2014 (9) TMI 576 - SC - Income Tax

Proviso to Section 113 Income Tax Act is prospective, not retrospective, favoring clear tax laws and taxpayer rights

Commissioner of Income Tax (Central) -I, New Delhi Versus Vatika Township Private Limited

The SC held that the proviso to Section 113 of the Income Tax Act, inserted by the Finance Act, 2002, is prospective, not retrospective. The Court ruled ... Levy of surcharge on tax u/s 113 - Block assessment u/s 158BC - Effective date of proviso appended to Section 113 of the Income Tax Act vide Finance Act, 2002 - Amendment retrospective or prospective - Held that:- The intention of the legislature was to make it prospective in nature. This proviso cannot be treated as declaratory/statutory or curative in nature. - the rate at which the tax is to be imposed is an essential component of tax and where the rate is not stipulated or it cannot be applied with precision, it would be difficult to tax a person. - Decided against the revenue. At the same time, it is also mandated that 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 favours the subjects, as against there the revenue, has to be preferred. This is a well established principle of statutory interpretation, to help finding out as to whether particular category of assessee are to pay a particular tax or not. No doubt, with the application of this principle, Courts make endeavour to find out the intention of the legislature. At the same time, this very principle is based on “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. This principle also acts as a balancing factor between the two jurisprudential theories of justice – Libertarian theory on the one hand and Kantian theory along with Egalitarian theory propounded by John Rawls on the other hand. General Principles concerning retrospectivity - Held that:- The obvious basis of the principle against retrospectivity is the principle of 'fairness’, which must be the basis of every legal rule as was observed in the decision reported in L’Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co.Ltd (1994) 1 AC 486. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. For the sake of completeness, that where a benefit is conferred by a legislation, the rule against a retrospective construction is different. If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In Government of India & Ors. v. Indian Tobacco Association- [2005 (8) TMI 113 - SUPREME COURT], the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. - Decided against the revenue. Issues Involved:1. Whether the proviso appended to Section 113 of the Income Tax Act, inserted by the Finance Act, 2002, is to operate prospectively or is clarificatory and curative in nature and, therefore, has retrospective operation.Issue-wise Detailed Analysis:1. Background Facts:The case revolves around a search and seizure operation conducted under Section 132 of the Income Tax Act on the premises of the assessee on 10.02.2001. The assessee filed a return for the block period from 01.04.1989 to 10.02.2000, and the Block Assessment was completed under Section 158BA on 28.02.2002. The Assessing Officer later observed that surcharge had not been levied and passed a rectification order under Section 154 on 30.06.2003. This order was challenged and subsequently canceled by the CIT (Appeals) on the grounds that the levy of surcharge is a debatable issue. The CIT issued a notice under Section 263 to revise the order, leading to a series of appeals culminating in the present case.2. Reference to Larger Bench:The core issue about the proviso to Section 113, whether it is clarificatory and curative and thus retrospective, was referred to a Constitution Bench. The Division Bench in the case of Commissioner of Income Tax, Central II v. Suresh N. Gupta had held that the proviso is clarificatory. However, doubts about this view led to the constitution of a larger Bench.3. Statutory Provisions:Section 4 of the Income Tax Act is the charging section, and the rate or rates at which income tax is charged are specified annually by the Finance Act. The power to levy surcharge is contained in Article 271 of the Constitution. The relevant provisions for block assessment are contained in Chapter XIV-B, which lays down a special procedure for the assessment of search cases. Section 113, before the insertion of the proviso, stipulated a tax rate of 60% for block assessments.4. Judgment in Suresh N. Gupta:The Division Bench in Suresh N. Gupta held that the proviso to Section 113 is clarificatory, addressing the ambiguity regarding the applicable date for surcharge rates. The Court concluded that the proviso merely clarified that the relevant date for the applicability of the Finance Act is the year in which the search is initiated.5. Analysis and Conclusion:The Constitution Bench undertook a detailed analysis of the scheme of Chapter XIVB and the principles of retrospectivity. It concluded that Chapter XIVB is a complete code in itself for assessing undisclosed income, with Section 158BA(2) as the charging section. The Bench emphasized that the proviso to Section 113 could not be treated as clarificatory or curative and thus could not have retrospective effect. The general principle against retrospective operation was applied, noting that the proviso imposes an additional burden on the assessee.6. Reasons for Prospective Operation:- The ambiguity regarding the levy of surcharge before the proviso was acknowledged, with different dates being considered for applying the surcharge rate.- The Department itself recognized the difficulty in justifying the levy of surcharge in block assessments.- The legislative intent, as indicated in the Notes on Clauses and the CBDT circular, was to make the amendment prospective.- The Finance Act, 2003, further clarified that surcharge in block assessments was intended to be prospective.7. Conclusion:The appeals filed by the Income Tax Department were dismissed, and the appeals of the assessees were allowed, deleting the surcharge levied for the block assessment period prior to 1st June 2002. The judgment in Suresh N. Gupta was overruled, establishing that the proviso to Section 113 is prospective in nature.