Holding

Surcharge is a distinct tax separate from income tax, and the Finance Act 2001 (with its surcharge rate) governs block assessments where the search was initiated before 1 June 2002, rendering the surcharge levy valid despite the later proviso amendment.

Summary

The Central Board of Income Tax, Jalandhar appealed against the order of the Punjab & Haryana High Court which had upheld the Income Tax Appellate Tribunal’s decision that surcharge could not be levied on tax assessed under a block assessment where the search was conducted before 1 June 2002. The case involved a search on 6 April 2000, a block assessment under Chapter XIV‑B and the imposition of a 17 % surcharge under the Finance Act 2001. The Supreme Court examined whether surcharge is part of income tax, the applicability of the Finance Act 2001 versus the Finance Act 2002 (which inserted a proviso to Section 113), and which Finance Act governs the levy when the search predates the amendment. The Court held that surcharge is a separate tax, that Section 113’s proviso merely clarifies that the Finance Act of the year the search is initiated governs the assessment, and that the Finance Act 2001 (with its surcharge rate) applies to the present block assessment. Consequently, surcharge was lawfully levied despite the later amendment. The appeal was allowed and the High Court order set aside.

Issues considered

Whether surcharge is a component of income tax or a distinct tax for purposes of block assessment.
Whether the Finance Act 2001 applies to block assessments where the search was initiated before the insertion of the proviso to Section 113 by the Finance Act 2002.
Whether the proviso inserted in Section 113 by the Finance Act 2002 has retrospective effect on cases booked before 1 June 2002.
Interpretation of Section 113, Section 158BA, Section 158BC and their interaction with the Finance Acts for levy of surcharge.

Legislation cited

Finance Act, 2001
Finance Act, 2002
Income Tax Act, 1961s. 113, s. 154, s. 158BA, s. 158BC, s. 2(1), s. 2(3), s. 260A, s. 4

Subjects

block assessmentsurchargeIncome Tax ActFinance Act 2002Section 113retroactive effecttax law interpretationsearchassessment procedure

Judgment

[2009] 2 S.C.R. 873

-"' 1 COMMNR. OF INCOME TAX, JALANDHAR-1 A
v
SHRI RAJIV BHATARA
Civil Appeal No. 1121 of 2009
FEBRUARY 19, 2009
B
[DR. ARIJIT PASAYAT AND DR. MUKUNDAKAM
SHARMA, JJ.]
y
Income Tax Act, 1961 :
s.113, proviso, s.158BA rlw s.4 and s.158BC - Block c
assessment - Search conducted on 6-4-2000 - Levy of
surcharge on assessed tax- Insertion of proviso to s.113 vide
Finance Act, 2002 w. e. f 1-6-2002 - Effect of, on cases booked
before 1-6-2002 - Held: In the various Finance Acts, the
Parliament sought to levy surcharge on tax in case of block
D
assessment - Even without the proviso to s. 113, the Finance
Act, 2001 was applicable to block assessment under Chapter
XIV-B in relation to search initiated on 6-4-2000 and
accordingly surcharge was leviable on the tax.
The present appeal filed by the Department concerns E
levy of surcharge on assessed tax in cases of block
assessment and the effect of insertion of proviso to s.113
vide Finance Act, 2002 w.e.f 1-6-2002 on cases booked
before 1-6-2002.
Allowing the appeal, the Court F

HELD:1. As a general concept, income tax includes
surcharge. Reading Section 2(1) of the Finance Act, 2001,
it is clear that the term 'income tax' as used in Section 2(1)
and proviso to Section 2(3) of the said Act did not include G
the amount of surcharge. Surcharge was a separate item
of taxation, different from income tax. [Para 10] [878-G]
2. Section 158-BA(2) read with Section 4 of the Act

873 H
''\ .
,_ ...... ~

874 · SUPREME COURT REPORTS [200912-·s.c.R.

