects the substantive right has to be held prospective unless made retrospective either expressly or by necessary intendment". This judgment in fact supports the case of the assessee. The judgment of the Hon'ble Supreme Court in the case of CIT v. Shaan Finance (P) Ltd., and CIT v. First Leasing Co, of India Ltd., 231 ITR 308, specifically at page 317, has laid down therein that "in interpreting a fiscal statute, the court cannot proceed to make good deficiencies if there be any; the court must interpret the statute as it stands and in the case of doubt in a manner favourable to the taxpayer". He relied on the judgment of the Hon'ble Supreme Court in Union of India v. Onkar S. Kan war and others, 258 ITR 761, at page 769. It is laid down therein that "where two views are possible then the one which is in favour of the assessee must be adopted",. For this proposition, reliance is also placed on the judgments in the cases of CIT v. Quantas Airways Ltd., 255 ITR 84 (Del) and A.P. State Civil Supplies Corporation v. DCIT, 83 ITD 398 (Hyd), and CWT v. Ellis Bridge Gymkhana and Others, 229 ITR 1.

11 The learned counsel Shri Ajay Gandhi, on behalf of Unix Electronics and Smt. Priti Bhushan Merita, assessee-interveners adopted the same arguments as other assessee-interveners above.

12.1. Rival submissions heard and relevant orders read besides going through the facts of the case on record and the written submissions filed on record by the assessee-appellant, Department and assessee-interveners. After doing so and duly considering the various aspects of the issue involved in our long and due deliberations, even for and against, amongst us, giving due care and meticulous attention to the complexities involved, while closely analysing the facts and circumstances of the instant case roped with the issue in adjudication before us and in the light of the various provisions of law under different enactments and copious case-laws showering non-stop like torrential rain overflowing even to the subsequent month heard from the previous month of hearing, tremendous arguments put forth with their untiring efforts and zeal had by the learned representatives of the assessee-appellant with those of the assessee-interveners entering appearance from different States in the country, and of the Department with particularly its learned Senior Standing Counsel, ably assisted by the Departmental Representatives, presenting before us their respective stand highlighting in their own inimitable style, all of which we are bound to appreciate on record, thus inundating us to sail over and reach our destination of decision that the stand of the assessees has substantial force, which we are rendering with considered reasons as herein below-

12.2 We proceed to consider answering the question referred to this Special Bench after listing out the areas that are not in dispute before us THAT:

(a) The legislature is competent to impose a fresh and new levy of surcharge.

(b) The legislature can levy surcharge either through the Income-tax Act or through the Finance Act, or any other Central Act by reason of Article 271 of the Constitution of India read with Entry 82 in List 1 of 7th Schedule of the Constitution. In other words, the source of power of Parliament as well as the manner in which it chooses to levy surcharge is not in dispute before this Bench.

(c) The assessee has not raised before the Tribunal an issue as to the Constitutional validity of the levy of surcharge as both parties are conscious of the fact that such an argument cannot be raised before Tribunal.

(d) There is no express intendment in the proviso introduced to sec. 113 of the Income-tax Act, 1961, by the Finance Act, 2002, that it is retrospective, though the Revenue argues that this is retroactive due to necessary implication.

(e) The resolution of the National Conference of Chief Commissioners of Income-tax cannot be used as an aid for interpreting the Income-tax Act, nor does it have any statutory power to make recommendations, and that it is just an opinion expressed in yet another seminar.

(f) The Parliament did not stipulate the rate of surcharge applicable, explicitly prior to the introduction of the proviso to sec. 113 and that this issue is capable of debate, though while stating so the Revenue's argument is that the rate of surcharge applicable as on the date of search, should be the rate applicable to the block, as such an interpretation would be harmonious and the proviso to Sec.113 is a declaratory legislation and this proviso clarifies and reiterates the intention of legislature as it always was.

12.3. Though the resolution of the National Conference of Chief Commissioners of Income-tax cannot be considered as an aid to interpretation of a statute, nor as a guideline for decision in this case, we find that the resolution has aptly and precisely put the problem of levy of surcharge prior to the insertion of the proviso to sec. 113 in the proper perspective. The comments and suggestions of the Conference are as follows:-

"3.Section 113: Tax on undisclosed income (Levy of Surcharge on tax on undisclosed income).

Section 113 provides for tax on undisclosed income at the rate of 60 per cent. The Finance Act stipulates that the amount of income tax shall be increased by a surcharge, as applicable to the assessee. Levy of surcharge on tax on regular income does not pose a problem since the amount of income-tax is determined with reference to a particular assessment year, as specified in the Finance Act. The basis for levy of such tax on regular income is contained in section 4 of the Income-tax Act, in which the charge of tax is linked to any Central Act and such a Central Act in this case is the Finance Act.

In the case of a block assessment, there are two problems in relation to the levy of surcharge. The first is that section 113 does not mention a Central Act. In the absence of a reference to another Central Act in the charging section/ it becomes difficult to justify levy of surcharge. Even if it is assumed that reference in the Finance Act to section 113 is sufficient authority to levy surcharge, the second problem is that the Finance Act levies surcharge on the amount of income-tax of a particular assessment year whereas in the block assessment tax is levied on the undisclosed income of the block period. Absence of a specific assessment year in the block assessment may render the levy suspect. Yet another problem is the rate of surcharge applicable. To illustrate, if the search took place on, say April 4, 1996, whether the rate of surcharge is to be adopted as applicable to the assessment year 1996-97 or the assessment year 1997-98, the rate of surcharge being different for the two years? The provisions of section 113 or the provisions of the Finance Act do not offer any guidance on the issue.

Suggestions:

The foregoing problem indicates that levy of surcharge on undisclosed income is a matter of uncertainty and is prone to litigation. In the circumstances, it is suggested that section 113 may be amended retrospectively in order to provide for levy of surcharge at the rate applicable to the assessment year relevant to the financial year in which the search was conducted."

1.2.4 The provisions of the Income-tax Act, 1961, which are relevant for deciding the issue before us are as follows:-

Sec. 2(9):

""assessment year" means the period of twelve months commencing on the 1st day of April every year;"

Sec. 2(34):

""previous year" means the previous year as defined in section 3*"

Sec, 2(37A):

""rate or rates in force" or "rates in force", in relation to an assessment year or financial year, mean-

(i) for the purposes of calculating income-tax under the first proviso to sub-section (5) of section 132, or computing the income-tax chargeable under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 or deducting income-tax under section 192 from income chargeable under the head "Salaries" or computation of the "advance tax" payable under Chapter XVll-C in a case not falling under section 115A or section 115B or section 115BB or section USE or section 164 or section 164A or section 167B , the rates or rate of income-tax specified in this behalf in the Finance Act of the relevant year, and for the purposes of computation of the "advance tax" payable under Chapter XVII-C in a case falling under section 115A or section 115B or section 115BB or section 115E or section 164 or section 164A or section 167B, section 115B or section 164 , the rate or rates specified in section 115A or section 115B or section 115BB or section 115E or section 164 or section 164A or section 167B, as the case may be, or the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year, whichever is applicable;

(ii) for the purposes of deduction of tax under sections 193,194, 194A, 194B, 194BB, and 194D 194D and 195 , the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year;

(iii) for the purposes of deduction of tax under section 195, the rates rates of income-tax-specified-in-this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, whichever is applicable by virtue of the provisions of section 90;"

Sec.2(40):

""regular assessment" means the assessment made under sub-section (3) of section 143 or section 144;"

Sec. 2(43):

""tax" in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date;"

Sec. 2(45):

""total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act;"

(Emphasis ours)

Sec.4(1):

"4. Charge of Income-tax.

(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 the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly." [Emphasis ours]

Sec. 5:

"5. Scope of total income.

l) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived......................." (underlining is provided by us]

Thus, total income under sec. 2(45) is the total income of a previous year defined in sec. 2(34), as this is mandated by Sec.5.

Sec. 113:

"113. Tax in the case of block assessment of search cases.

The total undisclosed income for the block period, determined under section 158BC, shall be chargeable to tax at the rate of sixty per cent."

The proviso to sec. 113, introduced by Finance Act, 2002, with effect from 1-6-2002, reads as under:

"Provided that the tax chargeable under this section shall be increased by a surcharge, if any, levied by any Central Act and applicable in the assessment year relevant to the previous year in which . the search is initiated under section 132 or the requisition is made under section 132A."

Chapter XIVB "Special Procedure for assessment" -

"158B. Definitions.

In this Chapter, unless the context otherwise requires,--

(a) "block period" means the period comprising previous years relevant to six assessment years preceding the previous year in which the search was conducted under section 132 or any requisition was made under section 132A and also includes the period up to the date of the commencement of such search or date of such requisition in the previous year in which the said search was conducted or requisition was made:

Provided that where the search is initiated or the requisition is made before the 1st day of June, 2001, the provisions of this clause shall have effect as if for the words six assessment years, the 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 the books of account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the 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 the purposes of this Act." [Emphasis ours]

Sec. 158BA:

. "158BA. Assessment of undisclosed income as a result of search.

(1) Notwithstanding anything contained in any other provisions of this Act, where after the 30th day of June, 1995 a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of any person, then, the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of this Chapter.

(2) The total undisclosed income relating to the block period shall be charged to tax, at the rate specified in section 113, as income of the block period irrespective of the previous year or years to which such income relates and irrespective of the fact whether regular assessment for any one or more of the relevant assessment years is pending or not.

Explanation. - For the removal of doubts, it is hereby declared that-

( a) the assessment made under this Chapter shall be in addition to the regular assessment in respect of each previous year included in the block period;

( b) the total undisclosed income relating to the block period shall not include the income assessed in any regular assessment as income of such block period;

( c) the income assessed in this Chapter shall not be included in the regular assessment of any previous year included in the block period.

(3) Where the assessee proves to the satisfaction of the Assessing Officer that any part of income referred to in sub-section (1) relates to an assessment year for which the previous year has not ended or the date of fifing the return of income under sub-section (1) of section 139 for any previous year has not expired, and such income or the transactions relating to such income are recorded on or before the date of the search or requisition in the books of account or other documents maintained in the normal course relating to such previous years, the said income shall not be included in the block period." [Emphasis ours]

Sec. 158BB:

"158BB. Computation of undisclosed income of the block period.

(1) The undisclosed income of the block period shall be the aggregate of the total income of the previous years falling within the block period computed, in accordance with the provisions of Chapter IV, on the basis of evidence found as a result of search ............."

Sec. 158BC:

"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 the case of any person, then,--

(c) the Assessing Officer, on determination of the undisclosed income of the block period in accordance with this Chapter, shall pass an order of assessment and determine the tax payable by him on the basis of such assessment ;"

Sec. 158 BH:

"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."

12.5. The issues that arise for our consideration are framed as under;-

(a) Whether the proviso to sec. 113 introduced by the Finance Act, 2002, with effect from 1-6-2002, can be considered as a piece of clarificatory legislation or declaratory legislation and thus retroactive in nature?

(b) Whether the Finance Acts, 1995 to 2000 imposed an independent and distinct levy/charge of surcharge on block assessment prior to insertion of the proviso to sec. 113 of the Income-tax Act, 1961?

(c) Whether there is ambiguity or unworkability in the provisions of the Finance Act by which the levy fails?

(d) Whether it can be held that there was an unintended reference to sec. 113 in the Finance Acts, 1995 to 2000, inasmuch as, it was never the intention of the legislature to levy surcharge in cases covered by sec. 113 and whether it can be considered a drafting error?

12.6 Interpretation of statutes stipulates search for real meaning of the words employed in the legislation to resolve ambiguities. While so, mens legis, i.e. the mind of the law, as made in the legislation must be ascertained as demonstrated in the statute. If one takes literal meaning it is like just seeing the body, i.e. 'Deha' but missing the soul i.e. 'Dehi' (AATMA).

Hence, composite perception of 'Deha' and 'Dehi' must be had to attain the core of the meaning while detecting and deducing it by judicial interpretation. There are procedures to be followed in resolving conflicts as also regarding the rule of preference in case of conflict. Maharshi Jaimini expounded Meemamsa Rules (of interpretation) which are adopted to find out the real meaning of the provisions, including daises or words incorporated in the statute, having due regard to the object and purpose of the provisions whenever it became necessary. The elementary and important principles of interpretation laid down demonstrate THESE:

(a) Firstly, (Sarthakya) axiom is that every word and sentence must have the same meaning and purpose;

(b) Secondly (Laghava) axiom is that when one rule or proposition would suffice, more must not be assumed..

(c) Thirdly, (Arthaikaitva) axiom is that to a word or sentence occurring at one and the same place, double meaning should not be given..

(d) Fourthly, (Gunapradhana) axiom is that if a word or sentence which on the face of it purports to express a subordinate idea which clashes with the principal idea, the former must be adjusted to the latter or altogether disregarded.

(e) Fifthly, (Samanjasya) axiom is that contradiction between words and sentences should not be presumed, where it is possible to reconcile them;

(f) Sixthly, (Vikalpa) axiom is that where there is a real contradiction, one of the contradictory matters may be adopted at one's option.

