Holding

The Finance Act, 2001 applies to block assessments for searches initiated in 2001, and the 2002 proviso to Section 113 is merely clarificatory, making the 17% surcharge valid.

Summary

A search under Section 132 of the Income Tax Act was conducted on 17 January 2001 at the premises of Suresh N. Gupta, uncovering undisclosed income of Rs.1,62,427. The Assessing Officer levied tax at the 60% rate prescribed by Section 113 and imposed a 17% surcharge relying on the Finance Act, 2001. The assessee challenged the surcharge, arguing that Chapter XIV‑B’s block assessment is a self‑contained scheme and that the Finance Act, 2001 should not apply, and that the proviso added to Section 113 by the Finance Act, 2002 was retrospective. The Supreme Court held that Section 15888 must be read with Section 4 of the 1961 Act, so the Finance Act of the year in which the search was initiated governs the surcharge, and that the 2002 proviso merely clarifies the applicable Finance Act without retrospective effect. Consequently, the surcharge was valid and the Department’s appeal was allowed.

Issues considered

Whether the Finance Act, 2001 is applicable to block assessment under Chapter XIV‑B for a search initiated on 17 January 2001.
Whether the proviso inserted in Section 113 by the Finance Act, 2002 is clarificatory or retrospective.
Whether a surcharge of 17% can be levied on tax computed under Section 113 for undisclosed income.

Legislation cited

Constitution of Indias. Article 271
Finance Act, 2001s. 2(1), s. 2(3), s. Part I First Schedule Paragraph A
Finance Act, 2002s. 113 (proviso)
Income Tax Act, 1961s. 113, s. 132, s. 15888, s. 158BA, s. 158BB, s. 158BC, s. 158BE, s. 158BH, s. 4(1)

Subjects

Income taxBlock assessmentUndisclosed incomeSurchargeFinance ActSection 113Chapter XIV‑BSearch under Section 132Clarificatory proviso

Judgment

(2008] 1 S.C.R. 157

COMMISSIONER OF INCOME TAX CENTRAL II A
II.
SURESH N. GUPTA
(C:A. No. 32 of 2008)
_ JANUARY 7, 2008
B
[S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]

...
I
Income Tax Act, 1961 - s. 4 (1) and proviso, 113, 132,
Chapter XIV B; ss. 158 BA, 158 BB, 158 BF - Undisclosed
income - Unearthed during search carried out on 17.1.2001 - c
Levy of surchar.ge @ 17% on the tax calculated at 60% on the
total undisclosed income by placing reliance on Finance Act,
2001 - Propriety of - Held: Surcharge was rightly imposed -
Revenue could place reliance on Finance Act, 2001 for the
purpose of 'block assessment' under Chapter XIV B -
Computation under Chapter XIV B has to be read with D
computation of 'total income' under Chapter IV - Relevant date
for applicability of the Finance Act would be the year in which
the search stood initiated - Proviso inserted ins. 113 by Finance
Act, 2002 was clarificatory in nature - Constitution of India,
1950 - Article 271 r/w VII Schedule List I Entry 82 - Finance E
Act, 2001 - Finance Act, 2002
A search uls 132 of Income Tax Act, 1961 was carried
out on 17.1.2001, at the premises of the respondent-
assessee, an Individual. Undisclosed income was
_... · unearthed in the se~rch. Assessing Officer determined the F
undisclosed income and computed tax thereon at 60% in
terms of Section 113 of the Act. Surcharge at the rate of
17% was also levied thereon. Assessee challenged the
levy of surcharge. The appeal was allowed by
Commissioner of Income Tax (Appeals). The decision was G
further upheld by the Tribunal and also High Court.
i_ In appeal to this court, the questions for
determination were (1) whether in the facts of the instant
case, Finance Act, 2001 was applicable to 'block H
' 157
158 SUPREME COURT REPORTS [2008] 1 S.C.R.

A assessment' under Chapter XIV 8 in respect of the search r '
carried out on 17.1.2006 upto 1.6.2002 and (2) whether the
proviso inserted in Section 113 by the Finance Act, 2002
was clarificatory.
Allowing the appeal, the Court
B
HELD: 1.1 The concept of a charge on the "total
income" of the previous year under Income Tax Act, 1961
is retained even under Chapter XIV-8. Therefore, Section t//I

15888 which deals with computation of undisclosed
c income of the block period has to be read with
computation of 'total income' under Chapter IV of Income
Tax Act. Once Section 15888 is required to be read with
Section 4 of the 1961 Act, then the relevant Finance Act of
the concerned year would automatically stand attracted
D to the computation under Chapter XIV-8. (Para 15 and16]
-~

(178-E-G]
1.2 There is a fallacy in the argument of the assessee +~
that the concepts of "total income" and "previous year"
are given ago by in Chapter XIV-8. The analysis of Section
E 15888 indicates that both the concepts are retained in
Chapter XIV-8. The only difference is that Section 4 of the
1961 Act charges the total income of a person of one single
previous year (unit of assessment) whereas Section
158BA(2) levies a charge on the income of a person for
F the block period of previous years relevant to 10/6 ~
assessment years. The word "block period", as defined
in Section 1588(a), comprises previous years relevant to
10/6 assessment years as one unit of time for the purposes
of assessment. (Para 15] (177-G-H; 178-A-8]
G 1.3 The object behind enactment O·f Chapter XIV-8 is
to assess and compute "undisclosed incomes" relatable
to different accounting years in which the income is earned. r
Therefore, if the block period comprising of previous years
relevant to 10/6 assessment years is treated by Parliament
H as one unit of time for assessment purposes, one has to
COMMISSIONER OF INCOME TAX CENTRAL II v. 159
SURESH N. GUPTA

' '-1
correlate "undisclosed income" to each of the years in A
which income was earned by the assessee. It is true that
under Chapter XIV-B, computation of regular income and
computation of undisclosed income has to be worked out
separately. However, to arrive at the figure of undisclosed
income, the said parallel calculations have to converge B
in order to work out the difference between the first and
the second aggregates of the total incomes/losses of the
1\, previous year, in which undisclosed income is taxed
under Section 113. [Para 15] [178-B-E]
1.4 Section 4(1) prescribes the subject matter of the c
tax and the rate of that tax is prescribed by the Legislature,
either under the Act as in the case of Section 113 or vide
the Finance Act. As long as the charge is on "total income"
of the previous year and so long as the rate relates to the
subject matter of the tax, there is nothing to prevent D
Parliament from fixing the rate. But the rate must be
applied to the "total income" and the tax that an assessee
-.S
. has to pay must be at the rate in respect of total income of
the previous year. [Para 7] [167-D-E]
1.5 A bare reading of the provisions of Section 158BA E
and Section 15888 of Income Tax Act indicates that the
searches conducted by the Department are an important
means of unearthing black money. However, undisclosed
income has to be related to different years in which the
income was earned. The essence of the block assessment F
procedure, therefore, is a separate single assessment of
undisclosed income, dete~ted as a result of a search. This
separate assessment is in addition to normal or regular
assessment covering the same period. A separate return .
is a pre-requisite for making a "block assessment". G
However, in the matter of computation, the principle of
-i aggregation of total incomes, is inbuilt into Section 15888.
One aggregate has to be subtracted from the other.
Further, while applying the principle of aggregation of the
total income, computation is required to be done in H
160 SUPREME COURT REPORTS [2008) 1 S.C.R.