A looks~t Section 113 for the imposition rate at which tax r )I>,-
has to be imposed in the case of block assessment. That
rate is 60%. That rate is fixed by the Act itself. That rate
has been stipulated by Parliament not with a view to oust
the levy of surcharge but to make the levy cost effective
B and easy. Therefore, a flat rate is pre$cribed. The difficulty
in block assessment is that one has to -correlate· the
undisclosed income to different years in which income is
earned, hence, Parliament has fixed a flat rate of tax in
-Section 113. [~ara 11][879-8] "'(

_-c 3. Though Parliament was aware of rate of tax
!;._
prescribed by Section 113 and yet- in. the various Finance
"'1
Acts, Parliament has soughtto levy surcharge on the tax
in the case of block assessment. In the present case, the r

assessing officer has applied the rate of surcharge at 17%
D which, rate finds place in Para A"of Part I of Schedule I to -l
the said Finance Act of 2001., therefore, surcharge leviable
under Einance Act was a distinct charge,. nol dependent
for its leviability on the assessee's liability to pay income
tax but on assessed tax. [Para-12] [879-D]
E 4. Even without the proviso to Section 113 (inserted
vide Finance Act, 2002 w.e.f. 1.6.2002), Finance Act, 2001
was applicable to block assessment under Chapter XIV-
8 in relation to the search initiated ori 6.4.2000 and
'accordingly surcharge was leviable on the tax. [Para 13] -1

F [879-E-F]
5. -According to the assessee,, prior to 1.6.2002, the
_ position ~as ambiguous as it was not clear even to the
Department as to whether surcharge was leviabfe with
reference to .the rates provided for in Finance Act of the
G year in which the search was initiated or the year in which·
the search was conclude.d or the year·in which the block
.\
assessment proceedings -under Section 158 BC were
·initiated or the year in which block assessment order was
passed. To ~lear that doubt precisely, the _provis~ has
H been inserted in. Section 113 by which it is indicated that
COMMNR. OF INCOME TAX, JALANDHAR-1 V. 875
SHRI RAJIV BHATARA

-..._ 1 Finance Act of the year in which the search was initiated A
would apply. Therefore, it has to be held that the proviso
to Section 113 was clar;lficatory in nature. It only clarifies
that out of the four dates, Parliament was opted for the
date, namely the year in which the search was initiated,
. which date ·would be relevant for applicability of a s
particular Finance Act. Therefore, the proviso has to be
read as it stands. [Para 14] [879-G; 880-A]
Y CIT v. Ram Lal Bahu Lal 148 CTR 643; CIT v. Roshan
Singh Makkar (2006) 287 !TR 160; CIT v. Neotech·Company
[(2007) 291 /TR 27] and CIT v. S. Palanivel [(2,007) 291 /TR C
33; Commissioner of Income Tax, Central II v. Suresh N. Gupta
[2008(4) sec 362 - referred to.
Case Law Reference
148 CTR 643 referred to Para 3 D
(2006) 287 ITR 160 referred to Para 3
(2007) 291 ITR 27 referred to . Para 3
(2007) 291 ITR 33 referred to Para 3
E
2ooa(4) sec 352; referred to Para 3
-
CIVILAPPELLATE JURISDICTION: Civil Appeal No. 1121
of 2009
From the Judgement ~nd Order dated 06.08.2007 of the
High Court of Punjab &Haryana at Chandigarh in Income Tax, F
Appeal No. 587 of 2006.
Harlsh Chandra, Sanjiv Bha,rdwaj, Gaurav Agarwal, Pankaj
Kapoor and B.V. Balaram Das, for the Appellant.
The Judgement of the Court was delivered by . G,

DR. ARIJIT PASAYAT, J
1. Leave granted.
2. Challenge in this appeal is to the judgment of a Division· H
876 SUPREME COURT REPORTS [2009] 2 S.C.R.

A Bench of the Punjab and Haryana High Court dismissing the '{ )t"

appeal filed under Section 260(A) of Income Tax Act, 1961 (in
shc-:t lhe 'Act'). In the said appeal, challenge was to the order
dated 01. 7.2006.passed by the Income Tax Appellate Tribunal
Amritsar Bench, Amritsar (in short the 'Tribunal'). The dispute
B related to the block period 1.4.1990·to 3. 7.2000. The question
which arose for consideration is as follows:

"Whether, on the facts and in the circumstances of the
'>i
case, the ITAT was right in law in confirming the CIT(A)'s
order directing not to levy surcharge on the tax worked out
c on the undisclosed income as the case pertains to a search
conducted period to 1.6.2002?".
3. Factual position in a nutshell reads as follows :
Search was conducted on 6.4.2000. The Assessing Officer
-.).
D in his order dated 22.5.2002 imposed surcharge and an
application under Section 154 of the Act filed by the assessee
for rectification was dismissed vide order dated 17.9.2003 with
the observation that the surcharge was levied as per the
provisions of Part I of the 1st Schedule appended to Finance
E Act, 2000. On the ground that there was no mistake apparent '
I',
on the record, the application under Section 154 of the Act was
rejected. However, the Commissioner of Income Tax (Appeals),
Ludhiana, (for brevity the CIT(A)') reversed the order passed .j
by the Assessing Officer and took the view that surcharge was
F not fevlable in cases where the search has taken place prior to
1.6.2002, In that regard, reliance was placed on a Division
Bench judgment of this Court in the case of CIT v. Ram Lal
Bahu Lal (148 CTR 643).
On further appeal by the Revenue the Tribunal upheld the
G order dated 12.9.2005 passed by the CIT (A) holding that the
$earch in the present case took place on 6.4.2000 which was
much prior to the date of amendment made in Section 113. The
amendment was incorporated on 1.6.2002 by inserting proviso
to Section 113 by Finance Act, 2002. It was by the amendment
H that levy of surcharge on the disclosed income was specifically
COMMNR. OF INCOME TAX, JALANDHAR-1 V. 877
SHRI RAJIV BHATARA [DR. ARIJIT PASAYAT, J.]

- .. 1 provided w.e.f. 1.6.2002. The provision has not been given A
retrospective effect, and therefore, the Tribunal held that it
applied only to cases where searches were carried out after
1.6.2002.
The High Court dismissed the appeal relying on its decision
in the case of CIT v. Roshan Singh Makkar (2006) 287 ITR B
160 and also referred to two other decisions of the Madras High
Court in CIT v. Neotech Company [(2007) 291 ITR 27] and CIT
v. S. Palanivel [(2007) 291 ITR 33].
4. Learned counsel for the appellant submitted that the
case at hand is squarely covered by a decision of this court in
c
Commissioner of Income Tax, Central II v. Suresh N. Gupta
[2008(4) sec 362].
5. The power to levy a surcharge on income tax is
traceable to Article 271 read with Entry 82 of List I of Schedule D
VII to the Constitution of India, 1950 (in short the 'Constitution').
That power is not traceable to Section 4 of the Act. Every year
the Finance Act is enacted by Parliament to give effect to the
financial proposals of the Central Government. The rate at which
a charge on the total income of the previous year is imposed
under Section 4(1) of the Act is not laid down in the Income Tax E
Act and, therefore, the said Section provides that the charge
has to be fixed by the Central Act. It is because of this, that
\.· income tax is levied at different rates under the Finance Act.
6. In order that the charge should be a legal charge under
Section 4, it must be a tax on the Income of the assessee. If the F
charge is the tax on anything else, then it would not be a valid
charge. That is the only limitation upon the power or authority of
Parliament to fix any rate it pleases. So long as the charge is on
'total income' of the previous year, there is no limitation upon
the power or authority of Parliament to fix any rate if pleases. G
o; The Income Tax Act, therefore, contains an elaborate machinery
for ascertaining 0 total income" of an assesses. Section 4(1)
prescribes the subject matter of the tax and the rate of that tax
is prescribed by the legislature, either under the Act aa in the
case of Section 113 or vide the Finance Act. H
.•

'878 SUPREME COURT REPORTS [2009] 2 S.C.R.