Maxwell on interpretation of statutes says that a construction which would leave without effect any part of the language of the statute would normally be rejected, and further that it is reasonable to presume that the same meaning is employed by the use of the same expression in several parts of the Act. Thus, in the light of the principles laid down by various famous Jurists like Maharshi Jaimini, Craies, Maxwell on Interpretation of Statutes, we begin to dissect as below the various arguments advanced by the assessee, department and interveners referred to above, for dealing with the issues as follows.

12.7. The first issue for consideration as to whether the proviso to S.113 inserted by the Finance Act, 2002, is a declaratory legislation and thus retroactive in nature. The contention of the Revenue is that the insertion of the proviso has to be held as having retroactive, operation in view of the mention of sec. 113 in the various Finance Acts, and that this piece of legislation can be considered a clarificatory or declaratory legislation, which is retroactive in nature and thus has to be considered retrospective.

12.8 The primary contention of the Revenue is that the amendment is only procedural, and thus retroactive. We do not find merit in this argument, for the reason that the proviso to S.113 enabling the increase of tax chargeable under this section by a surcharge', is a substantive amendment. At this juncture, we may extract below the Note to Clauses given in 254 ITR(Statutes) 149, which reads as under:-

"Clause 41 seek to amend section 113 of the Income Tax Act relating to tax in the case of block assessment of search cases.

Under the existing provision of the said section, the total undisclosed income of the block period, determined under section 158BC, shall be chargeable to tax at the rate of sixty per cent.

It is proposed to insert a proviso in the said section to provide that the tax chargeable under that section shall be increased by a surcharge, if any, levied by any Central Act and applicable in the assessment year relevant to the previous year in which the search was initiated under section 132 or requisition was made under section 132A.

This amendment will take effect from 1st June, 2002." [Emphasis ours]

12.9 The relevant portion of the Memorandum explaining provisions in the Finance Bill, 2002, 254 ITR(Statutes)213, reads as follows-

"It is further proposed to amend section 113 of the Income-tax Act to provide that the tax chargeable on the undisclosed income determined under Chapter XIV-B shall be increased by the amount of surcharge applicable in the previous year in which the search commenced or requisition was made, and to amend clause (a) of sub-section (2) of section 119 of the Income-tax Act to enable the Central Board of Direct Taxes to issue such directions as it deems fit for relaxing the provisions of section 158BFA relating to charging of interest.

These amendments will take effect from 1st June, 2002." (Emphasis supplied)

The amendment in question has vested in the assessing authority a power to enhance the amount of tax computed under S.113 by the amount of surcharge. So, what is aimed at by the amendment is not a change in procedure, but a substantial levy. Such an amendment cannot be termed as a mere procedural one, so as to be retrospective and applicable to all pending matters, but has to be deemed to be a substantive one effective only from the date specified in the Act itself.

12.10 In this context, we may refer to the decision of Hon'ble Kerala High Court in the case of N.T. John V/s. CIT (228 ITR 314)(Ker) wherein considering the question whether S.158BA contained in Chapter XIVB is retrospective or prospective in operation, Hon'ble Kerala High Court held, as per relevant portion of the head note( at pp 314-315) as under-

"Normally, a change in the law of procedure operates retrospectively. In the case of Chapter XIVB, there was no change of procedure, but a special procedure was provided. Section 158BA would not apply in a case where a search was initiated under S.132 before June 30,1995. In that view, it cannot be said that Chapter XIVB has retrospective operation."

12.11 Similarly, in the case of Jayalakshmi Leasing Co. In re (228 ITR 1(AT)) the Special Bench of the IT Settlement Commission, examining the jurisdiction to admit and deal with applications in respect of cases of block periods arising under Chapter XIVB of the Income-tax Act, on the interpretation of statutory provisions observed, vide relevant portion of the head note on pages 2 and 3, as follows-

"... The failure to specifically bar the application of Chapter XIX-A to proceedings under Chapter XIVB could be taken to indicate a legislative intent not to exclude the provisions of Chapter XIX-A to block assessment proceedings. Section 158BH would also support this view. The conclusion that a later enactment repeals an earlier enactment is to be resorted to only if the two enactments are so inconsistent with or repugnant to each other that they cannot stand together. The Act must be construed as it stands today and a harmonious construction of all the provisions in the Act is called for in this context. Any construction which renders any provision of the Act nugatory and defeats the object of that provision must, if it is possible, be avoided. Even if two views were possible it would be preferable to adopt the view which will allow the applicability of the "simplified procedure laid down in Chapter XIX-A to all assessees including assessees falling within the ambit of Chapter XIV-B, than the truncated view denying the benefits of this procedure, when in fact there is no express specific provision in this regard and express permission can be read from Section 158BH."

12.12 Similarly, the Apex Court in K.M.Sharma V/s.FTO (254 ITR 772)-SC examining the retrospective or otherwise nature of the amendment to the provisions of S.150(1) with effect from 1st April, 1989, held as per head note(773-774) as under-

"Held, reversing the decision of the High Court, that the provisions of section 150(1) as amended with effect from April 1, 1989, did not enable the authorities to reopen assessments which had become final due to the bar of limitation prior to April 1, 1989, and this position was equally applicable to limitation proposed on the basis of order passed under the Income Tax Act or under any other law.

The provision of a fiscal statute, more particularly one regulating the period of limitation, must receive a strict construction. The law of limitation is intended to give certainty and finality to legal proceedings and to avoid exposure to risk of litigation of litigants for an indefinite period on future unforeseen events. Proceedings which had attained finality under existing law due to bar of limitation cannot be held to be open for revival unless the amended provision is clearly given retrospective operation so as to allow upsetting of proceedings which had already concluded and attained finality.

A taxing provision imposing liability is governed by the normal presumption that it is not retrospective and the settled principle of law is that the law to be applied is that which is in force in the assessment year unless otherwise provided expressly or by necessary implication. Even a procedural provision cannot, in the absence of clear contrary intend men t expressed therein be given greater retrospectivity than is expressly mentioned so as to enable the authorities to affect finality of tax assessments or to reopen liabilities which have become barred by lapse of time." (Emphasis supplied)

In the light of the observations of the Apex Court underlined above, the law that governs the levy of tax on the undisclosed income determined in a block assessment in terms of S.113, is the provisions of S.113 as it stood prior to 1.6.2002, and not the provisions of that section, as amended by the insertion of proviso thereunder, which came into effect only from 1.6.2002, in the absence of any express or implied indication in the amended provisions imputing retrospective operation to the same.

12.13 We may also refer to the decision of Apex Court in CIT V/s. Dhadi Sahu(199 ITR 610) (SC) wherein Considering the effect of amendment to the provisions of S.274(2) by the Taxation Laws(Amendment)Act, 1970 with effect from April 1, 1971, the Apex Court vide relevant portion of the head-note on pages 611-612 of the Report(199 ITR) held as follows-

"The general principle is that a law which brings about a change in the forum does not affect pending actions unless an Intention to the contrary is clearly shown. One of the modes by which such an intention is shown is by making a provision for change over of proceedings from the court or the Tribunal where they are pending to the court or tribunal which under the new law gets jurisdiction to try them.

It is also true that no litigant has any vested right in the matter of procedural law; but where the question is of change of forum, it ceases to be a question of procedure only. The forum of appeal or proceedings is a vested right as opposed to pure procedure to be followed before a particular forum. The right becomes vested when the proceedings are initiated in the tribunal or court of first instance and unless the Legislature has, by express words or by necessary implication, clearly so indicated, that vested right will continue in spite of the change of jurisdiction of the different tribunals or forums."

12,14 We may now refer to the decision of the Apex Court in National Agricultural Co-operative Marketing Federation of India Ltd. and Another(260 ITR 548)-SC, wherein the court was concerned with the nature of amendment made to the provisions of S.S0P(2)(a)(iii). Facts before the Apex Court in that case are that S.8QP(2)(a)(iii) of the Income Tax Act, 1961 as originally inserted provided that in the case of a Co-operative Society engaged in "(iii) the marketing of the agricultural produce of its members" the whole of the amount of profits and gains of business attributable to such activity would be deducted from the gross total income. The Supreme Court in Assam Co-operative Apex Marketing Society Ltd. V/s.CIT (201 ITR 338) rendered under the corresponding earlier proviso, Section 81, held that the phrase "produce of its members" must refer to agricultural produce actually "produced by its members." In a later decision, Kerala State Co-operative Marketing Federation Ltd.(231 ITR 814), a larger Bench of the Supreme Court overruled the decision in the case of Assam Cooperative Apex Marketing Society Ltd.(supra) and held that the exemption under S.80P(2)(a)(iii) was not restricted only to primary societies and that "produce of its members" in that provision had to be construed as including the "produce belonging to" a member-society. Immediately thereafter, in 1999 the provisions of S.80P(2)(a)(iii) were amended by the Income-tax (Second Amendment) Act, 1998(No.ll of 1999) with retrospective effect from April 1, 1968, by substituting sub-clause (lit) to read "the marketing of agricultural produce grown by its members". When the validity of the retrospective amendment to S.80P(2)(a)(iii) is challenged, the Apex Court affirming the view taken by the High Court upholding the validity, held, vide relevant portion of head-note on page 550 of the Reports(260 ITR), as follows-

"The legislative power either to introduce enactments having retrospective effect for the first time or to amend an enacted law with retrospective effect is not only subject to the question of competence but Is also subject to several judicially recognized limitations. The first is the requirement that the words used must expressly provide for or dearly imply retrospective operation. The second is that the retrospectivety must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional. The third is where the legislation is introduced to overcome a judicial decision, here the power cannot be used to subvert the decision without removing the statutory basis of the decision." (Emphasis supplied)

In the instant case, the very first condition, i.e. 'the words must expressly provide for or clearly imply retrospective operation', is not fulfilled, inasmuch as the proviso to S.113 came into effect only from 1.6.2002 by the Finance Act, 2002, the same having not been either expressly or impliedly given with retrospective operation.

12.15 We may now refer to the decision of the Madras High Court in CIT V/s.Pooshya Exports P.Ltd.(262 ITR 417)-Mad., wherein examining the issue with regard to retrospective or otherwise nature of the amendment in S.80HHC by Finance (No.2)Act/ 1991, Hon'ble Madras High Court held, as per relevant portion of the head-note on p.417, as follows-

"If a provision is introduced with a view to confer a benefit, which had not been conferred before such introduction, even though the provision to which the amendment was incorporated is a beneficial provision, that does not necessarily imply that the amendment is to be given retrospective effect even without a declaration to that effect from the legislature. Where the intention of the Legislature is clearly conveyed and wherever the language is clear the intention of the legislature is to be gathered from the language used. A construction which requires for its support, addition or substitution of words or which results in rejection of words has to be avoided. The court is to pronounce the judgment and not to make law." (Emphasis supplied)

In the instant case there is a pronouncement by the legislature itself that the amendment is effective from 1.6.2002. Therefore, in view of the ratio of the Madras High Court noted above, there cannot, be retrospectivity against the intention of the legislature.

12.16 Similarly, in the case of M.G.Pictures(Madras)Ltd.V/s.ACIT(263 ITRT 83)-Mad, examining the issue with regard to retrospective or otherwise nature of the amendment to S.40A(3) restricting disallowance with effect from 1.4.1996, Hon'ble Madras High Court held, as per relevant portion of the head-note on p.83, as follows-

"An amendment must have in its, language something pointing towards its retrospectivity. In order to hold a statute retrospective', it should be specifically so provided. In order to hold the provision to be having retrospective operation, it would have to be shown that if is of a procedural nature." (Emphasis supplied)

On the procedural or substantive nature of the provision under consideration in that case, the High Court held as per relevant portion of head note as follows-

"Held:

(ii)That it was clear from the language of section 40A(3) that the language did not in any manner suggest retrospectivity Considering the tense used in the section, the amendment was prospective. The amendment limiting the discretion of the assessing authorities and creating a right on the assessee to plead for the remaining eighty per cent, expenditure as allowable expenditure could not be viewed as a mere procedural provision. It would have to be held as a provision dealing with substantive right of the assessee. Thus, the amended provision was not of retrospective nature. The Tribunal was right in holding that the amended provision was only prospective."

In the instant case, the proviso to S.113 enabling the enhancement of tax determined under S.113 by the amount of surcharge is clearly a substantive provision, and cannot be said to be a mere procedural one, and in the absence of specific provision in the statute providing for retrospective operation the same cannot have retrospective effect.

12.17 Now we may refer to the decision of Hon'ble Karnataka High Court in Kardicoppal Estate V/s. State of Karnataka and Another (266 ITR 20)-Kar., wherein interpreting retrospective amendment made to-S.15 of the Karnataka Agricultural Income-tax Act, 1957, brought about subsequent to the decision of that Court in Ashok Plantation V/s.Asstt. Commissioner of Commercial Taxes, the High Court held that the retrospective amendment is invalid. In that case, the Court noted that in Ashok Plantation, the High Court did not point out any lacuna and, on the other hand, the court only noticed both the provisions and interpreted the law as it stood then, in the light of the judgment of the Apex court in CIT v/s.Kufu Valley Transport Co. P. Ltd.(77 ITR 518) and held that retrospective amendment of a provision must not be only for the purpose of nullifying a judgment where there was no lacuna or defect pointed.out in the parent Act. It was also observed that the retrospective amendment takes away the right given to the petitioner and that cannot be done in the guise of curing a non-existing lacuna by the respondents.