A accordance with the provisions of Chapter IV. Therefore,
T <
Section 4 has to be read with Section 15888. If Section 4
has to be read with Section 15888 for computing
undisclosed income then the provisions of the relevant
Finance Act have got to be read into the block assessment
B scheme under Chapter XIV-8, even prior to 1.6.2002. [Para
14) [176-E-H; 177-A-8]
1.6 Under Section 15888, there is the theory of
"block period". It is based on "the principle of aggregation ;.
of total incomes". Under that section, the first aggregate
c to be computed is the total income of the previous years
falling within the block period including returned/assessed
incomes as per regular returns and regular assessments.
The second aggregate to be computed is the aggregate of
the total incomes/losses of the previous years determined in
D terms of clauses (a) to (f) of Section 15888(1 ). The
difference between first aggregate and the second
aggregate is described in Section 1588(b) as the
"undisclosed income" to be taxed under the provisions f-r
of Section 113 of the 1961 Act at the special rates
prescribed. Further, clause (a) of Explanation to Snction
E
15888 clarifies that the total income/loss of each previous
years shall, for the purpose of aggregation, be taken as
the total income or loss computed in accordance with the
provisions of Chapter IV without giving effect to set off of
brought forward losses under Chapter VI or unabsorbed
F depreciation under Section 32(2) of the 1961 Act. Hence,
one has to read Section 15888 with Section 4 of the 1961
Act. There is no conflict between the computation
machinery under Chapter XIV-8 and normal computation
machinery under Chapter IV. [Para 15] [177-8-F]
G 1.7 The power to levy a surcharge on income-tax is
traceable to Article 271 read with Entry 82 of List I of
Seventh Schedule to the Constitution of India. That power 'r
is not traceable to Section 4 of the 1961 Act. Every year
the Finance Act is enacted by Parliament to give effect to
H the financial proposals of the Central Government. The
COMMISSIONER OF INCOME TAX CENTRAL II v. 161
SURESH N. GUPTA
~ -I
' rate at which a charge on the total income of the previous A
year is imposed under Section 4(1) of 1961 Act is not laid
down in the Income-tax 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. [Para 7] [166-F-H] B
1.8 In the present case, the AO has imposed surcharge
of 17% on the tax calculated at 60% on the total
undisclosed income. The AO imposed surcharge of 17%
by placing reliance on the Finance Act, 2001. The Finance
Act, 2001 stood enacted by Parliament to give effect .to c
the financial proposals of the Central Government for the
financial year 2001-02. It is important to note that every
Finance Act prescribes a graduated scale for payment of ·
tax, i.e., different rates for different slabs of income. As a
general concept, income-tax includes surcharge. [Paras D
18 and 21] [179-C-D; 183-A-B]
,.A
1.9 The term "income-tax" as used in Section 2(1)
and as used in the proviso to sub-section (3) of Section 2
of the Finance Act, 2001 did not include the amount of
surcharge. Surcharge was a separate item of taxation, E
different from income-tax. This was made clear vide
Section 2(1)(a), proviso to Section 2(3) and Paragraph A
of Part I to the First Schedule, which stated that the
· amount of income-tax computed in accordance with the
....\
provisions of Section 112 or Section 113 sh.all be increased F
by a surcharge calculated at the rate of 17% of such
income-tax: Under the provisions of Section 2(1) of the
Finance Act, 2001; which is made subject to sub-section
(3) of that section; the assessee is entitled to claim that
income-tax on his undisclosed income to be calculated G
by applying the rate or rates as prescribed in the Finance
.. Act, 2001, but he cannot claim that the amount of income-
tax so deter:mined should not be increased by addition of
the surcharge. Therefore, the AO has rightly imposed
surcharge at 17% on the undisclosed income of the H
162 SUPREME COURT REPORTS [2008] 1 S.C.R.