A 7. The purpose of Chapter XIV is to lay down a special
procedure for assessment· of surcharge cases with a view to . '
comJ?at tax evasion and also to expedite and simplify'
assessments in search cases. Undisclosed incomes have to
be relat~d in different years in which income was earned 'under.
8 · block asse~ent. This is because in such cases, the "block
periocl" is for previous years relevant to 10/6 assessment years
and also the period of the current previous year up to the date
of the search. The essence of this new procedure, therefore, is
a separate single assessment of the "undisclosed income",
c detected as a result of search and this separate assessment
has. to be iri addition to the normal assessment covering the
same period. Therefore, a separate return covering the years
of the block period is a prerequisite for making block
assessment. Under the said procedure, Explanation is inserted
in Section 158-88, which is computation Section, explaining
0
th~method o( computation of"undisclosed-income" of the block
period.
8. If the i'block perfod", as defined in Section 158-8(a),
comprises previous years relevant to 10/6 assessment" years
E is treated by Parliament as one· unit of time -for assessment
purposes, one has to correlate "undisclosed income" to each
of the years in which income was earned by the assessee ..
9. Section 158-BB is. required to be read with Section 4 of
the Act, then the relevant Finance Act of lhe year concerned
F would automatically stand attracted to .the computation unde.r
Chapter XIV-8. Section 158-88 looks at Section 113. That
Section fixes the rate of tax. ~
. ' ~ ~

10. In tne present case undisputedly Para A was applicable
at the given point <;>_f time. As a general concept, income tax
G includes surcharge. Reading Section 2(1) of the Finance Act,-
.. 2001, it is clear that the term 'income tax' as used in Section
2(1) and proviso to Section 2(3) of the said Act did not i~flude
. the amount of surcharge. .
Surcharge was,,. a separate item of
taxation, different from income tax. This was made clear vide
H
COMMNR. OF INCOME TAX, JALANDHAR-1 V. 879
SHRI RAJIV BHATARA [DR ARIJIT PASAYAT, J.]

Section 2(1 )(a), proviso to Section 2(3) and Para A of Part I to A
Schedule I.
11. Section 158-BA(2) read with Section 4 of the Act looks
• at Section 113 for the imposition rate-at which tax has to be
imposed in the case of block assessment. That rate is 60%.
That rate is fixed by the Act itself. That rate has been stipulated 8
by Parliament not with a view to oust the levy of surcharge but to
make the levy cost effective and easy. Therefore, a flat rate is
prescribed. The difficulty in block assessment is that one has to
correlate the undisclosed income to different years in which
income is earned, hence, Parliament has fixed a flat rate of tax C
in Section 113.
12. Though Parliament was aware of rate of tax prescribed
by Section 113 and yet in the various Finance Acts, Parliament
has sought to levy surcharge on the tax in the case of block
0
assessment. In the present case, the assessing officer has
applied the rate of surcharge at 17% which rate finds place in
Para A of Part I of Schedule I to the said Finance Act of 2001,
therefore, surcharge leviable under Finance Act was a distinct
charge, not dependent for its leviability on the assessee's liability E
to pay income tax but on assessed tax.
13. Therefore, even without the proviso to Section 113
(inserted vide Finance Act, 2002 w.e.f. 1.6.2002), Finance Act,
2001 was applicable to block assessment under Chapter XIV-
B in relation to the search initiated on 6.4.2000 and accordingly F
' surcharge was leviable on the tax.

14. According to the assessee, prior to 1.6.2002, the
position was ambiguous as it was not clear even to the
Department as to whether surcharge was leviable with reference
to the rates provided for in Finance Act of the year in which the G
search was initiated or the year in which the search was
concluded or the year in which the block assessment
proce~dings under Section 158 BC were initiated or the year
m which block assessment order was passed. To clear that
doubt precisely, the proviso has been inserted in Section 113 H
880 SUPREME COURT REPORTS [2009] 2 S ..C.R.

A by which it is indicated that Finance Act of the year in which the
search was initiated would apply. Therefore, it has to be held
that the proviso to Section 113 was clarificatory in nature. It only
clarifies that out of the four dates, Parliament was opted for the
date, namely the year in which the search was initiated, which
B date would be relevant for applicability of a particular Finance
Act. Therefore, the proviso has to be read as it stands.
15. The above position was highlighted in Suresh N.
Gupta's Case (supra).
c 16. There is no appearance on behalf of the Assessee- •
respondent in spite of service of notice.
17. In view of what has been stated in the aforesaid case
the inevitable result is that the appeal deserves to be allowed,
which we direct. The impugned order of the High Court in Tax
D Appeal No.587 of 2006 is set aside and the departmental Civil
appeal is allowed with no order as to costs.

8.8.8. Appeal allowed.