12.18. Similarly, in the case of Gem Granites V/s. CIT (271 ITR 322)SC, the Apex Court, examining the retrospective or otherwise nature of the amendment to the provisions of S.80HHC by the Finance Act, 1991, whereby the benefit of S.80HHC has been extended to a specific kind of mineral, held that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. It was also held therein that subsequent legislation may be looked into to fix the proper interpretation to be put on the statutory provision as it stood earlier. In this case, the Hon'ble Summit Court has also approved the view taken by the Hon'ble Madras High Court in CIT V/s.Pooshya Exports P. Ltd.(262 ITR 417)-Mad.

12.19. Further in the case of CIT V/s. New Rajasthan Trading Co.(271 ITR 511)- Raj., on the retrospectivity of proviso inserted in S.272A(2) by Finance (No.2) Act, 1991 with effect from 1.10.1991, the Hon'ble Rajasthan High Court held that

"The proviso inserted by the Finance (No.2)Act/ 1991 with effect from October 1, 1991, to section 272A(2) of the Income-tax Act, 1961, has not been given retrospective effect. In the absence of any retrospective effect to such provisions, this proviso cannot have any impact with regard to any default relating to the assessment year 1989-90 requiring the assessee to fife the return on or before April 30, 1989, for the period ending on March 31", 1989. No law can have retrospective effect unless it is so provided specifically by the law itself." (Emphasis supplied)

12.20 In CWT V/s.B.R.Theatres and Industrial Concerns P.Ltd.(272 ITR 177)-Mad. examining the retrospective or otherwise nature of Amendment of SAO of Finance Act, 1983 by Finance Act, 1988, for purposes of Wealth Tax Act, the Hon'ble Madras High Court held-

"The test to be applied for deciding as to whether a later amendment should be given retrospective effect, despite a legislative declaration specifying a prospective date as the date from which the amendment is to come into force, is as to whether without the aid of the subsequent amendment, he unamended provision is capable of being so construed as to take within its ambit the subsequent amendment. The exclusion of stock in trade from the ambit of levy of Wealth-tax on assets of closely held companies in section 40(3) of the Finance Act, 1983 could not per se be regarded as an "obvious omission" nor is giving it immunity from the levy of wealth-tax necessary for reasonably interpreting the unamended provision. The amendment effected to section 40 of the Finance Act, 1983, by the Finance Act, 1988, exempting stock-in-trade is only prospective and not retrospective." (Emphasis supplied)

12.21 Further, in Gujarat Ambuja Cements Ltd.. and Another V/s. Union of India and. Another(274 ITR 194)-SC legislative powers to remove infirmities in earlier legislation and to make retrospective amendment were examined. As per the relevant portion of the head note, the court observed that the decision of the Hon'ble Supreme Court in Laghu Udyog Bharati V/s. Union of India (1999)6 SCC 418; (1999)115 STC 616(SC) was solely on the basis that there was conflict between each of sections 65, 66, 68(1A) and 71 of the Finance Act, 1994, as amended in 1997 on the one hand and clauses (xii) and (xviii) of Rule 2(1)(d) of the Service Tax Rules, 1994, on the other. There was no question of Parliament overruling the decision of the Supreme Court by passing Finance Act, 2000, and the Finance Act, 2003, to amend the provisions retrospectively. It was held in that context that a Legislature is competent to remove infirmities retrospectively and make any imposition of tax declared invalid, valid.

12.22 In the case of Kanmarlapudi Lakshminarayana Chetty(AIR 1957 AP 159), Hon'ble A.P.High Court examining the retrospective or otherwise nature of the amendment to the Income Tax Act, by way of insertion of subsection (5) to S.35 by the Income Tax(Amendment)Act 1953, observed that the said sub-section (5) is not declaratory of a pre-existing law but it clearly affects vested rights which have accrued to the assessee, and as such- the well-settled rule of construction precludes the Court from construing the section as retrospective. It was held in that case that a statute affecting vested rights is prima facie prospective unless the statute expressly or by necessary implication indicates to the contrary. Even where it is retrospective in operation, the Courts should confine its operation only to the extent the language renders it necessary.

12.23 Further, in the case of Uppala Peda Venkataramanaiah (1964 LII ITR -Short Notes of Current Cases- 2), examining the retrospective or otherwise nature of the provisions of S.155 of the Income Tax Act, 1961, Hon'ble Andhra Pradesh High Court held as follows-

"(ii) that in the absence of express words or necessary implication to the contrary a statute which was not purely procedural had only prospective and not retrospective operation: section 155 of the Income tax Act, 1961 had only prospective operation.

(iii) that as the appellate orders were passed before the coming into force of the Income tax Act, 1961, the statutory provisions which were in force at the time when the appellate orders were passed coverned those rectification proceedings and the Act of 1961 did not in any manner destroy the rights and privileges acquired under these statutory provisions or the liabilities incurred thereunder;;" (Emphasis supplied)

12.24. Similarly, in the case of Harlal V/s. Lala Prasad (AIR 1931 Nagpur 138), the then Hon'ble Nagpur High Court examining the retrospective or otherwise nature of the amendment made to the Transfer of Property Act, observed as under-

"Unless an intention to the contrary is clear, an Act is to be construed as operating only on cases or facts which come into existence after the Act, and not retrospectively on cases or facts which had come into existence before the Act." (Emphasis supplied)

12.25 Further in the case of Madhya Pradesh State Road Transport Corporation(AIR 1993 MP 95), considering retrospective or otherwise nature of amendment made to Motor Vehicles Act, 1988, Hon'ble Madhya Pradesh High Court held as follows-

"Vested or substantive rights cannot be taken away by an enactment which is ex facie or by implication not retrospective. Before giving a construction of retrospectivity to an Act of Parliament one would require that it should either appear very clearly in the terms of the Act or arise by necessary and distinct interpretation, and perhaps no rule of construction is more firmly established than this -that a retrospective operation is not to be given to a statute so as to Impair an existing right or obligation otherwise than as regards matter of procedure, unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation it ought to be construed as prospective only." (Emphasis supplied)

12.26 Further, in the case of J.P. Jaini vs. Induprasad Devshankar Bhatt(AIR 1969 SC 778), Hon'ble Supreme Court, examining the scope of S.297(2)(d)(ii) of the new Act, I.e. Income-tax Act, 1961, held as follows-

"On a proper construction of S.297(2)(d)(ii) of the New Act, the Income Tax Officer cannot issue a notice under S.148 in order to reopen the assessment of an assessee in a case where the right to reopen the assessment was barred under the old Act at the date when the new Act came into force.

The principle is based on the well-known rule of interpretation that unless the terms of the statute expressly so provide or unless there is a necessary implication, retrospective operations should not be given to the statute so as to affect, alter or destroy any right already acquired or to revive any remedy already lost by efflux of time." (Emphasis supplied)

12.27 Further, in the case of Y. Arul Nadar (AIR 1990 Madras 33), considering retrospective or otherwise nature of an amendment made to the statute, Hon'ble Madras High Court held as follows-

"The general rule is, when an amendment is introduced in the statute governing the case already pending, the rights and obligations of parties should be decided only according to the law, which existed when .the action was begun, unless a clear contrary intention is evident in the Amending Act. There could not be imputation of retrospective operation to an Amending Act and that could be done only by the Amending Act either expressly or by necessary implication. In the instant case the Amending Act has indicated that the amendments introduced shall have only prospective operation and pending proceedings should continue as if the Amending Act had not been passed." (Emphasis supplied)

12.28. Similarly in the case of Maharaja Chintamani Saran Nath Sahdeo (AIR 1999 SC 3609), considering retrospective or otherwise nature of amendment made to Bihar Land Reforms Act, Hon'ble Summit Court held that the amending provision restricting compensation to three times of net income has no retrospective application, as amendment affects substantive right. It was also held that substituted legislation cannot be said to have ' retrospective operation as Golden Rule of construction applies even to a substituted legislation and a substituted legislation cannot be held to be retrospective in the absence of any thing in the enactment to show that it is to have retrospective operation. It is apt to extract hereunder the comments of the Apex Court with regard to the power of the Board of Revenue-

"But in the Act, authorities and their powers have been specified and we do not find any provision which vests power on the Board of Revenue, so we have to proceed on the assumption that the Board of Revenue has no power,"

In the instant case too, the provisions of 5,113, at they stood at the relevant point of time, viz. prior to 1.6.2002, did not confer any power on the assessing authorities to enhance the tax leviable under S.113 by the amount of surcharge. That being so, in view of the above ratio decidendi, one has to assume that the levy of surcharge is not permissible in respect of tax determined on the block assessments made prior to 1.6.2002.

12.29 Similarly in the case of Sales Tax Officer V/s.Oriental Coal Corporation (AIR 1988 SC 648), considering retrospective or otherwise nature of a provision in the amending Act, the Hon'ble Supreme Court observed that where the statute thus, on its face, clearly indicates retrospective effect where intended, there can be no justification to read retrospectivity into the amendment made by clause (a) of S.6 of the amending Act which does not contain any word to that effect.

12.30 Further, in the case of Govinddas and Others(AIR 1977 SC 552), the Hon'ble Summit Court examining retrospective or otherwise nature of the provisions of S.171(6), held that unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or imply an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure.

12.31 In the case of Agastyar Trust (2005 (3) SCC 516), Hon'ble Supreme Court, considering the assessee's claim for exemption under T.N. Urban Land Tax Act, 1966 on the basis of recognition by a subsequent order of the ITAT of the assessee as a public Charitable Trust under S.12A(a) of the Income Tax Act, 1961, it was held as follows-

"Since the order recognizing the appellant Trust as a charitable trust under Section 12-A(a) of the Income Tax Act was passed on 29.4.1977 by ITAT, the appellant could not claim the benefit of that order as the exemption of the land from payment of urban land tax was claimed only for the period 1965 to 1976. The said order could not be given retrospective effect." (Emphasis supplied)

12.32 This Hyderabad Bench of the Tribunal in the case of A.P. State Civil Supplies Corporation Ltd. V/s. DCIT (83 ITD 398) had occasion to consider the applicability of the amended provisions of S.254(2A) inserted by the Finance Act, 2001 with effect from 1.6,2001, to the matters where stay had already been granted prior to that date. After discussing at length the case-law on the point in the light of K.J. Aiyer's Judicial Dictionary (8th Edition 1980 at page 836); commentaries by Sampath Iyengar on Law of Income-tax, Eighth Edition (revised by Hon'ble Supreme Court Justice Mr.S.Ranganathan) Vol.1 at page 57 under SI.38 with the head note 'Retroactive Legislation' and Chatuvedi and Pithisaria's 'Income-tax Law' Fourth Edition, 1990 Vol.I at page 239, the Tribunal concluded that no retrospectivity could be read into those amended provisions. Relevant portion of the head-note of the said decision reads as under-

"Sub-sections (2A) and (2B) have been inserted by the Finance Act, 1999 with effect from 1.6.1999 and the provisos to the aforesaid section were inserted by the Finance Act, 2001 with effect from 1.6.2001. Nowhere in the language employed in the aforesaid section, particularly in the said sub-section (2A) and especially in the footnote provided whereunder, the word 'retrospectively' has been couched by the Parliament, It simply states "provisos Inserted by the Finance Act, 2001 with effect from 1.6,2001", One cannot appreciate the stand of the department that the said provisos are inserted by the Finance Act, 2001 with effect from 1.6.2001 retrospectively. One cannot read the language as if the word retrospectively has been introduced into it as interpreted by the department when it had not been done so by the Parliament.

In the instant case, where stay had been granted by the Tribunal already, i.e. prior to 1,6,2001, i.e. the date of coming into force of the aforesaid amendment by inserting the proviso to section 254 (2A) right had accrued in favour of the assessee and against the department by virtue of the Tribunal's order staving recovery proceedings on the assessee for collection of the demand in dispute-Such a right accrued to the assessee by virtue of the Tribunal's order coming into effect, could get impaired if the proviso to section 254(2A) is read as retrospective when it has been actually not effectuated so but only with effect from 1.6.2001 by the Finance Act, 2001. If at all, the said insertion of the proviso might be applicable only to stay petition which had been filed prior to the said date of 1.6.2001 but which has not come up for hearing until the said date of 1.6.2001, but in the instant stay petitions except for the assessment year 1997-98, orders had been passed by the Tribunal very much prior to the date of 1.6.2001. As the concerned proviso inserted by the-Amendment Act was not retrospective -but only prospective with effect from 1.6.2001 as spelt out by the Amendment Act itself, the stay already granted by the Tribunal on various dates prior to 1.6.2001 would hold good and continue to be in force pending disposal of the relevant appeals out of which the stay petitions had arisen...." (Emphasis supplied)

The above ratio decidendi squarely applies to the facts of the present case wherein the Revenue seeks to press into service the proviso of S.113 brought on to the statute book with effect from 1.6.2002, so as to levy surcharge enabled by the insertion of proviso below S.113 by the Finance Act, 2002, expressly with effect from 1.6.2002 on tax levied in block assessments, wherein search has commenced prior to 1.6.2002.