r .
A assessee in this case, particularly when the search was
carried out on 17.1.2001. [Para 21) [183-F-H; 184-A-8]
1.10, Section 1588A(2) read with Section 4 of Income
Tax Act looks at Section 113 for the imposition rate at
which tax has to be imposed in the case of block
8 assessment. That rate is 60%. That rate is fixed by the
1961 Act itself. That rate has been stipulated by Parliament
not with a view to oust the levy of surcharge but to make
the levy cost-effective and easy. Therefore, a flat rate is
prescribed. The difficulty in block assessment is· that one
C has to correlate the undisclosed income to different years
in which income is earned, hence, Parliament has fixed a
flat rate of tax in Section 113. On the contrary, a bare
perusal of various Finance Acts starting from 1999
indicates that Parliament was aware of rate of tax
D prescribed by Section 113 and yet in the various Finance
Acts, Parliament has sought to levy surcharge on the tax
in the case of block assessment. In the present case, the
AO has applied the rate of surcharge at 17% which rate
finds place in Para A of Part I of the First Schedule to the
E ·said Finance Act of 2001, therefore, surcharge leviable
under the Finance Act was a distinct charge, not
dependant for its leviability on the assessee's liability to
pay income-tax but on assessed tax. [Para 22) [184 8-F]
1.11 Even without the proviso to Section 113
F (inserted vide Finance Act, 2002 w.e.f. 1.6.2002), the Finance
Act, 2001 was applicable to block assessment under
Chapter XIV-8 in relation to the search initiated on
17.1.2001 and accordingly surcharge was leviable on the
tax at 17%. [Para 23) [184-F-G]
G
Govind Saran Ganga Saran v. Commissioner of Sales
Tax and Ors. 1985 155 ITR 144 (SC) - referred to.
2. Prior to 1.6.2002, in several cases, tax was
prescribed sometimes in Income Tax Act and sometimes
H in the Finance Act and often in both. This made liability
COMMISSIONER OF INCOME TAX CENTRAL II v. 163
SURESH N. GUPTA [KAPADIA, J.]
> --1 uncertain. In the present case, however, the rate of tax in A
case of block assessment at 60% was prescribed by
Section 113 but the year of the Finance Act imposing
surcharge was not stipulated. This resulted in the above
four ambiguities. Therefore, clarification was needed. The
proviso was curative in nature. Hence, the proviso 8
inserted in Section 113 merely clarifies that out of the
above four dates, i.e. date on which the search was
·~
initiated the date on which the search was concluded, the
year in which the block assessment proceedings u/s 158
BC were initiated or the year in which block assessment c
order: was passed; the relevant date for applicability of
the Finance Act would be the year in which the search
stood initiated under Section 1588C. [Para 26) (186-8-D]
Allied Motors (P) Ltd. v. Commissioner of Income-tax
1997 224 ITR 677 (SC) - referred to. D
CIVIL APPELLATE JURISDICTION : Civil Appeal No 32
~"'1-
of 2008.
From the final Judgment and Order dated 13.2.2006 of
the High Cpurt of Gujarat atAhmedabad in Tax Appeal No. 1042/ E
2005.
G.E. Vahanvati, S.G., Devdatt Kamat, Chinmoy Pradip
Sharma, D.K. Singh, Sparsha Bhargava and B.V. Balaram Das
for the Appellant.
-\ F
Ajay Vohra, Bhargava V. Desai, Rahul Gupta, Reema
Sharma and Sandeep for the Respondent.
The Judgment of the Court was delivered by
KAPADIA, J. 1. Leave granted.
G
2. Whether the AO had erred in imposing surcharge at
-1·,
17% on the tax amount of Rs. 97,456/- under Section 113 of the
Income-tax Act, 1961 ("1961 Act") for the "block period"
comprising of previous years relevant to 10 assessment years,
i.e., 1991-92 to 2000-01, including the period from 1.4.2000 to H
164 SUPREME COURT REPORTS [2008] 1 S.C.R.

A 17.1.2001. ... '
FACTS
2. 011 17 .1.2001 a search under Section 132 of the 1961
Act was carried out at the premises of the respondent-assessee,
B an individual. The search unearthed an unexplained investment
of Rs. 65,000/- being the value of household valuables and Rs.
97 ,427 /- on account of unexplained marriage expenses
(undisclosed income). Accordingly, in the block assessment,
the A.O. determined the assessee's undisclosed income at Rs.
c 1,62,427/-. He computed tax thereon at 60% in terms of Section
113 of the 1961 Act amounting to Rs. 97,456/- on which
surcharge was levied at 17%, i.e., Rs.16,504/-. The levy of
surcharge was challenged by the assessee in appeal before
the CIT(A). The said appeal was allowed. The decision of CIT(A)
has been confirmed by the Tribunal and the High Court. Hence,
D
this civil appeal.
Points for determination:
f-r

3. Two points arise for determination: Whether on the facts
and circumstances of this case, the Finance Act, 2001 ("FA" fo1
E short) was applicable to "block assessment" under Chapter XIV-
8 in respect of the search carried out on 17.1.2001; secondly,
whether the proviso inserted in Section 113 by the Finance Act,
2002 is clarificatory?

F Whether Finance Act, 2001 was applicable to block
assessment under Chapter XIV-B up to 1.06.2002: i--

4. Chapter XIV-B was inserted by the Finance Act, 1995,
w.e.f. 1.7.1995. According to the assessee, the said Chapter is
a self-contained chapter as it lays down a special procedure ·
G for assessment of "undisclosed income" found during search
for the "block period", containing a charging section (158BA), a
computation section (15888), a procedural section for block
assessment (158BC), limitation provision for completion of block
assessment (158BE) and the provisions for imposition of
H interest and penalty (158BFA).
COMMISSIONER OF INCOME TAX CENTRAL II v. 165
SURESH N. GUPTA [KAPADIA, J.)

' . --; 5. According to the assessee, the scheme of assessment A
of "undisclosed income" under Chapter XIV B is different from
scheme of assessment of "total income" of any person in terms
of Section 4(1) of the 1961 Act inasmuch as under Chapter XIV-
B assessment is made of "undisclosed income" as against
assessment of "total income" under Section 4(1) of the Act; that, B
assessment under Chapter XIV-B is made for the 'block period"
as against assessment of income of the "previous year" under
Section 4(1) of th~ Act; that, under Chapter XIV-B "undisclosed
income" is assessed at 60% in terms of Section 158BA(2) read
with Section 113 as against taxation of normal income at the c
rates prescribed in the relevant Finance Act; that, the provisions
of the Finance Act are not found in the block assessment
scheme under Chapter XIV-B up to 1.06.2002 and, therefore,
according to the assessee, Finance Act, 2001 was not
applicable to Chapter XIV-B. According to the assessee, proviso
D
to Section 4(1) of the 1961 Act carves out an exception to the
normal rule in Section 4(1) and provides that, where under any
provision of the 1961 Act, tax is to be charged in respect of
--"' income of a period other than "the previous year", such tax shall
be levied as may be specifically provided under special
provision of the 1961 Act. According to the assessee, Chapter E
XIV-B is such special provision as it concerns assessment of
undisclosed income for the "block period" which is the period
other than the previous year referred to in Section 4(1 ).
Therefore,. according to the assessee, block assessment falls
not in Section 4(1) but it falls under the aforesaid proviso to F
-' Section 4(1) ofthe 1961 Act. Consequently, it is urged that since
there is no reference to the Finance Act under Chapter XIV-B
(Section 158BA), which only looks at a fixed rate of 60%
stipulated under Section 113, it was· not open to the AO to
impose surcharge at 17% prior to 1.06.2002. G
6. We find no merit in the above arguments. We quote
'"f hereinbelo.w Article 271 of the Constitution of India and Section
4 of the 1961 Act, which read as follows:
"271. Surcharge on certain duties and taxes for H
166 SUPREME COURT REPORTS [2008] 1 S.C.R.

