In a very important ruling regarding levy of surcharge on block assessment of income, the Supreme Court of India ruled that the proviso to Section 113 of the Income Tax Act imposing surcharge shall not have a retrospective affect.
“…….. there cannot be imposition of any tax without the authority of law. Such a law has to be unambiguous and should prescribe the liability to pay taxes in clear terms. If the concerned provision of the taxing statute is ambiguous and vague and is susceptible to two interpretations, the interpretation which favors the subjects, as against there the revenue, has to be preferred. This very principle is based on the “fairness” doctrine as it lays down that if it is not very clear from the provisions of the Act as to whether the particular tax is to be levied to a particular class of persons or not, the subject should not be fastened with any liability to pay tax”, a Constitution Bench of the Court observed while noting that even the revenue department was not sure whether the proviso (added in financial year 2002) to Section 113 of the Act would be prospectively or retrospectively applicable.
“In absence of certainty about the rate because of uncertainty about the date with reference to which the rate is to be applied, it cannot be said that surcharge as per the existing provision was leviable on block assessment qua undisclosed income. Therefore, it cannot be said that the proviso added to Section 113 defining the said date was only clarificatory in nature”, the Court said.
Technically, the Court said that Chapter XIVB of the Act which deals with block assessment lays down a special procedure for search cases. The essence of this new procedure, therefore, is a separate single assessment of the “undisclosed 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 assessment.
The Court further stated that it is now well accepted that this Chapter XIVB is a complete code in itself providing for self-contained machinery for assessment of undisclosed income for the block period of 10 years or 6 years, as the case may be. Hence, the irresistible conclusion is that the intention of the legislature was to make it prospective in nature.