12.33. On the issue whether the legislature in question is retroactive or declaratory in nature, we may examine the case law on the subject. In the case of Shyam Sunder and Others vs. Ram Kumar and Another, (2001) 8 SCC 24, Hon'ble Supreme Court held as under-

"37. We are in respectful agreement with the view taken in Moti Ram vs. Suraj Bhan. The right of pre-emption may be a weak right but nonetheless the right is recognised by law and can be allowed to be defeated within the parameters of law. A statute which affects the substantive right has to be held prospective unless made retrospective either expressly or by necessary intendment".

Explaining the legal position of retroactive and declaratory legislation at length, the Hon'ble Supreme Court In that case at paragraphs 39 to 44 of that judgment, observed as follows-

"39. Lastly, it was contended on behalf of the appellants that the amending Act whereby new Section 15 of the Act has been substituted is declaratory and, therefore, has retroactive operation. Ordinarily when an enactment declares the previous law, it requires to be given retroactive effect. The function of a declaratory statute is to supply an omission or to explain a previous statute and when such an Act is passed, it comes into effect when the previous enactment was passed. The legislative power to enact law includes the power to declare what was the previous law and when such a declaratory Act is passed, invariably it has been held to be retrospective- Mere absence of use of the word "declaration" in an Act explaining what was the law before may not appear to be a declaratory Act but if the court finds an Act as declaratory or explanatory, it has to be construed as retrospective. Conversely where a statute uses the word "declaratory", the words so used may not be sufficient to hold that the statute is a declaratory Act as words may be used in order to bring into effect new law.

40. Craize on Statute Law, 7th Edn. stated the statement of law thus:

"If a doubt is felt as to what the common law is on some particular subject, and an Act is passed to explain and declare the common law, such an Act is called a declaratory Act."

41. G.P, Singh on Principles of Statutory Interpretation quoting Carize stated thus:

" 'For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word "declared" as well as the word "enacted".' But the use of the words 'it is declared' is not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form.

If a new Act is "to explain' an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended."

42. In Keshavlal Jethalal Shah v. Mohanlal Bhagwandas [AIR 1968 SC 1336] this Court while interpreting Section 29(2) of the amending Act, held thus: (AIR p. 1339, para 8)

"An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. Section 29(2) before it was enacted was precise in its implication as well as in its expressed; the meaning of the words used was not in doubt, and there was no omission in its phraseology which was required to be supplied by the amendment."

43. In R. Rajagopal Reddy v. Pad mini Chandrasekharan [(1995) 2 SCC 630] it was held thus: (SCC Head note)

"Declaratory enactment declares and clarifies the real intention of the legislature in connection with an earlier existing transaction or enactment, it does not create new rights or obligations. If a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. ... A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the Constitution came into force the amending Act also will be part of the existing law. If a new Act is to explain an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act."

"44. From the aforesaid decisions, the legal principle that emerges is that the function of a declaratory or explanatory Act is to supply an obvious omission or to clear up doubts as to meaning of the previous Act and such Act comes into effect from the date of passing of the previous Act. Learned counsel for the appellants strongly relied upon a decision of a two- Judge Bench of this Court in Mithilesh Kumari v. Prem Behari Khare [(1989) 2 SCC 95] in support of his argument. In the said decision, it was held by this Court that the Benami Transactions (Prohibition) Act, 1988 being a declaratory Act, the provisions of Section 4 of the Act have retroactive operation. The reliance on this decision by the appellants' counsel is totally misplaced as this decision was overruled in R. Rajagopal Reddy v. Padmini Chandrasekharan [(1995) 2 SCC 630] wherein it was held that the Act was not passed to clear any doubt that existed as to the common law or the meaning or effect of any statute and it was, therefore, not a declaratory Act." [Underlining is ours]

Thus, it is well-settled that a tax provision imposing a liability is governed by the normal presumption that it is not retrospective and the settled principle of law is that the law to be applied is that which is in force in the assessment year, unless otherwise provided expressly or by necessary intendment.

12.34 A reading of the Note to Clauses or the amendment to sec. 113 in the Finance Act, 2002, extracted above, does not give any indication that the legislation was introduced to explain an earlier Finance Act or clarify the real intention of the legislature or that the proviso was inserted to supply an obvious omission or to clear up doubts as to the levy of surcharge in question. On the contrary, the Memorandum Explaining the Provisions as well as the Notes on Clauses, also extracted above, states that the rate of tax on undisclosed income in block assessment is only 60%, There is no whisper of surcharge.

12.35 The learned Senior Standing Counsel for the Department, (at paragraph 22 on page 13 of his written submissions), stated as follows:-

"As seen from the Finance Acts of 1995, 1996 and 1997 (in the case of domestic companies) and Finance Acts of 1999 and 2000 (in the case of all assessees), the Parliament provided for levy of surcharge on the incomes assessable U/s,113 of the Act, but did not stipulate the rate of surcharge may be because the Parliament opined that it was not specifically required to be returned. As has been rightly pointed out by the assessees, since the search is the triggering point for the ensuing assessments under Chapter XIV-B, it is the law as on the date of search that should be applied for all aspects including rate of tax and surcharge. Therefore, whatever rate of surcharge that subsisted as on the date of search, would govern the assessees concerned. However, since the issue is capable of debate, the Parliament intervened to make a declaratory law, clarifying that the surcharge shall be levied at the rate prevalent on the date of search. By this, the Parliament only clarified the pre-existing legal position and has not made any new provision much less did it enhance the liability." [Emphasis ours]

This argument is not supported by the express language used by the legislature while introducing the proviso to sec 113. The plea that the Finance Act did not stipulate the rate of surcharge as the Parliament in its wisdom thought it was not specifically required to 60 so and that as the issue of rate of surcharge is capable of debate, it got clarified by insertion of proviso to sec. 113 and thus the amendment is a declaratory and clarificatory legislation which is brought in only to clarify the confusion on the rate of surcharge that has to be applied, is not supported by a plain reading of the section. Nothing is mentioned about pre-existing legal position. The proviso does not have a prefix "for removal of doubts" as in all retrospective or declaratory legislations. Thus, we have no difficulty in holding that the proviso inserted to sec. 113 of the Income-tax Act, 1961, by Finance Act, 2002, with effect from 1-6-2002 is neither retrospective nor declaratory or clarificatory having retroactive operation. In fact, the Memorandum Explaining the Provisions as well as the Notes on Clauses indicate and make it clear to us to come to a conclusion that surcharge was not leviable earlier and thus a fresh amendment is brought about to levy surcharge from 1-6-2002, None of the ingredients necessary for treating this piece of legislation as retroactive/declaratory is present in this case. Thus, we are not persuaded by this argument of learned Standing Counsel for the Revenue.

12.36. In view of the foregoing discussion and considering the ratio decidendi laid down in the case-laws not only those which are cited before us, but also others being fortifying our view taken, the first contention of the Revenue based on the retrospective nature of the amendment to the provisions of S.113, by the insertion of proviso thereunder, is liable to be rejected.

12.37. This brings us to the issue, as to whether the Finance Act has levied surcharge on tax on undisclosed income computed under Chapter XIVB, by introducing a distinct and independent charge and, if so, whether the levy of surcharge by the Finance Act is an unworkable proposition inasmuch as it is not practical and thus the charge fails. The argument of the learned Senior Standing Counsel for the Revenue is that de hors the
reference to the proviso to sec. 113 introduced by the Finance Act, 2002, , or to the, Income-tax Act itself, there are specific provisions incorporated in the various Finance Acts referred to above, and as it is conceded that the Parliament may choose either the Income-tax Act or" the "Finance Act or any-other Central Act to levy surcharge, the surcharge has been rightly levied under the Finance Acts and such a levy is a valid levy. The contention of the assessee is that the Finance Act is lacking in creation of the charge and that, at any rate, there is ambiguity as to the rate of surcharge to be applied, and thus it was-unworkable and impractical and hence the charge, if any, fails.

12.38. The relevant portion of the Finance Act, 1999, which is the basis upon which the learned Standing Counsel submits that the surcharge is leviable through Finance Act, reads as under:-

"(8) Subject to the provisions of sub-section (9), in cases in which income-tax has to be charged under sub-section (4) of section 172 or sub-section (2) of section 174 or section 175 or sub-section (2) of section 176 of the Income-tax Act or deducted under section 192 of the said Act from income chargeable under the head "Salaries" or in which the "advance tax" shall be so charged, deducted or computed at the rate or rates specified in Part III of the First Schedule and such tax as reduced by the rebate of income-tax calculated under Chapter VIII-A of the said Act shall be increased, -

(a) in the cases to which Paragraphs A, B, C and D of that Part apply, by a surcharge for purposes of the Union; and

(b) in the cases to which Paragraph E of that Part applies, by a surcharge, calculated in each case in the manner provided therein;

Provided that in cases to which the provisions of Chapter XII or Chapter XII-A or sub-section (1A) of section 161 or section 164 or section 164A or section 167B of the Income-tax Act apply, "advance tax" shall be computed with reference to the rates imposed by this sub-section or the rates as specified in that Chapter or section, as the case may be:

Provided further that the amount of income-tax computed In accordance with the provisions of sections 112 and 113 of the Income-tax Act shall be increased by a surcharge for purposes of the Union or surcharge as provided in Paragraph A, Br C, D or E, as the case may be, of Part III of the First Schedule." (Emphasis ours)

12.39 The case of the Revenue is that it is evident that Parliament has specifically provided for charging of surcharge in respect of the advance tax payable for the year 1999. The corresponding Part-III of the First Schedule provided for surcharge. The relevant provision reads as follows:

Paragraph A

In the case of every individual or Hindu undivided family or association persons or body of individuals, whether incorporated or not, every artificial juridical person referred to in sub-clause (vii) of clause(31) of section 2 of the Income-tax Act, not being a case to which any other Paragraph of this Part applies, --

Rates of income-tax

xxxxxxx

Surcharge on income-tax

The amount of income-tax computed in accordance with the preceding provisions of this Paragraph or section 112 or section .113 shall,-

(i) in the case of every individual or Hindu undivided family or association of persons or body of Individuals having a total Income exceeding sixty thousand rupees, be reduced by the amount of rebate of income-tax calculated under Chapter VIII-A, and the Income-tax as so reduced.

(ii) in the case of every person, other than those mentioned in item (i), be increased by a surcharge for purposes of the Union calculated at the rate of ten per cent. of such income-tax:

Paragraph B

Rates of income-tax

xxxxxxx

Surcharge on income-tax

The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or in section 112 or section 113, shall, in the case of every co-operative society, be increased by a surcharge for purposes of the Union calculated at the rate often percent of such income-tax.

Paragraph C

Rate of income-tax

xxxxxxxx

Surcharge of income-tax

The amount of income-tax computed at the rate hereinbefore specified or in section 112 or section 113, shall, in the case of every firm, be increased by a surcharge for purposes of the Union calculated at the rate of ten percent of such income-tax:

Provided that no such surcharge shall be payable by a non-resident.

Paragraph D

Rate of income-tax

xxxxxxxxxxx

Surcharge on income-tax

The amount of income-tax computed at the rate hereinbefore specified or in section 112 or section 113, shall, in the case of every local authority, be increased by a surcharge for purposes of the Union calculated at the rate of ten percent of such income-tax:

Paragraph E

Rate of income-tax

xxxxxxx

Surcharge on income-fax

The amount of income-tax computed in accordance with the preceding provisions of item I of this Paragraph, or in section 112 or section 113, shall, in the case of every domestic company be increased by a surcharge calculated at the rate of ten percent of such income-tax:

12.40 It was submitted that since the levy has been introduced in Part III, it is not in dispute that the said provision has got to be taken into account for the purpose of computation of "advance tax", for the financial year commencing from 1.4.1999, in respect of undisclosed income also. The aforesaid provisions which are found in Part III of Finance Act, 1999, have also been correspondingly introduced in the Finance Act, 2000 in Part I so as to make it applicable for the Assessment Year 2000-2001, the corresponding previous year being 1999-2000. It was thus submitted that in view of the specific incorporation of the provisions in the Finance Act,1999 and due provision being made for levy of surcharge by the Finance Act,2000, it is inescapable to conclude that the surcharge is leviable un undisclosed income of all assessees from the Assessment Year 2000-2001 (previous year 1.4.1999 to 31.3,2000); of course, domestic companies were liable for surcharge in respect of their undisclosed income for the anterior period also, in view of the relevant Finance Act of 1995, 1996 and 1997.