A purposes of the Union.- Notwithstanding anything in ,. . '
articles 269 and 270, Parliament may at any time increase
any of the duties or taxes referred to in those articles by
a surcharge for purposes of the Union and the whole
proceeds of any such surcharge shall form part of the
B Consolidated Fund of India."
"Charge of income-tax.
4.(1) Where any Central Act enacts that income-tax shall
be charged for any assessment year at any rate or rates,
c 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 :
D 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 ·.
t-r
charged accordingly. \-

(2) In respect of income chargeable under sub-section ·
E
(1 ), income-tax shall be deducted at the source or paid in
advance, where it is so deductible or payable under any
provision of this Act."
7. The power to levy a surcharge· on income-tax is
F traceable to Article 271 read with Entry 82 of List I of Seventh
;.... '
Schedule to the Constitution of India. That power is not traceable
to Section 4 of the 1961 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
G total income of the previous year is imposed under Section 4(1)
of 1961 Act is not laid down in the Income-tax 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
r
different rates under the Finance Act. It must be borne in mind.
H that the Income-tax Act deals with tax on income and nothing
COMMISSIONER OF INCOME 'TAX CENTRAL II v. 167
SURESH N. GUPTA [KAPADIA, J.) ..

else. Therefore, in order that the charge should be a legal charge A
' ) ;
under Section 4, it must be a tax on the income of the assessee.
If the charge is the tax on anything else, then it would not be a
valid charge. This 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 B
the power or authority of Parliament to fix any rate it pleases.
However, if "rate" is understood to mean the fixing of the tax
irrespective of "total income" and unconnected with "total
income", then, in our view, Parliament "You Id be travelling outside
the ambit of Section 4(1 ). The Income-tax Act, therefore, contains c
an elaborate machinery for ascertaining "total income" of an
assessee. If Parliament has power to fix tax at a rate which has
no connection with the "total income", then the machinery set up
under the 1961 Act becomes infructuous. In our view, Section
4(1) prescribes the subject matter of the tax and the rate of that D
tax is prescribed by the Legislature, either under the Act as in
the case of Section 113 or vide the Finance Act. As long as the
charge is on "total income" of the previous year and so long as
-..:\
the rate relates to the subject matter of the tax, there is nothing
to prevent Parliament from fixing the rate. But the rate must be
E
applied to the "total income" and the tax that an assessee has
to pay must be at the rate in respect of total income of the
previous year.
8. Having discussed the scope ofArticle 271 and Section
4 of the 1961 Act, we have to look at some of the relevant F
.,.\ provisions of Chapter XIV-8. The purpose of this Chapter is to
lay down a special procedure for assessment of surcharge cases
with a view to combat tax evasion and also to expedite and
simplify assessments in search cases. Undisclosed incomes
have to be related in different years in which income was G
earned under block assessment. This is because in such cases,
the "block period" is for previous years relevant to 10/6
-~ assessment years and also the period of the currentprevious
year up to the date of the search, i.e., from 1.4.2000 to
17 .01.2001, in this case. The essence of this new procedure, H
168 SUPREME COURT REPORTS [2008] 1 S.C.R.

A therefore, is a separate single assessment of the "undisclosed r .
income", detected as a result of search and this separate
assessment has to be in addition to the normal assessment
covering the same period. Therefore, a separate return covering
the years of the block period is a pre-requisite for making block
B assessment. Under the said procedure, Explanation is inserted
in Section 158 BB, which is computation section, explaining
the method of computati~n of "undisclosed income" of the block
period.
9. We quote hereinbelow Sections 158B, 158BA, 158BB,
C 158BC and 1S8BH, which read as follows:
"1588. In this Chapter, unless the context otherwise
requires,
(a) block period means the period comprising previous
D 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 a/so includes the period up to the date of the
commencement of such search or date of such requisition
E 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 151 day of June, 2001, the
provisions of this clause shall have effect as if for the
F 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
G 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
H not have been disclosed for the purposes of this Act.
COMMISSIONER OF INCOME TAX CENTRAL II v. 169
SURESH N. GUPTA [KAPADIA, J.]

Assessment of undisclosed income as a result of A
> i
search.
158BA. (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
B
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.
c
(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-
E
(a) the assessment made under this Chapter stiall 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 F
,..._ 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.
G
(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 filing the
return of income under sub-section (1) of section 139 for H
170 SUPREME COURT REPORTS [2008] 1 S.C.R.

A any previous year has not expired, and such income or
the transactions relating to such income are recorded on r '
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
B shall not be included in the block period.
Computation of undisclosed income of the block
period.
15888. (1) The undisclosed income of the block period -jlll

c 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 basi.s
of evidence found as a result of search or requisition of
books of account or documents and such other materials
or information as are available with the Assessing Officer,
D
as reduced by the aggregate of the total income, or as the
case may be, as increased by the aggregate of the losses
of such previous years, determined,-
f.-
(a) where assessments under section 143 or section 144
E or section 147 have been concluded, on the basis of such
assessments;
(b) where returns of income have been filed under section
139 or section 147 but assessments have not been made
till the date of search or requisition, on the basis of the
F income disclosed in such returns;
~
(c) where the due date for filing a return of income has
expired but no return of income has been filed, as nil;
(d) where the previous year has not ended or the date of
G filing the return of income under sub-section (1) of section
139 has not expired, on the basis of entries relating to
such income or transactions as recorded in the books of
)
account and other documents maintained in the normal
course on or before the date of the search or requisition
H relating to such previous years;
COMMISSIONER OF INCOME TAX CENTRAL II v. 171
SURESH N. GUPTA [KAPADIA, J.]
(e) where any order of settlement has been made under A
I -1
' sub-section (4) of section 2450, on the basis of such
order;
(f) where an assessment of undisclosed income had been
made earlier under clause (c) of section 158BC, on the
B
basis of such assessment.
Explanation.- For the pljrposes of determination of
undisclosed income,
(a) the total income or loss of each previous year shall, for
the purpose of aggregation, be taken as the total income c
or loss computed in accordance with the provisions of
Chapter IV without giving effect to set off of brought forward
losses under Chapter VI or unabsorbed depreciation under
sub-section (2) of section 32;
D
(b) of a firm, returned income and total income assessed

.. ~
· for each of the previous years falling within the block period
shall be the income determined before allowing deduction
of salary, interest, commission, bonus or remuneration by
whatever name called to any partner not being a working
E
partner:
Provided that undisclosed income of the firm so
determined shall not be chargeable to tax in the hands of
the partners, whether on allocation or on account of
enhancement; F
(c) assessment under section 143 includes determination
of income under sub-section (1) or sub-section (1 B) of
section 143.
(2) In computing the undisclosed income of the block G
period, the provisions of sections 68, 69, 69A, 698 and
69C shall, so far as may be, apply and references to
financial year in those sections shall be construed as
references to the relevant previous year falling in the block
period including the previous year ending with the date of H
172 SUPREME COURT REPORTS [2008] 1 S.C.R.