12.41. Before we examine the contentions, a cogent reading of the income Tax Act on the definitions under sec. 2(9), i.e. 'assessment year', sec. 2(34) 'previous year, sec. 2(37A) 'rate or rates in force', sec. 2(45) 'total income', sec. 4(1) i.e. charge of Income Tax, Sec, 5 i.e. scope of total income and the Finance Acts makes it clear that the Finance Acts specify rate or rates of income-tax only in relation to total income of a previous year corresponding to an assessment year. The definition of "block period" under sec. 158B(a) and "undisclosed income" under sec. 158B(b), computation of undisclosed income of the block period on the basis of evidence found as a result of search under sec, 158BB, determination, of undisclosed income under "the procedure for block assessment under S,158BC(c), are not referred to in any of the Finance Acts. These special provisions under Chapter XIV B, treat "undisclosed income" of a "block period" as distinct from "total income" of a ''previous year''. Now the question is, whether the Finance Acts which are enacted to prescribe the rate or rates of income-tax on "total income" of a "previous year", have also prescribed levy of surcharge on "undisclosed income" of a "block period".

12.42. The first limb of the argument of the Revenue is that Chapter XIVB is not a self-contained code and that the concepts of 'assessment year' and 'previous year' are not excluded from the scheme of Chapter XIVB. The decision relied upon is in the case of Venkatagiri Raja (2003) 6 ALD 463. In this case, the Hon'ble jurisdictional High Court laid down the proposition that the statutory forms also constitute integral part of the statutory scheme and that it is no longer in dispute and they could be taken as an aid for the purpose of interpreting the statutory provision in the enactment. This proposition has been put forward to state that Form 2B prescribed In terms of the Income-tax Rule 12(la) provides for calculating undisclosed income for each assessment year included in the block period and thus the concepts of assessment year' and "previous year'" have not been given a go-by in Chapter XIVB. Another argument is that sec. 113 is outside Chapter XIVB and that sec. 158BH applies to all other provisions of the Act. The judgment of the Hon'ble Supreme Court in the case of N.M. Veerappa v. Canara Bank and others (1998) 2 SCC 317, was relied upon for the proposition that the non obstante clause which appears under sec. 158 BA does not in any way exclude the applicability of the concepts of 'assessment year' and 'previous year' to block assessment under Chapter XIVB and that it is a restrictive one and that, at any rate, it cannot give overriding effect to the Finance Act.

12.43 In the case of N.M. Veerappa (supra), Hon'ble Supreme Court held as. follows;-

"It is now well settled that scope and width of the non obstante 'clause is to be decided on the basis of what is contained in the enacting part of the provision."

12. 44 Further reliance was placed on the judgment of the Hon'ble Supreme Court in the case of State of W.B. and Another vs. Madan Mohan Ghosh and others (2002) 9 SCC 177, wherein it was held;

"6..........Learned counsel further contended that the non obstante clause in Rule 17 refers only to rules which were in existence at the time when the said Rule was brought into force and the same could not be construed as having an overriding effect for all times to come.

7. xxxxxxxxxxxxx

8. Having heard the learned counsel, we. are of the opinion that we need not dilate very much on the finding arrived at by the High Court in regard to the overriding power of Rule 17 of the 1993 Rules vis-a-vis the Order of 2000. We agree with the learned Additional Solicitor-General that the language of Rule 17 of the 1993 Rules cannot be construed so as to mean that all future rules and notifications will be subject to such a non obstante clause."

First, we consider whether, as argued by the Revenue, Chapter XIVB is not a self-contained code for assessing undisclosed income and whether the concepts of 'assessment year' and 'previous year' as well as 'total income' are given o go-by In Chapter XIVB.

12.45 The legislative intent behind introduction of the special procedure was clarified in the Memorandum explaining provisions of Finance Bill, 1995 : 212 ITR 345 (St). Relevant extracts thereof are reproduced hereunder:

"Searches conducted by the Income-tax Department are important means of unearthing black money. However, under the present scheme, valuable time is lost in trying to relate the undisclosed incomes to the different years. Tax evaders generally manage to divert the focus to procedural and legal issues and often invent evidence to explain undisclosed income. By the time search-related assessments are completed, the effect of search is considerably diluted. Legal battles continue for years to decide which income is assessable in which assessment year. No finality is reached and the seized assets remain with the Department for a long time.

In order to make the procedure of assessment of search cases cost effective, efficient and meaningful, it is proposed to introduce a new scheme of assessment of undisclosed income determined as a result of search under section 132 or requisition under section 132A. Under this scheme, the undisclosed income detected as a result of any search initiated, or requisition made, after 30 June, 1995, shall be assessed separately as income of a block of years. Where the previous year has not ended or the due date for filing a return of income of any previous year has not expired, the income recorded on or before the date of search or requisition in the books of account or other documents maintained in the normal course relating to such previous years will not be included in that block."

(emphasis supplied)

12.46 The Special Bench of Tribunal in the case of Nawal Kishore and Sons v. DCIT, 87 ITD 407, 433, has held that section 158BC read with section 158BA are special provisions in search matters. It is settled in jurisprudence that special provisions override the general provisions as per Latin maxim 'Generalia specialibus non derogant vide Broom's Legal Maxim, 10 Edn. 2001, pg. 348. The Tribunal observed :

"37. The above discussion reveals that the Legislature has made independent substantive provisions regarding the power to proceed to make assessment under section 143(2) as well as under section 158BC. Section 158BC, read with section 158BA, being special provisions for proceeding to assess the undisclosed income of the assessee in search matters, would override the provisions of section 143(2) as far as power/jurisdiction to proceed to make assessment is concerned inasmuch as it is the settled legal position that special provisions override the general provisions......"

12.47 Chapter XIV-B was, thus, introduced as a self-contained Chapter consisting of section 158B to 158BH of the Act containing provisions which are in the realm of substantive law seeking to levy tax on the undisclosed income of the block period at the rate of 60%. In addition, the Chapter contains procedural provisions for the assessment of 'undisclosed income' found during the course of search (refer Special bench decision in the case of Mahesh Kumari Batra, 95 ITD 152).

12.48. Learned authors of the book titled "Income-tax Law by Chaturvedi and Pithisaria" (Fifth Edition, at pages 5459 and 5460), stated as follows:-

"Assessment of undisclosed income of the block period as a result of of search- Sub-section (1) of the newly inserted (w.e.f. 1.7.1995) section 158BA opens with a non obstante clause, namely, 'Notwithstanding anything contained in any other provisions of this Act', and, thus, enacts provisions of overriding nature so as to prevail over any other provisions of the 1961 Act. According to that sub-section (1), where after 30.6.1995 -

-- a search is initiated under section 132 or

-- books of account, other documents or any assets are requisitioned under section 132A

in the case of any person, then, --

-- the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of Chapter XIV-B (containing sections 158B to 158BH)"

12.49 A close reading of the above clearly brings out the fact that Chapter XIVB is a self-contained code and undisclosed income relatable to the block period is different from total income of a previous year relatable to any assessment year. The legislature had in fact brought in these special provisions to overcome the difficulties that were arising in search cases due to the concepts of "Previous Year" "Assessment Year". Statutory forms may be an aid to interpretation, but these forms or even rules do not override the Act. " Block Period" as defined in sec. 158B(a) is different from Previous year" or "Assessment Year" as defined in sec. 2(9) and sec.2 (34) respectively. Even the subsequent enactment i.e. the Finance Act does not change the concept of Block Assessment. The mention of sec. 113 in sub-sec.(2) of Sec.158BA as well as the provisions of Sec. 158BH are 'legislation by incorporation'. Chapter XIVB has specifically been incorporated with an intention to do away with the requirement of relating a particular income to a particular previous year or to any particular assessment year as the legislature states that valuable time was lost in relating undisclosed income to different assessment years. Further, Explanation to sec. 158BA(2) specifically declares, 'for the removal of doubts', that the assessment under Chapter XIVB (containing sections 158B to 158BH) shall be "in addition to the regular assessment in respect of each previous year included in the block period". From the above, it transpires that the said clause (a) segregates the gamut of the block assessment from that of regular assessment which relates to total income of a previous year so as to keep each one of them having independent and distinct identity. Thus, we hold that Chapter XIVB is a self-contained code and undisclosed income of a block period is distinct from total income computed with reference to a previous year. In other words, we hold that the concept of computing total income of a previous year for being assessed in an assessment year as contemplated by Sec.5 has been given a go-by in the concept of "block assessment". Statutory forms could be used as an aid to interpretation, but they do not override the Act. When the Act provides that the concept of "Previous Year" and "assessment Year" do not apply to Chapter XIVB, the statutory forms cannot mean otherwise.

12.50 This brings us to the question as to whether, de hors the proviso to sec.113, it could be said that the Finance Act has levied surcharge on tax on undisclosed income determined under Chapter XIVC. Elaborate arguments were advanced on whether sec. 4(1) or the proviso to sec. 4(1) is applicable in this case. In our considered opinion, the charging section is 158BA(2), which has been extracted in paragraph 11.4 above. A plain reading of Sec.158BA (2) shows that there is no reference to 'Central Act' as in sec. 4(1).

12.51. If we have to refer to sec. 4, we have necessarily to hold that sub-sec. (1) of sec.4 is applicable in respect of the total income of the previous year. The proviso to sec. 4(1) provides an exception to the rule and brings within its ambit all other situations than those situations wherein total income is computed with reference to a particular previous year. As the period for which income is computed in the case of a block assessment is other than for the period of a previous year, in our considered opinion the proviso to sec. 4(1) only applies. In this proviso, there is no reference to any 'Central Act', unlike in sec. 4(1).

12.52 Having held so, we examine as to whether the proviso to sec. 4(1) and / or Sec.158BA(2) enables levy of surcharge. The answer, in our considered opinion, is in the affirmative. It is well settled that 'income-tax' includes 'surcharge' which is a receipt in the nature of additional income-tax, as held in the case of CIT, Bihar and Orissa, v. Maharaja Pratapsingh Bahadur of Gidhaur, 41 ITR 421 (SC). The assessee's argument that the term "tax" has been defined under sec. 2(43) and that it includes only income-tax and super-tax and not surcharge, is against the proposition laid down by the Hon'ble Supreme Court, as surcharge has been interpreted as nothing but additional income-tax. The only requirement is that the levy should have been under the Income-tax Act itself as there is no reference to any Central Act in this proviso or in Sec. 158BA(2). Thus, the argument that sec. 158BA(2) and the proviso to sec. 4(1) are charging provisions in a block assessment and as they do not refer to surcharge but only to tax, the same cannot be levied under the Income-tax Act, cannot be accepted. At the same time, we find that for the period under consideration, the Income Tax Act prescribes only 60% rate of tax on block assessments, but it does not authorise levy of surcharge. As there is no reference to the Central Act either in sec. 158BA(2) or in the proviso to sec. 4(1), the question of any Central Act prescribing the levy of surcharge under these charging provisions does not arise. The Finance Act has to be examined de hors these two charging sections of the Income-tax Act, to find out as to whether it levies independently surcharge on undisclosed income of a block period by having an independent and distinct charging section. The charging section in the Finance Act does not authorise the levy in the Finance Act.

12.53. We examine the issue as to whether the Finance Act has levied a separate and independent charge de hors the provisions of the Income-tax Act, 1961. At this stage, we once again reiterate that none of the counsels for the assessees has canvassed a proposition before us that the Finance Act cannot bring about an independent charge. The assessee's counsels base their arguments on first principles and argue that there is no charging section in the Finance Act to levy surcharge and that even if it is held that there is a charging section and thus a valid charge, there is ambiguity as to the date and rate applicable and thus the charge fails. Before we go into the issue we extract below the observations of the Hon'ble Supreme Court in the case of Govind Saran Ganga Sara v. CST, 155 ITR 144 :

"The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity."

Their Lordships held that there are four components in the concept of tax : (a) the character of imposition, (b) a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, (c) the rate at which the tax is imposed and (d) the measure or value to which the rate will be applied for computing the tax liability. We have now to examine as to whether the Finance Act satisfies all the above components so as to enable us to hold that there is a valid levy.

12.54 The bedrock of the argument of the Revenue is that the judgment of the Hon'ble Supreme Court in the case of Madurai District Co-operative Central bank, 101 ITR 24, is applicable to the facts of this case and that the judgment in the case of CIT v. Elphinstone Spinning and Weaving Mills Co. Ltd., 40 ITR 142, does not apply to the facts of this case. The assessee argues on the contrary and distinguishes the judgment in the case of Madurai (supra) and submits that the judgment in the case of Elphinstone (supra) applies to the case. We will first discuss these two judgments. Before we do so, we have to observe that in the written arguments, the Revenue has submitted at paragraph 20 on page 12, that while Elphinstone case was decided by a Division Bench of two Judges, the case of Madurai District Co-operative Central Bank was decided by a bench consisting of three Judges. This is factually wrong. The judgment in the case of Elphinstone (supra) was delivered by a bench consisting of three Judges as in the case of Madurai (supra).

12.55. In the case of Elphinstone Spinning and Weaving Mills Co. Ltd. (28 ITR 811), judgment rendered by the Hon'ble Bombay High Court, was upheld by the Hon'ble Supreme Court (40 ITR 142). The facts of that case were that the assessee had no taxable income for the asst. year 1951-52. In that very year, the assessee company declared dividends amounting to Rs. 3,29,62 in respect of the year 1950. The contention of the assessee company was that it had no income at all and thus the question of assessing income at a particular rate would not arise. It was argued that only when there is income which constitutes 'total income' within the meaning of the Income-tax Act, the question has to be considered as to the rate at which that income is to be assessed to tax. The Hon'ble Court brought out legislative intent and observed :

"The Legislature was anxious that companies should not act in a spendthrift fashion and should plough back some of its profits into the industry, and therefore a bait, as it were, was held out to companies not to distribute all the profits they made to their shareholders and the bait took the form of giving the companies a certain rebate. If a company did not distribute as dividends more than nine annas of its profits (substantially speaking, as I need not go into the details of the matter), then to the extent that dividends paid were less than that figure of nine annas, a rebate of one anna was given to the company concerned. If the company paid more than nine annas, then not only it lost the rebate but it was also liable to pay an additional income-tax which was provided for in clause (ii) of the proviso, and the additional income-tax was to be calculated by the difference between the rate of five annas per rupee and the rate which the excess dividend had actually borne."

In that case, the undisputed fact was that the sum of Rs. 3,29,062, which the company declared as dividend, was undistributed profit of the preceding years and was not out of the income which constitutes total income of the current year. In that context, the Hon'ble Court observed that additional income-tax must postulate first the total income liable to tax, and secondly an income-tax which has been levied on the total income. As these two essential conditions were absent, that is, there was neither a total income liable to tax nor was there any income-tax which was assessed on the total income, the Hon'ble Court came to the conclusion that the Department was not justified in taxing the subject. While holding so, the Hon'ble Court specifically stated that the Finance Act could have provided that in the income of the previous year certain income which was not made or has not accrued in that particular year should be included and that to accede to that contention, they would require much clearer and much stronger language in the finance Act. Their Lordships went on to observe:

"It is always with some reluctance that a Court comes to the conclusion which seems to defeat the object of the Legislature. But the rights of a subject under a fiscal statute are equally important, if not more important than giving effect to the object of the Legislature, and if the Legislature uses inappropriate language and fails to bring some income to tax, we must come to the conclusion that the Department is not justified in taxing the subject."

In a separate, but concurring judgment, Tendulkar J., at page 825 of the reported judgment, observed as follows:-

"But although there may be no logical reason for this distinction, the function of this Court is to interpret the statute as it stands. It may be a case where the Legislature has not succeeded in giving effect to its intentions; and in any event it appears to me that if the Legislature intended that in the case of a company which has no total income which attracts tax a tax should be levied within the framework of the Income-tax Act as it exists, such an object could only be achieved by providing that the company shall be deemed to have a total income and proceeding to tax such total income."

12.56. Upholding this judgment of the Hon'ble Bombay High Court, Hon'ble Supreme Court, at page 147 of 40 ITR, held :

"Where there is a total income and there is a payment of dividend either more or less than the limit fixed, one can easily find the figures by which the total income as reduced exceeds or falls short of the dividends and the additional tax that has to be paid. But when the total income is a negative figure and no tax on the total income is levied, the words of the part of the paragraph, "total income", "profits liable to tax", "dividends payable out of such profits" and "an additional income-tax", cease to have the meaning they were intended to convey."

Their Lordships then referred to the contention of the Commissioner of Income-tax that some of these words should be ignored as being surplusage or drafting error, and after considering a number of decisions, at page 150, observed as follows:-

"There is no doubt that if the words of a taxing statute fail, then so must the tax. The courts cannot, except rarely and in clear cases, help the draftsmen by a favourable construction."

The pith and substance of this judgment is that the rate in the proviso is applicable to 'total income' and the total income is to be determined in accordance with the Income-tax Act, and that when there is no total income, the second paragraph of the proviso, as it is worded, ceases to be workable. In that case, Their Lordships also considered the contention of the CIT that this should be treated as an independent charging section and observed: "There are no words here making the excess dividend into income or subjecting it to tax independently of the charge to tax on the total income." In the concluding remarks, it was held : "We respectfully agree with the learned Chief Justice that though the interpretation we have placed upon the proviso might lead to some anomalies, it is for the Legislature to avoid the anomalies which, according to us, spring not from our interpretation but from the language employed." It was further stated: "The Income-tax Act creates an assessment year and a corresponding previous year. Assessment to tax in any assessment year can only be in respect of the profits of the immediately preceding previous year." While observing so, the Hon'ble Supreme Court held the fiction in that enactment, which brings profits of back years into the immediately preceding previous years, so that the requirements of the income tax law may be complied with, cannot be carried further than what it is intended for; it cannot be used to make these profits to take the place of total income.

12.57. The contention of the Revenue that the judgment in the case of Madurai (supra) overrules the judgment in the case of Elphinstone (supra) is not correct. In the case of CIT v. Khatau Makanji Spinning and Weaving Mills Co. Ltd., 40 ITR 189, a case which was similar to Elphinstone case was considered by the Hon'ble Supreme Court. In that case also, it was held (as per Head note) as follows:-

"Under section 3 of the Income-tax Act (Indian Income-tax Act, 1922), income-tax is a tax on the income of the previous year and it would not cover something which is not the income of the previous year, or made fictionally so. The Finance Act, 1951, failed in its purpose: the additional tax was not properly laid upon the total income because what was actually taxed was never a part of the total income of the previous year. The Finance Act did not lay down that it should be taxed as part of the total income."

In that case, the argument that it was not necessary to look only to sec. 3 of the India Income-tax Act, 1922, (which was the then charging section), but also the provisions of the Finance Act through which the Parliament could impose a new tax, if it so pleased, was not dismissed by the Court. Hon'ble Supreme Court approved the opinion of the Hon'ble Bombay High Court in the judgment delivered by the Hon'ble Chief Justice of Bombay High Court, which was as follows:-

"In our opinion, the provision of the Finance Act travels beyond the ambit of section 3, and if Parliament has done so then no effective charge can be made on the total income of the previous year of the assessee under the provisions of the Finance Act which deals with additional tax on excess dividend."

It was further observed by the Hon'ble Supreme Court :

"These modifications, which were suggested, involve a recasting of the entire relevant paragraph of the Finance Act to make it independent of section 3 of the Indian Income-tax Act, a course which is only open to a Legislature and not to a court."

At page 194 of the report, it was observed:

"The Finance Act could have gone further, as pointed out by the learned Chief Justice in the extract quoted, and made the profits a part of the total income of the previous year under assessment, but it did not do so. The Finance Act could have also resorted to some other fiction, which might conceivably have met the case; but it has failed to do so."

Thus, the argument that a Finance Act could independently levy a tax has never been negatived by the Hon'ble Supreme Court in the case of Elphinstone (supra) or in he case of Khatau (supra).

12.58 Coming to the case of Madurai District Central Co-operative Bank Ltd. (supra), the judgment of the Hon'ble Madras High Court reported in 73 ITR 479 was affirmed by the Hon'ble Supreme Court. Hon'ble Madras High Court had considered the judgment in the case of Khatau (40 ITR 189), which in turn had considered the judgment in the case of Elphinstone (40 ITR 142), and distinguished these judgments in the following words:-

"The petitioner relies on Commissioner of Income-tax v. Khatau Makanji Spinning and Weaving Company, but we fail to see what assistance it gives to him in the instant case. All that was decided in that case was that, in view of the terms of section 3 of the Income-tax Act, 1922, income-tax was levied on the income of the previous year and not on something which was not the income of the previous year, or made fictionally so. The excess dividend in that case, which was subjected to the additional tax, was not shown or not deemed by the particular Finance Act to be part of the total income of the previous year. In such circumstances, the Supreme Court agreed with the High Court of Bombay that the Finance Act had misfired, because it did not resort to legislation which would have conformed to the subject for which the finance Act was passed every year. Observed the Supreme Court:

"This fiction, as we have already pointed out, provides only that the dividends shall be deemed to be out of the profits not of the previous year under assessment but of some other years. What the Finance Act fails to do is to make them 'total income', so ass to take in the rate which is prescribed for the total income in the proviso. Unless the Finance Act stated that after the working out of the fiction the profits of the back year or years shall be deemed to be a part of the total income of the previous year under assessment, the purpose of the Act clearly fails."

That was the basis for the decision of the Supreme Court. The position is very different in the case before us, where-and this is not actually disputed by counsel for the petitioner-the income which was exempt from tax under section 81 had formed part of the total income of the previous year. There was no need, therefore, for the Finance Act to make any deeming provision making what was not the income of the previous year as such income by a fiction."

12.59. This proves that there is no conflict in the aforesaid decisions as the position was different in both the cases. In the case of Madurai District Central Co-operative Bank Ltd., the income which was exempt from tax under sec. 81 of the Income-tax Act, 1961, had formed part of the "total income" of the "previous year", unlike in the cases of Elphinstone Spinning and Weaving Mills Co. Ltd. and Khatau Makanji Spinning and Weaving Company, wherein undistributed profits of earlier years did not form part of total income" of the "previous year", Nowhere in this line of judgments it is disputed that the Finance Act cannot introduce a new and distinct charge. In fact, it is clearly laid down that the Parliament has legislative competence to introduce a new charge of tax and it may exercise that power either by incorporating the charge in the Income-tax Act or by introducing it in the Finance Act or, for that matter, in any other statute. In the case of Madurai District Central Co-operative Bank Ltd., the question considered was whether the Finance Act, 1963, authorises by its terms the levy of additional surcharge on income which is exempt from tax under the Income-tax Act, 1961, but at the same time, the said income undisputedly constitutes total income of the previous year and the Finance Act prescribed rates for such total income of the previous year. The Court was considering a case of levy of additional surcharge on residual income and it did not accept the contention of the assessee that the same cannot be dissociated from the main charge of income-tax. In 101 ITR @ 33, it was observed that:

(a) Section 2(1)(a)(ii) of the Finance Act, 1963, provided that income-tax shall further be increased by an additional surcharge for the purposes of the Union calculated in the manner provided in the First Schedule.

(b) Clause (c) of Paragraph A prescribes the manner in which the additional surcharge is to be calculated. It was held that clause (c) provides that additional surcharge for purposes of the Union shall be calculated "on the amount of the residual income" at the rates mentioned in that clause.

(c) Thus, both the purpose and concept of the additional surcharge are different from those of income-tax. The additional surcharge is leviable exclusively for purposes of the Union so that the entire proceeds of such surcharge may, under article 271 of the Constitution, form part of the Consolidated found of India.

(d) The additional surcharge levied for purposes of the Union is to be calculated not on the total income like the income-tax but it is to be calculated on the residual income, which was in fact part of the total income.

(e) Section 2(8) of the Finance Act, 1963, defines residual income and introduces the concept of residual income on which alone the additional surcharge is payable.

(f) The residual income is not the same as the business income of a co-operative bank, which is exempt under section 81(1)(a) from income-tax.

The Apex Court concluded that the additional surcharge in that case was a distinct charge not dependant for its leviability on the assessee's liability to pay income-tax or super tax. In fact, Sec.2(8) of the Finance Act defined residual income and it was not in dispute that such residual income is part of total income. The assessee's contention that income-tax is a single levy, was rejected and it was held that even though assessee was not liable to pay income-tax or super tax, because of this independent and instinct charge, he would be liable to pay the additional surcharge. The Court went on to observe that the interpretation placed by them on the Finance Act, 1963, does no violence to sec. 4 of the Income-tax Act, 1961.

12.60. From the above two judgments, the propositions that can be culled out are THESE:

a) Finance Act prescribes rates of income-tax on total income for the previous year.

b) In the case of Elphinstone Spinning and Weaving Mills Co. Ltd., the income in question did not form part of total income of the previous year, and as the Finance Act has not been worded in a manner that such income other than total income could be brought to tax, the charge fails.

c) In the case of Madurai District Central Co-operative Bank Ltd., the income in question was in fact part of total income of the previous year, though exempt, and thus the wording in the Finance Act was sufficient to uphold the levy.

In the case on hand, the "undisclosed income" for a "block period" is different from "total income" of a "previous year" and as the Finance Act only refers to "total income" of a "previous year", the ratio of the judgment in the case of Elphinstone Spinning and Weaving Mills Co. Ltd applies on all fours.

12.61 What has to be seen in this case is whether a distinct and independent charge has been created in the Finance Act de hors the Income-tax Act, that is, proviso to sec. 4(1) and sec. 158BA(2), and whether any of the Finance Act levy surtax on any income, which is expressly not part of "total income" of a "previous year". A plain reading of the Finance Act shows that nowhere the concept of "undisclosed income" or "block period" has been mentioned and the rates are only regarding "total income" of a "previous year".

12.62. Coming to sec. 2(8) of the Finance Act, relied upon by the learned Senior Standing Counsel of the Revenue, at page 8 of the written submissions, after reproducing the provision, it is stated as follows:-

"From the above, it is evident that Parliament has specifically provided for charging of surcharge in respect of the advance tax payable for the year 1999."