A search or of the requisition. )" \

(3) The burden of proving to the satisfaction of the
Assessing Officer that any undisclosed income had
already been disclosed in any return of income filed by the
assessee before the commencement of search or of the
B requisition, as the case may be, shall be on the assessee.
(4) For the purpose of assessment under this Chapter,
losses brought forward from the previous year under ~

ChapterVI or unabsorbed depreciation under sub-section
c (2) of section 32 shall not be set off against the
undisclosed income determined in the block assessment
under this Chapter, but may be carried forward for being
set off in the regular assessments.
Procedure for block assessment.
D
158BC. 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 f.
of any person, then,
E (a) the Assessing Officer shall-
(i) in respect of search initiated or books of account or
other documents or any assets requisitioned after the 30th
day of June, 1995, but before the 1st day of January, 1997,
serve a notice to such person requiring him to furnish
F within such time not being less than fifteen days; ~

(ii) in respect of search initiated or books of account or .
other documents or any assets requisitioned on or after
the 1st day of January, 1997, serve a notice to such person
G
requiring him to furnish within such time not being less
than fifteen days but not more than forty-five days,
as may be specified in the notice a return in the prescribed >
form and verified in the same manner as a return under
clause (i) of sub-section (1) of section 142, setting forth
H his total income including the undisclosed income for
COMMISSIONER OF INCOME TAX CENTRAL II v. 173
SURESH N. GUPTA [KAPADJA, J.]
; ,. the block period : A

Provided that no notice under section 148 is required to
be issued for the purpose of proceeding under this
Chapter:
Provided further that a person who has furnished a return 8
under this clause shall not be entitled to file a revised
return;
(b) the Assessing Officer shall proceed to determine the
undisclosed income of the block period in the manner laid
down in section 15888 and the provisions of section 142, c
•
sub-sections (2) and (3) of section 143 and section 144
shall, so far as may be, apply;
(c) the Assessing Officer, on determination of the
undisclosed income of the block period in accotdance D
with this Chapter, shall pass an order of assessment and
determine the tax payable by him on the basis of such
assessment;
(d) the assets seized under section 132 or requisitioned
under section 132A shall be retained to the extent E
necessary and the provisions of section 1328 shall apply
subject to such modifications as may be necessary and
the references to regular assessment or reassessment in
section 1328 shall be construed as references to block
assessment. F
)()()(

Application of other provisions of this Act.
158BH. Save as otherwise provided in this Chapter, all
other provisions of this Act shall apply to assessment made G
under this Chapter."
. -1,.
10. We also quote herein below Section 113 with and
without the proviso inserted vide Finance Act, 2002 w.e.f.
1.6.2002, which read as follows: H
174 SUPREME COURT REPORTS [2008] 1 S.C.R.

A "Tax in the case of biock assessment of search
cases.
113. The total undisclosed income of the block period,
determined under section 15flBC, shall be chargeable to
tax at the rate of sixty per cent.
B
Proviso inserted vide Finance Act, 2002 w.e.f. 1.6.2002
reads as follows:
· Provided that the tax chargeable under this section shall
be increased by a surcharge, if any, levied by any Central
c 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."
11. Reading of the relevant provisions of Chapter XIV-B
0 one finds that Section 158 BA deals with assessment of
"undisclosed income" as a result of search whereas
computation of such income falls under Section 158BB. The
procedure for block ass!ssment falls in Section 158 BC. Section
158 BA begins with non obstante clause. It states that nothing
E contained in any other provisions of the 1961 Act, where search
is initiated after 30.6.1995 under Section 132 or in cases of
requisition under Section 132A after the cut off date, the AO
shall proceed to assess the undisclosed income in accordance
with the provisions of Chapter XIV-B.
F 12. Relying on Section 158BA(1) assessee claims that
Chapter XIV-B is a special procedure for assessment of cases;
that it constitutes a self contained mechanism and, hence, it
falls outside the scope of Section 4(1) of the 1961 Act,
particularly when Section 4(1) imposes a charge on the "total
G income" and not on the "undisclo'sed income" and, particularly
when Section 158 BA(2) is an independent charging section
in contrast to Section 4(1) of the 1961 Act, which imposes a
charge on the "total income" of the previous year. According to
the assessee, the charge under Section 158BA(2) is on the
H "block period" and not on the total income of the "previous year".
COMMISSIONER OF INCOME TAX CENTRAL II v. 175
SURESH N. GUPTA [KAPADIA, J]
j 'i
Therefore, according to the assessee. Chapter XIV-Bis a self- A
contained mechanism.
13. As stated above. these arguments advanced on behalf
of the assessee has no merit. Section 1588 defines "block
period" to mean the period comprising the previous years
B
relevant to 10/6 assessment years preceding the previous year
in which the search was conducted under Section 132. It also
""' includes the period up to the date of commencement of such
search or date of requisition. Under Section 4, the subject of
charge is the income of the previous year and not the income of
the assessment year. Thus, tax is levied on the actual income of c
the previous year. Each "previous year" is a distinct unit of time
for the purposes of assessment. However, when we come to
Section 158BA, we find that Parliament has taken the block
period to mean the period comprising previous years relevant
to 10/6 assessment years preceding the previous year in which D
the search is conducted. In other words, Parliament has in search
-.~
cases expanded the unit of time for block assessment purposes
from 1 year to 10/6 previous years. However, it is important to
note that the unit of time remains constant. It is open to Parliament
to treat the unit of time as one year in normal assessment cases E
and, at the same time, it is also open to Parliament to treat.10/
6 previous years as a unit of time for block assessment period.
The important thing to be noted is that the block assessment
computation in Section 158BB does not exclude the concept of
"previous years" as well as the concept of "total income". Those F
concepts are retained. Further, we need to examine the scheme
of Chapter XIV-B. The said Chapter has three parts consisting
of assessment, computation and procedure for making block
assessment. Assessment of undisclosed income as a result of
search stands covered by Section 1588A whereas computation G
·~ of undisclosed income of the block period falls in Section 15888
and procedure for block assessment falls in Section 1588C. In
this case, we are mainly concerned with computation of
undisclosed income under Section 15888(1). This section
incorporates principle of aggregation of total income of the H.
176 SUPREME COURT REPORTS [2008] 1 S.C.R.

r
A previous years falling within the block period computed in "
accordance With the provisions of Chapter IV The important
thing to be noted is that the computation has to be done even
under Section 15888 of "undisclosed income" in the manner
provided for in Chapter IV of the 1961 Act which deals with
8 "computation of total income". Chapter IV deals with
computation in cases of normal assessment. Chapter IV is not
ruled out by provisions of Chapter XIV-8. In this connection, we
may also take note of Section 1588H which deals with
application of other provisions of the 1961 Act to the block
c assessment procedure in Chapter XIV-8. Section 158 8H
makes it clear that save as otherwise provided in Chapter XIV-
8, all other provisions of the 1961 Act shall equally apply to block
assessment. Therefore, one has to read the non obstante clause
in Section 1588A in juxtaposition with Section 1588H. Keeping
D in mind the provisions of Section 15888 and keeping in mind
the retention of the concepts of "previous years" and "total
income" in Chapter XIV-8, we are of the view that Chapter IV is
J,
not ruled out from block assessment procedure and, therefore,
one has to read Section 15888 with Section 4 of the 1961 Act.
E 14. There is one more fact which needs to be noted. A
bare reading of the provisions of Section 1588A and Section
15888 indicates that the searches conducted by the Department
are an important means of unearthing black money. However,
undisclosed income has to be related to different years in which
F the income was earned. The essence of the block assessment
procedure, therefore, is a separate single assessment of
undisclosed income, detected as a result of a search. This
separate assessment is in addition to normal or regular
assessment covering the same period. A separate return is a
G pre-requisite for making a "block assessment". However, in the
matter of computation, the principle of aggregation of total
incomes, is inbuilt into Section 15888. l/'ie have to subtract
one aggregate from the other. Further, while applying the principle
of aggregation of the total income, computation is required to
be done in accordance with the provisions of Chapter IV.
H
COMMISSIONER OF INCOME TAX CENTRAL II v. 177
SURESH N. GUPTA [KAPADIA, J.]

• i Therefore, in our view, Section 4 has to be read with Section A
15888. That section is not ruled out by Section 15888. If
Section 4 has to be read with Section 15888 for computing
undisclosed income then the provisions of the relevant Finance
Act have got to be read into the block assessment scheme under
Chapter XIV-8, even prior to 1.6.2002. 8
15. Under Section 15888, there is the theory of "block
·~
period''. It is based on "the principle of aggregation of total
incomes". Under that section, the first aggregate to be computed
is the total income of the previous years falling within the block
period including returned/assessed incomes as per regular c
returns and regular assessments. The second aggregate to be
computed is the aggregate of the total incomes/losses of the
previous years determined in terms of clauses (a) to (f) of
Section 15888(1 ). The difference between first aggregate and
the second aggregate is described in Section 1588(b) as the D
"undisclosed income" to be taxed under the provisions of Section
~
~ .... 113 of the 1961 Act at the special rates prescribed. Further,
clause (a) of Explanation to Section 15888 clarifies that the
total income/loss of each previous years shall, for the purpose
of aggregation, be taken as the total income or loss computed E
in accordance with the provisions of Chapter IV without giving
effect to set off of brought forward losses under Chapter VI or
unabsorbed depreciation under Section 32(2) of the 1961 Act.
Hence, one has to read Section 15888 with Section 4 of the
1961 Act. There is no conflict between the computation F
machinery under Chapter XIV-8 and normal computation
machinery under Chapter IV. This is the importance behind
enactment of Section 1588H which inter alia states that if there
is no conflict between the provisions of Chapter XIV-8 and any
other provisions of the 1961 Act, then the later will operate. There G
is a fallacy in the argument of the assessee that the concepts of
"total income" and "previous year" are given go by in Chapter
XIV-B. The above analysis of Section 15888 indicates that both
the concepts are retained in Chapter XIV-8. The only difference
is that Section 4 of the 1961 Act charges the total income of a H
178 SUPREME COURT REPORTS [2008] 1 S.C.R.

,.. '
A person of one single previous year (unit of assessment) whereas
Section 158BA(2} levies a charge on the income of a person
for the block period of previous years relevant to 10/6
assessment years. In our view, the word "block period", as
defined in Section 158B(a), comprises previous years relevant
8 to 10/6 assessment years as one unit of time for the purposes
of assessment. As stated above, the object behind enactment
of Chapter XIV-8 is to assess and compute "undisclosed :
..,.
incomes" re/atable to different accounting years in which the
income is earned. Therefore, if the block period comprising of
c previous years relevant to 10/6 assessment years is treated by
l-
Parliament as one unit of time for assessment purposes, one
has to correlate "undisclosed income" to each of the years in
which income was earned by the assessee. It is true that under
Chapter XIV-8, computation of regular income and computation
D of undisclosed income has to be worked out separately.
However, to arrive at the figure of Undisclosed Income, the said ...
parallel calculations have to converge in order to work out the -jy-
difference between the first and the second aggregates of the
total incomes/losses of the previous year, in which undisclosed
income is taxed under Section 113. Therefore, in our view, the
E
concept of a charge on the "total income" of the previous year
under the 1961 Act is retained even under Chapter XIV-8.
Therefore, Section 15888 which deals with computation of

F
undisclosed income of the block period has to be read with
computation of total income under Chapter IV of the 1961 Act.
16. Once Section 15888 is required to be read with
..
Section 4 of the 1961 Act, then the relevant FA of the concerned
year would automatically stands attracted to the computation
under Chapter XIV-8. Section 15888 looks at Section 113. That
G section fixes the rate of tax at 60%. In the present case, e.g., the
AO assigned the value of Rs. 2,70,000/- to Unaccounted
Investment in household valuables. That amount was distributed
between three brothers including the assessee after deducting
Rs. 75,000/- and that is how a sum of Rs. 65,000/- has been
added as undisclosed income for assessr.ient year 2001-02 in
H
COMMISSIONER OF INCOME TAX CENTRAL II v. 179
SURESH N. GUPTA [KAPADIA, J.]
) "I
the hands of the assessee. A
17. In the case of Govind Saran Ganga Saran v.
Commissioner of Sales Tax and Ors. [(1985) 155 ITR 144 (SC)]
this Court held that, there are four components of tax, namely,
character of the imposition, person on whom the incidence of
tax falls, the rate at which tax is imposed and lastly, the value to B
which the rate is applied for computing tax liability
-~
Applicability of the Finance Act, 2001 :
18. Applying the law as discussed hereinabove, we find
that in the present case, the AO has imposed surcharge of 17% c
on the tax calculated at 60% on the total undisclosed income of
Rs. 1,62,427/-, which tax comes to Rs.97456/-. The AO imposed
surcharge of 17% on Rs.97,456/- amounting to Rs. 16,504/- by
placing reliance on the FA of 2001.
D
19. We quote hereinbelow Section 2(1) r/w Para A of Part
~ I of the First Schedule, which read as follows:
"Income-tax.
2.(1) Subject to the provisions of sub-sections (2) and (3),
E
for the assessment year commencing on the 151 day of
April, 2001, income-tax shall be charged at the rates
specified in Part I of the First Schedule and such tax as
reduced by the rebate of income-tax calculated under
_,.. Chapter VIII-A of the Income-tax Act, 1961, (43 of 1961)
(hereinafter referred to as the Income-tax Act) shall be F
increased, -
(a) in cases to which Paragraphs A, B, C and D of that
Part apply, by a surcharge for purposes of the Union;
and
G
--1 {b) in the cases to which Paragraph E of that Part
applies, by a surcharge, calculated in each case in
the manner provided therein.
(2) ...
H
180 SUPREME COURT REPORTS [2008] 1 S.C.R.