Thereafter, Part III of the First Schedule was extracted. We find that sec.2 of the Finance Act is only in relation to "total income" of an "assessment year" and that there is not even a remote reference to "undisclosed income" computed for a "block period". In fact, in Part-III of the First Schedule under Paragraph 'A', surcharge on income tax clause (i) in case of individuals or HUF's or AOP's or BOI's, the surcharge is not applicable to persons having 'total income' below Rs. 60,000 and rebate of income-tax under Chapter -VIII-A is specified. Such rebate under Chapter VIII-A and 'total income below Rs. 60,000 is contrary to provisions of Chapter - XIVB, as they are not contemplated in Chapter XIVB. Thus, we have to conclude that there is no independent and separate charge brought about by the Finance Act for levying surcharge on "undisclosed income" of a "block period". We hold that sec. 2(8) of the Finance Act, 1999, does not advance the propositions canvassed by the Revenue. The very fact that tax has to be deducted at source on a particular income and the fact that advance tax is required to be paid on a particular income as per Sec.2(8) of the Finance Act, take the income referable to such TDS or advance tax outside the scope of the definition of 'undisclosed income' as contained under sec.158B(b). No reasonable person would assume that an assessee would have suffered TDS and/or would have voluntarily paid advance tax on a particular income with an intention not to disclose such income for the purposes of the Income-tax Act. The courts have laid down that when regular entries have been made in the books of account and when the due date for filing of the return has not expired, and in cases where Advance Tax and TDS were made on such income, the income relatable to the entires recorded in the books of account and other documents maintained in the normal course on or before the date of search, cannot be considered as undisclosed income for the purposes of Chapter XIVB and this proposition has been made clear through the amendment by Finance Act, 2002, with effect from 1.7.1995 by insertion of clause (c) to sec. 158BD(1) of the Act as well as from sec. 158BA(3). This interpretation of law is supported by the case-laws following:-

(a) ACIT V. A.R. Enterprises, 274 ITR 110 (Mad.)
(b) Dr. Mrs Alaka Goswami V. CIT, 268 ITR 178 (Gau.)
(c) CIT v. Mrs. Kumkum Kohli, 276 ITR 589 (Del.)

12.63. The very fact that the proposal to levy surcharge has found a place for the first time in Part III of the First Schedule read with sec. 2(8) of the Finance Act, clearly demonstrates that the mention of sec. 113 therein, is in direct conflict with the provisions of Chapter XIVB of the Income-tax Act. Such a mention in the Finance Act is against the concept of assessment of "undisclosed income for a block period". As the question of payment of advance tax on undisclosed income simply does not arise, there is no question of levy of surcharge on such assumed advance tax liability on undisclosed income. this clearly shows that the reference to sec.113 in sec. 2(8) of the Finance Act is unintended and is also a drafting error. Sec.2(1) of the Finance Act, 1999, reads as under:-

"2. (1) Subject to the provisions of sub-sections (2) and (3), for the assessment year commencing on the 1st day of April, 1999, Income-tax shall be charged at the rates specified In Part I of the First Schedule."

Even Sec. 2(8) refers to the liability of an assessee in respect of total income of a previous year and not to undisclosed income in a block period. Thus, both sec. 2(1) and sec.2(8) of the Finance Act, which refer to an assessment year commencing from a particular date, or the previous year relevant to that assessment year, do not provide for a separate and independent levy of a separate tax on "undisclosed income of a block period". On the contrary a proposal to levy surcharge on advance tax on undisclosed income is in direct conflict with the very concept of 'block assessment' and 'undisclosed income' contemplated under Chapter XIVB. It would be ridiculous to take a view that a person would pay advance tax and surcharge thereon, in anticipation of a search taking place at his residence and that such income which suffered tax would be treated as undisclosed income, and it would not be proper to assume that the legislature wanted the assessees to pay advance tax on undisclosed income. In the Finance Act, the proviso relating to levy of surcharge was for the first time found under the rates prescribed for advance tax payments, i.e. Part III. It can be safely concluded that it was never the intention of the legislature to levy surcharge on tax on undisclosed income relatable to a block period for the period under dispute. There is no charging section in the Finance Act with a clear intendment or levy fastened on undisclosed income of a block period. The levy is only on 'Total Income' of a 'Previous Year' as contemplated in Sec.5 of the Act. The language of the Finance Act does not make the 'undisclosed income' of a 'block period' to be part of a 'total income'.

12.64. Now we consider the legal propositions on the issue of interpretation of these sections. It is well settled that the charging provision, which imposes a charge of tax, must be construed strictly. Hon'ble Supreme Court in the case of CWT v. Ellis Bridge Gymkhana and others (and other appeals), 229 ITR 1, held as follows (as per Head note):-

"The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all."

12.65. In the case of CIT v. Shahzada Nand and Sons and Others, 60 ITR 392, at 399 to 401, Hon'ble Supreme Court observed as follows:-

"Mr. Palkhivala, learned counsel for the respondents, answered this criticism thus. In a taxing Act one has to look merely at what is clearly stated and, if the interpretation is open to doubt, the construction most beneficial to the subject must be adopted. Section 34(1)(a), before it was amended in 1956, provided for the genus out of which, by the Income-tax (Amendment) Act, 1959, the species of section 34(1A) was carved out. While section 34(1)(a) was a general provision, section 34(1A) was a special provision. On the principle of generalia specialibus non derogant, the field covered by section 34(1A) should be excluded from that covered by section 34(1)(a). If that was the legal position before the 1956 amendment, the argument proceeded, the same position would continue thereafter, as Parliament retained section 34(1A), along with its provisos, as it stood before the amendment and amended only section 34(1)(a). The lifting of the bar of limitation, therefore, should, on the basis of the said doctrine, be confined to the field covered by section 34(1)(a) before the amendment. If Parliament intended to do away with the period of limitation in respect of the escaped incomes during the war period, it would not have retained section 34(1A) on the statute book; for, in that event, it would serve no purpose. It would be wrong to say that it ceased to be operative after April 1, 1956, for the period of limitation would still apply to proceedings in respect of escaped incomes of the war years. Sub-section (4) added in section 34 in the year 1959 and section 34(1B), as amended in 1956, would not throw any light on the question, but in a way would support the view that they were concerned only with the escaped incomes covered by section 34(1)(a), excluding therefrom those covered by section 34(1A). The argument based on the alleged anomaly led nowhere and indeed the retention of section 34(1A) on the statute book was intentionally done, as Parliament, having already placed a particular class of assessees under a special and heavy burden, did not think fit to make any provision which was likely to barass them further. The ambiguity in the section, if any, should go for the benefit of the taxpayer and not the tax-gatherer. This argument was accepted by the Madhya Pradesh and Gujarat High Courts in Rustomji vs. Income-tax Officer, Special Investigation Circle, Indore (1964) 54 ITR 461 and Mathurdas Govinddas vs. G.N. Gadgil, Income-tax Officer, Special Investigation Office, Ahmedabad (1965) 56 ITR 621.

Before we advert to the said arguments, it will be convenient to notice the relevant rules of construction. The classic statement of Rowlatt J. in Cape Brandy syndicate vs. Inland Revenue Commissioners (1921) 1 KB 64, 71 still holds the field. It reads;

"........... In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used".

To this may be added a rider: in a case of reasonable doubt, the construction most beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the same for all statutes, whether fiscal or otherwise. "The underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the court as to what is just or expedient". The expressed intention must guide the court. Another rule of construction which is relevant to the present enquiry is expressed in the maxim, generalia specialibus non derogant, which means that when there is a conflict between a general and a special provision, the latter shall prevail. The said principle has been stated in Craies on Statute Law, 5th edition, at page 205, thus:

"The rule is, that whenever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particulars enactment must be operative, and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply".

But this rule of construction is not of universal application. It is subject to the condition that there is nothing in the general provision expressed or implied, indicating an intention to the contrary: see Maxwell on the Interpretation of Statutes, 11th edition, at pages 168-169. When the words of a section are clear, but its scope is sought to be curtailed by construction, the approach suggested by Lord Coke in Heydon's case (1584) 3 Rep. 7b yields better results.

"To arrive at the real meaning, it is always necessary to get an exact conception of the aim, scope and object of the whole Act; to consider according to Lord Coke; 1. What was the law before the Act was passed; 2. What was the mischief or defect for which the law had not provided; 3. What remedy Parliament has appointed; and 4. The reason of the remedy."

12.66 In the case of Vikrant Tyres Ltd. V. First Income-tax Officer, 247 ITR 821, at 826, Hon'ble Supreme Court held as follows : -

"It is settled principle in law that the courts while construing revenue Acts have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning thereby that no tax or levy can be imposed on a subject by an At of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject. In this process, the courts must adhere to the words of the statue and the so-called equitable construction of those words of the statute is not permissible. The task of the court is to construe the provisions of the taxing enactments according to the ordinary and natural meaning of the language used and then to apply that meaning to the fact of the case and in that process if the taxpayer is brought within the net he is caught, otherwise he has to go agree. This principle in law is settled by this court in India Carbon Ltd. vs. State of Assam [1997] 106 STC 460; [1997] 6 SCC 479 wherein this court held (page 464) "Interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provisions in this behalf". A Constitution Bench of this court speaking through one of us (S.P. Bharucha J.) in the case of V.V.S. Sugars vs. Government of A.P. [1999] 114 STC 47; [1999] 4 SCC 192 reiterated the proposition laid down in the India Carbon Ltd.'s case [1997] 106 STC 460 in the following words (headnote of [1999] 4 SCC): "The Act in question is a taxing statute and, therefore, must be interpreted as it reads, with no additions and no subtractions, on the ground of legislative intendment or otherwise".

(Emphasis ours)

12.67 Applying the above ratio decided to the case on hand, we have to hold that as neither sec. 2(1) nor sec. 2(8) of the Finance Act brings to tax, by way of a distinct and separate charge, the undisclosed income of a block period computed as per Chapter XIVB and as levy of surcharge in block assessments cannot be brought within the ambit of these charging sections, the levy has to fail. Charging section has to be construed strictly. Proviso to sec. 4 and sec. 158 BA(2) which are charging sections for undisclosed income of a block period computed under Chapter XIV B, do not authorize levy of surcharge of even tax by any Central Act. The Finance Acts deals with only total income of a previous year. Thus, unless there is a distinct and separate levy under the Central Act, on undisclosed income of a block period which satisfies the tests laid down by the Hon'ble Supreme Court in the case of Govind Sarang Saran (supra), the levy cannot be upheld.

12.68 The Revenue relied on the judgment of the Hon'ble Supreme Court in the case of CIT v. Hindustan Bulk Carriers, (2003) 3 SCC 57 at [age 74, paragraphs 14 to 21, wherein it was stated as follows : -

14. A construction which reduces the statute to a futility has to be avoided. A statute or any enacting provisions therein must be so construed as to make it effective and operative on the principle expressed I the maxim utres maqis valeat quam pereat i.e. a liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect the intention of the parties [See Broom's Legal Maxims (10th Edn.), P. 361, Craies on Statutes (7th Edn.), P. 95 and Maxwell on Statutes (11th Edn.), P. 221.

15. A statute is designed to be workable and the interpretation thereof by a court should be to secure that object unless crucial omission or clear direction makes that end unattainable. (See Whitney v. IRC, AC at. P. 52 referred to in CIT v. S. Teja Singh and Gursahai Saigal v. CIT).

16. The courts will have to reject that construction which will defeat the plain intention of the legislature even though there may be some inexactitude in the language used. (See Salmon v. Duncombe AC at p. 634, Curtis v. Stovin referred in S. Teja Singh case).

17. If the choice is between two interpretations, the narrower of which would fail to achieve the manifest purpose of the legislation, we should avoid a constructions which would reduce the legislation to futility, and should rather accept the bolder constructions, based on the view that Parliament would legislate only for the purpose of bringing about an effective result (See Nokes v. Doncaster Amalgamated Collieries referred to in Pye v. Minister for Lands for Nsw). The principles indicated in the said cases were reiterated by this court in Mohan Kumar Singhania vs. Union of India.

18. The statute must be read as a whole and one provisions of the Act should be construed with reference to other provisions in the same Act so as to make consistent enactment of the whole statute.

19. xxxxxxxxxxxxxxxxxxxxxx

20. xxxxxxxxxxxxxxxxxxxxxx

21. The provisions of one section of the statute cannot be used to defeat those of another unless it is impossible to effect reconciliation between them. Thus a construction that reduces one of the provisions to a "useless lumber" or "dead letter" is not a harmonized constructions. To harmonies is not to destroy."

(Emphasis supplied by underlining)

12.69 The Revenue further relied upon the judgment of the Hon'ble Supreme Court in the case of Sultan Begum v. Premchand Jain, (1997) 1 SCC 373, at 382, para 15, in which it was held :

"On a conspectus of the case-law indicated above, the following principles are clearly discernible:

(a) It is the duty of the Courts to avoid a head on clash between two section of the Act and to construe the provisions which appeal to be in conflict with each other in such a manner as to harmonies them.