A (3) In cases to which the provisions of Chapter XII or r <

Chapter XII-A or sub-section (1A) of section 161 or section
164 or section 164A or section 1678 of the Income-tax
Act apply, the tax chargeable shall be determined as
provided in that Chapter or that section and with reference
8 to the rates imposed by sub-section ( 1) or the rates as
specified in that Chapter or section, as the case may be:

Provided that the amount of .income-tax computed in ,
accordance with the provisions of sections 112 and 113
shall be increased by a surcharge for purposes of the
c Union or surcharge as provided in Paragraph A, 8, C, D
or E, as the case may be, of Part I of the First Schedule:

Provided further that in respect of any income chargeable
to tax under sections 115A, 115A8, 115AC, 115ACA,
115AD, 1158, 11588, 11588A, 115E and 115J8 of the
D
Income-tax Act, the amount of income-tax computed under
·this sub-section shall be increased, -
~-
(a) by a surcharge for purposes of the Union, calculated, -

(i) in the case of a co-operative society, a first and a
E
local; authority, at the rate of twelve per cent of such
income-tax;
(ii) in the case of a person other than a company, a
co-operative society, a firm and a local authority, -
F (A) at the rate of twelve per cent of such income- ~
tax where the total income exceeds sixty
thousand rupees but does not exceed one lakh
fifty thousand rupees; or
(8) at the rate of seventeen per cent of such
G
income-tax where the total income exceeds one
lakh fifty thousand rupees; and
(b) by a surcharge calculated at the rate of thirteen per
cent of such income-tax in the case of a domestic
H company."
COMMISSIONER OF INCOME TAX CENTRAL II v. 181
SURESH N. GUPTA [KAPADIA, J.]

20. Para A of Part I of the First Schedule reads as follows: A
"THE FIRST SCHEDULE"
[See section 2]
PARTI
INCOME-TAX B
Paragraph A
In the case of every individual or Hindu undivided family or
association of persons or body of individuals, whether
incorporated or not, or every artificial juridical person referred
to in sub-clause (vii) of clause (31) of section 2 of the Income- C
tax Act, not being a case to which any other Paragraph of this
Part applies,-
Rates of income-tax

(1) Where the total Nil; D
income does not
10 per cent of the amount by
exceed Rs. 50,000
which the total income
(2) Where the total exceeds Rs. 50,000;
income exceeds Rs.
Rs. 1,000 plus 20 per cent E
50,000 but does not
of the amount by which the
exceed Rs. 60,000
total income exceeds Rs.
(3) Where the total 60,000;
income exceeds Rs.
Rs. 19,000 plus 30 per cent
60,000 but does not F
of the amount by which the
exceed Rs. 1,50,000
total income exceeds Rs.
(4) Where the total 1,50,000.
income exceeds Rs.
1,50,000
G
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,- H
182 SUPREME COURT REPORTS [2008) 1 S.C.R.

A (i) in the case of every individual or Hindu undivided
t '
family, or association of persons or body of
individuals having a total income exceeding sixty
r thousand rupees, be reduced by the amount of rebate
of income-tax calculated under Chapter VIII-A, and
B the income-tax as so reduced, be increased by a
surcharge for purposes of the Union calculated-
(A) at the rate of twelve per cent of such income-
.• tax where the total income exceeds sixty
thousand rupees but does not exceed one lakh
c fifty thousand rupees; or
(B) at the rate of seventeen per cent of such
income-tax where the total income exceeds
one lakh fifty thousand rupees;
D (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
twelve per cent of such income-tax:
Provided that in case of persons mentioned in sub-item
E (A) of item (i) above having a total income exceeding
sixty thousand rupees, the total amount payable as
income-tax and surcharge on such income shall not
exceed the total amount payable as income-tax on a
total income of sixty thousand rupees by more than the
F amount of income that exceeds sixty thousand rupees:
Provided further that in case of persons mentioned in
sub-item (B) of item (i) above having a total income
exceeding one lakh fifty thousand rupees, the total
amount payable as income-tax and surcharge on such
G
income shall not exceed the total amount payable as
income-tax and surcharge on a total income of one lakh
fifty thousand rupees by more than the amount of income
that exceeds one lakh fifty thousand rupees."
(emphasis supplied)
H
COMMISSIONER OF INCOME TAX CENTRAL II v. 183
SURESH N. GUPTA [KAPADIA, J.]

> .,._ 21. The Finance Act, 2001 stood enacted by Parliament A
to give effect to the financial proposals of the Central
Government for the financial year 2001-02. It is important to note
that every FA prescribes a graduated scale for payment of tax,
i.e., different rates for different slabs of income. As a general
concept, income-tax includes surcharge. Under Section 4 of the 8
1961 Act, income-tax is assessed and paid in the next
succeeding year upon the results of the year before. Section
2(1) of the Finance Act, 2001 inter alia stated that, subject to
the provisions of sub-sections (2) and (3), for the assessment
year commencing on 1.4.2001, income-tax shall be charged at c
the rates specified in Part I of the First Schedule and such tax
shall be increased in cases to which paragraphs A, 8, C and D
of that part applied, by a surcharge for purposes of the Union.
Under sub-section (3), it was expressly stated that in cases
falling under Chapter XII (which includes Section 113) the tax
D
chargeable shall be determined as provided in that Chapter.
By way of proviso to sub-section (3), it was further stipulated
-~ that the amount of income-tax computed in accordance with
Section 113 shall be increased by a surcharge as provided in
Paragraphs A, 8, C, Dor E, as the case may be of Part I to the
First Schedule. In this case, it is not in dispute that Para A was E
applicable at the given point of time. Reading Section 2(1) of
the Finance Act, 2001, it is clear that the term "income-tax" as
used in Section 2(1) and as used in the proviso to sub-section
(3) of Section 2 of the Finance Act, 2001 did not include the
amount of surcharge. Surcharge was a separate item of taxation, F
~
different from income-tax. This was made clear vide section
2(1 )(a), proviso to section 2(3) and Paragraph A of Part I to the
First Schedule, which stated that the amount of income-tax
computed in accordance with the provisions of Section 112 or
Section 113 shall be increased by a surcharge calculated at G
the rate of 17% of such income-tax. Under the provisions of
~
Section 2(1) of the Finance Act, 2001, which is made subject to
sub-section (3) of that section, the assessee is entitled to claim
that income-tax on·his undisclosed income to be calculated by
applying the rate or rates as prescribed in the Finance Act, 2001, H
•