(b) The provisions of one section of a statute cannot be used to defeat the other provisions unless the courts, in spite of its efforts, find it impossible to effect reconciliation between them.

(c) It has to be borne in mind by all the courts all the time that when there are two conflicting provisions in an Act, which cannot be reconciled with each other, they should be so interpreted that, if possible effect should be given to both. This is the essence of the rule of "harmonious constructions".

(d) The Courts have also to keep in mind that an interpretation which reduces one of the provisions as a "dead letter" or "useless lumber" is not harmonious construction.

(e) To harmonies is not to destrotoy any statutory provisions or to render it otiose."

12.70 It is true that a construction which reduces a statute to a futility has to be avoided. But, if the taxing statute fails in reflecting its intendment clearly, courts cannot help the draftsmen by a favourable construction, as observed by the Apex Court in the case of Elphinstone (40 ITR 142 at 150). In the instant case, the language in the Finance Act, 1999, unhesitatingly goes to show that it was a drafting error and levy of surcharge on undisclosed income of a block period was not levied by a charging section and even if it is held otherwise the levy is not workable. As explained in the earlier paragraphs, the concept of "undisclosed income" of a block period was intended to be applicable to persons who have never intended to disclosed either whole or a part of their taxable income and such persons would have obviously not paid advance tax or deducted tax at source. If the plain language of the Finance Act has to be given effect to, it has to be assumed that the legislature intended such assesses to pay advance tax on which surcharge is also payable, but such interpretation would affect the very purpose of Chapter XIV B. The crucial omission in the charging sections and ambiguity makes the object of harmonization, liberal construction, unattainable. On the other hand, we hold that the plain intention of the legislature was never to levy surcharge on undisclosed income of a block period prior to 01.06.2002, when the statute is read as a whole. When there is no charge, there cannot be a levy. The imposition off such a levy by the Finance Act does not mesh in with either proviso to sec. 4(1) or the provisions of sec. 158BA(2) read with sec. 113 of the Act or Chapter XIVB itself. Our interpretation does not destroy and statutory provisions, as there is no charging section in the Finance Act. When there is no charge, the question of rendering its otiose does not arise. When there is no charge, the question of rendering it otiose does not arise. When there was no intention on the part of the legislature to levy surcharge, either expressly or by implication and as there is no charging or procedural provision for levying the same, the question of making any provisions a 'dead letter' or a 'useless lumber' does not arise. There is no clash between any two acts or sections. The only question is as to whether there is a charring section under Finance Act to levy surcharge on undisclosed income of a block period.

12.71 The Revenue also relied on the judgment of the Hon'ble Supreme Court in AIR 1977 SC 265, wherein it was held as follows:-

"The argument of implied repeal has also no substance in it because our reason for according priority to the provisions of the Delhi rent act is not that the slum clearance act stands impliedly repealed pro tanto. Bearing in mind the language of the two laws, their object and purpose, and the fact that one of them is later in point of time and was enacted with the knowledge of the non obstinate clauses in the earlier law, we have come to the conclusion that the provisions of Section 14A and chapter IIA of the Rent Control Act must prevail over those contained in Sections 19 and 39 of the Slum clearance Act."

This proposition was relied upon for submitting that the Finance Acts being subsequent laws, as sec. 158 BA (1) was introduced by the Finance Act, 1995, whereas the levy of surcharge was introduced by the Finance Acts, 1996 to 1998, and hence the subsequent laws have to be given effect to. This contention of the Revenue cannot be accepted for the reason that it was by the Finance Act, 1995, that Chapter XIVB of the Income-tax Act, 1961, was introduced and it is in the same Finance Act, under sec. 2(7) reference to sec. 113 has appeared for the purpose of payment of advance tax as well as deduction of tax at source. Thus, the Finance Act though a subsequent legislation, it does not have an independent charging sections and thus the arguments that subsequent legislation overrides earlier legislation does not hold water. No doubt the Income Tax Act does not override the Finance Act. Even otherwise, we found that there is no distinct charge in the Finance Act for levy of the Impugned surcharge. Thus, the argument that the interpretation which holds that the levy of surcharge prior to 01.06.2002 amounts to ignoring a relevant piece of legislation which is admittedly found in the statue book, does not hold water. There is no such valid levy in the statute book. In fact, the Revenue, in its written submissions, at page 12 paragraph 19, stated as follows : -

"19. In Elphinstone's case, the Hon'ble Supreme Court construed the relevant provisions as amounting to not creating a charge. There is no controversy with regard to proposition that if the charge fails, question of taxing the assessee, doe not arise."

[Emphasis supplied]

Our finding in this case is that in the Finance Act, there is no distinct and independent charge whereby surcharge can be said to have been levied on undisclosed income determined for a block period under Chapter XIVB.

12.72 Even otherwise, we find that the Finance Act (s), prior to amendment in section 113 of the Act, did not satisfy the four components which enter into the concept of tax and some of these components are not clearly and definitely ascertainable, in order to be treated as an independent and distinct levy/charge which is workable and practicable as explained hereunder :

(a) The levy of surcharge was totally dependent on the assessee's liability to pay Tax on 'undisclosed income' for the 'block period';

(b) The rate for imposition of surcharge was unknown since the relevant date for imposition of surcharge, as admitted by the Standing Counsel during the course of hearing, was in doubt. It was not known as to which date was relevant for determining the imposition of surcharge as there are different rates for different dates. There was ambiguity as it was not known which of the following rates would apply:

(i) The rate applicable for the year in which search was initiated; or

(ii) The rate applicable for the year in which search was concluded; or

(iii) The rate applicable for the year in which the block assessment proceedings under section 158BC were initiated; or

(iv) The rate applicable for the year in which the block assessment order was passed.

(v) As a block period consists of an aggregate of several previous years and as each previous year had a separate rate of surcharge, whether the rate most favourable to the assessee was to be adopted.

(vi) If the Revenue's contention that the concept of Previous Year and Assessment Year are to be applied to block assessments, is to be accepted, then, whether the rate of surcharge of a particular assessment year is to be applied to the undisclosed income relatable to that particular assessment year in a block period thereby applying different rates of surcharge to undisclosed income after apportioning rates of surcharge to undisclosed income after apportioning it to different assessment years?

Further, in case of proceeding under section 158BD of the Act it was ambiguous whether either of the above rates was relevant or rate applicable on the date of initiation of the proceedings under that section or on the date on which block assessment order was passed under that section was relevant. Since the relevant date for imposition of surcharge was in doubt, the relevant rate for imposition of surcharge was also in doubt prior to amendment in section 113 of the Act.

(c) There was contradiction in basis in the provisions of the Finance Act (s) inasmuch as both part I of First Schedule and Part III of First Schedule referred to levy of surcharge.

12.73 The applicability of either of the rates would have resulted in absurdity as explained hereunder :

A Finance Act contains proposals for the following financial year e.g. Finance Act, 2001 contains the proposals for the Finance year 2001-02. Every Finance Act has first Schedule, which comprises of three parts as under :

-Part I of the First Schedule refers to rate of taxation for the assessment year beginning on 1st April and proceeding the year in respect of which proposals are introduced. So Part I of the Finance Act, 2001 contains rates for the assessment year 2001-02;

-Part II of First Schedule refers/contains rates for deduction of tax at source during the current year;

-Part III of First Schedule refers/contains the rates for the following assessment year. So Part III of the Finance Act, 2001 contains rates for the assessment year 2002-03.

The relevant Finance Act(s) from 1996 to 2001 referred to surcharge in the context of section 113 as under :

Finance Act Relevant Section of Finance Act 'A' 'B' Relevant Section of Finance Act 'C' 'D'
Finance (No. 2) Act, 1996 First proviso to section 2(3) refers to rate in Part I 15% NIL Second proviso to section 2(8) refers to rate in part III 7.5% NIL
Finance Act, 1997 First proviso to section 2(3) refers to rate in Part I 7.5% NIL NIL N.A. N.A.
Finance (No. 2) Act, 1998 Nil N.A. N.A. Nil N.A. N.A.
Finance Act, 1999 Nil N.A. N.A. Second proviso to section 2(8) 10% 10%
Finance Act, 2000 First proviso to section 2(3) refers to rate in Part I 10% 10% Second proviso to second 2 (8) refers to rate in Part III 10% 10%/15%
Finance Act, 2001 First proviso to section 2(3) refers to rate in Part I 13% 12%/17% Second proviso to section 2(8) refers to rate in Part III 2% 2%

'A' - Rates for companies as per Part I
'B' - Rates for individuals as per Part I
'C' - Rates for companies as per Part III
'D' - Rates for individuals as per Part III

From the above, it will be noticed that as per proviso to section 2(3) of the Finance Act, surcharge is to be levied at the rates specified in Part I of the First Schedule. In some years second proviso to section 2(8) referred to Part III of the First Schedule.

12.74. In the case of search initiated/conducted on 01.08.2001, the Revenue relies upon the proviso to sec. 2(3) of the Finance Act, 2001, to levy surcharge, which refers to Part I of the First Schedule. Part I of the Finance Act, 2001, contains the rates of tax for the asst. year 2001-2002, whereas the assessment year relevant to the date 01.08.2001 is 2002-2003. In such circumstances, the levy of surcharge as per the rate specified in part I of the First Schedule is clearly illegal as held by the Hon'ble Supreme Court in the case of Karimtharuvi Tea Estate Ltd. V. State of Kerala, 60 ITR 262. In that case, the assessee-company was assessed to agricultural income-tax under the Kerala Agricultural Income-tax Act, 1950, for the assessment year 1957-58. In the assessment, a surcharge at the rate of 5% on the agricultural income-tax and super-tax was also levied and collected from the company under the provisions of the Kerala Surcharge on Taxes Act, 1957 (XI of 1957). The Company objected to the imposition of surcharge on the ground that the law in force on April 1, 1957, should be the law applicable to the assessment for 1957-58. The Surcharge on Taxes Act came into force only from September 1, 1957, and did not have any retrospective effect. Their Lordships of the Supreme Court observed as under :

"Now, is well-settled that the Income-tax Act, as it stands amended on the first day of April of any financial year must apply to the assessment of that year. Any amendments in the Act which come into force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force.

In the instant case, there is no escape from the conclusion that the Surcharge Act not being retrospective by express intendment or necessary implication, it cannot be made applicable from April 1, 1957, as the Act came into force on September 1, of that year.

The Surcharge Act having come into force on September 1, 1957, and the said Act not being retrospective in operation, it could not be regarded as law in force at the commencement of the year of assessment 1957-58. Since the Surcharge Act was not the laws in force on April 1, 1957, no surcharge could be levied under the said Act against the appellant in the assessment year 1957-58."

[Emphasis supplied]

12.75 Even if the argument of the Revenue that the concepts of 'previous year', 'assessment year' as well as 'determination of income for each of the previous years' re not disturbed by the scheme of Chapter XIVB, is to be accepted, then it would logically followed that in such a situation, the total income determined in each of the previous years should be subject to levy of surcharge at the rates applicable to those very previous years only. Such a construction is against the proposition sought to be put forward by the Revenue that the date of search is the triggering event for the applicability of Chapter XIVB and that it was clarified in the proviso to sec. 113 introduced by the Finance Act, 2002, that the rate of surcharge applicable for the date of search should be the rate that should be applied.

12.76 It may not be out of context to mention, at this juncture that the legislature, whenever desired, specifically made a mention of the tag of surcharge accompanying the leviable tax in specific instances. For example, under Sections 161 to 164 A of the Income Tax Act, incomes of certain assesses, in certain circumstances were subject to tax at maximum marginal rate. The terms 'Maximum Marginal Rate' has been defined in S.2(29C), brought on to the Statute Book, by the Direct Tax Laws (Amendment) Act, 1987 with effect from 01.04.1989, as 'the rate of income tax (including surcharge on incometax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year. Prior to insertion of S.2(29C), the said term 'Maximum Marginal Rate' was defined on the very same lines, under the relevant provisions of Ss. 161 to 164A itself. Similarly, even in the matter of quantification of penalties for concealment of income, etc. leviable under the Income Tax Act, Department goes by only the tax sought to he evaded and for that purpose does not take into account the tag of surcharge in relation to such tax sought to be evaded. The Department, which is every correctly going by the wording of the statute while quantifying the penalties for concealment of income leviable under the Act, is unjustifiably seeking to add the levy of surcharge while computing the tax in relation to undisclosed income determined in a block assessment.

12.77 Thus, we conclude that the levy of surcharge, prior to introduction of proviso to sec. 113 with effect from 01.06.2002, is riddled with complexity to the extent of making it unworkable and impossible to harmonies and therefore, the levy fails.

13.1 In the result, the question referred to us by the Hon'ble President is answered in the negative, against the Revenue and in favour of the assessee.

13.2 Now, the matter shall go back to the concerned Division Bench to dispose of the appeal in the light of the above answer to the question referred to this Special Bench.

 
 
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