184 SUPREME COURT REPORTS [2008) 1 S.C.R.

A but he cannot claim that the amount of income-tax so determined .,.. 1

should not be increased by addition of the surcharge. Therefore,
in our opinion, the AO has rightly imposed surcharge at 17% on
the undisclosed income of the assessee in this case, particularly
when the search was carried out on 17.1.2001.
B 22. As stated above, Section 158BA(2) read with Section
4 of the 1961 Act looks at Section 113 for the imposition rate at
which tax has to be imposed in the case of block assessment.
That rate is 60%. That rate is fixed by the 1961 Act itself. That
rate has been stipulated by Parliament not with a view to oust
C the levy of surcharge but to make the levy cost-effective and
easy. Therefore, a flat rate is prescribed. The difficulty in block
assessment is that one has to correlate the undisclosed income
to different years in which income is earned, hence, Parliament
has fixed a flat rate of tax in Section 113 [See: (1995) 212 ITR
D (St.) 69]. On the contrary, a bare perusal of various Finance Acts
starting from 1999 indicates that Parliament was aware of rate
of tax prescribed by Section 113 and yet in the various Finance
Acts, Parliament has sought to levy surcharge on the tax in the
case of block assessment. In the present case, the AO has
E applied the rate of surcharge at 17% which rate finds place in
Para A of Part I of the First Schedule to the said FA of 2001,
therefore, surcharge leviable under the FA was a distinct charge,
not dependant for its leviability on the assessee's liability to pay
income··tax but on assessed tax.
F 23. For the aforestated reasons, we hold that even without
the proviso to Section 113 (inserted vide FA 2002 w.e.f.
1.6.2002), the FA 2001 was applicable to block assessment
under Chapter XIV-B in relation to the search initiated on
17.1.2001 and accordingly surcharge was leviable on the tax
G amounting to Rs. 97,456/- at 17% amounting to Rs. 16504/-.
We accordingly answer the above question in favour of the

H
revenue and against the assessee.
Whether insertion of the proviso in Section 113 by the
Finance Act, 2002 was applicable to search up to 31.5.2002:
-
COMMISSIONER OF INCOME TAX CENTRAL 11 v. 185
SURESH N. GUPTA [KAPADIA, J.]

't
24. In view of our findings on the first point, strictly speaking, A
we are not required to examine this question. However, it has
been vehemently urged on behalf of the assessee that the said
proviso cannot operate retrospectively. This argument is
founded on the basis that until the amendment in Section 113
w.e.f. 1.6.2002, there was inconsistency with regard to levy of B
surcharge. According to the assessee, the question which
usually bothered both the assessee and the Department was
..., whether surcharge was leviable with reference to the rates
provided for in the FA of the year in which the search was initiated
or the year in which the search was concluded or the year in c
which the block assessment proceedings under Section 158BC
were initiated or the year in which block assessment order was
passed. According to the assessee, there was a conference of
Chief Commissioners which had suggested to the Central
Government to amend Section 113 with retrospective effect. D
However, despite such recommendations, the Central
Government inserted the proviso in Section 113 only with effect
~ from 1.6.2002. Therefore, according to the assessee, the
proviso cannot be interpreted as retrospective.
25. We find no merit in the above arguments. Both, the E
Finance Acts of 2000 and 2001, indicated that a substantive
charge was created in respect of the income-tax to be levied.
Both these Acts prescribed the rates of surcharge. The said
surcharge did not depend for its leviability on the assessee's
liability to pay income-tax but on the assessed tax. The F
assessee has relied upon the above anomalies in support of
their contention that such anomalies made the charge
ineffective. In our view, such submission amounts to begging
the question. According to the assessee, prior to 1.6.2002, the
position was ambiguous as it was not clear even to the G
Department as to which year's FA would be applicable. To clear
this doubt precisely, the proviso has been inserted in Section
113 by which it is indicated that the FA of the year in which the
search was initiated would apply. Therefore, in our view, the said
proviso was clarificatory in nature. In taxation, the Legislation of H
186 SUPREME COURT REPORTS [2008) 1 S.C.R.

A the type indicated by the proviso has to be read strictly. There is
no question of retrospective effect. The proviso only clarifies
that out of the four dates, Parliament has opted for the date,
namely the year in which the search is initiated, which date would
be relevant for applicability of a particular FA. Therefore, we
B have to read the proviso as it stands.
26. There is one more reason for rejecting the above
submission. Prior to 1.6.2002, in several cases, tax was
prescribed sometimes in the 1961 Act and sometimes in the
FA and often in both. This made liability uncertain. In the present
C case, however, the rate of tax in case of block assessment at
60% was prescribed by Section 113 but the year of the FA
imposing surcharge was not stipulated. This resulted in the
above four ambiguities. Therefore, clarification was needed.
The proviso was curative in nature. Hence, the proviso inserted
D in Section 113 merely clarifies that out of the above four dates,
the relevant date for applicability of the FA would be the year in
which the search stood initiated under Section 158BC.
27. In the case of Allied Motors (P) Ltd. v. Commissioner
E of Income-tax [(1997) 224 ITR 677 (SC)) this Court observed
as follows:
"A proviso which is inserted to remedy unintended
consequences and to make the provision workable, a
proviso which supplies an obvious omission in the section
F and is required to be read into the section to give the
section a reasonable interpretation, requires to be treated
as retrospective in operation, so that a reasonable
interpretation can be given to the section as a whole."
28. For the aforestated reasons, we set aside the
G impugned judgment of the High Court dated 13.2.2006 in Tax
Appeal No. 1042 of 2005 and, accordingly, we allow the
Department's civil appeal with no order as to costs. )t-

K.K.T. Appeal allowed.
H