S. 113 Proviso inserted by FA 2002 w.e.f. 01.06.2002 to impose surcharge in search assessments is not clarificatory or retrospective. Suresh Gupta 297 ITR 322 (SC) overruled

A search and seizure operation u/s 132 was conducted on 10.02.2001 pursuant to which an assessment order for the block period from 01.04.1989 to 10.02.2000 was passed on 28.02.2002 at a total undisclosed income of Rs.85 lakhs. Tax was charged at the rate prescribed in s. 113. Subsequently, a Proviso was inserted to s. 113 by the Finance Act 2002 w.e.f. 01.06.2002 to provide for the levy of surcharge at 10%. The AO took the view that the said amendment was clarificatory in nature and he levied surcharge by passing an order u/s 154. However, the Tribunal and High Court upheld the assessee’s claim that the said amendment was prospective in nature and did not apply to block periods falling before 01.06.2002. However, the plea of the assessee was rejected by the Supreme Court in Suresh N. Gupta 297 ITR 322 (SC) (followed in (Rajiv Bhatara (SC)) and it was held that the said proviso is clarificatory in nature and applied to earlier block periods. When the present case reached the Supreme Court, the Bench was of the view that the issue ought to be referred to a larger Bench of 5 judges. HELD by the Full Bench of the Supreme Court:

(i) Chapter XIVB comprehensively takes care of all the aspects relating to the block assessment relating to undisclosed income, which includes s. 156BA(2) as the charging section and even the rate at which such income is to be taxed is mentioned in s. 113. Though s. 4 is also a charging provision, it does not apply to Chapter XIVB;

(ii) On the application of general principles concerning retrospectivity, the proviso to s. 113 cannot be treated as clarificatory in nature, thereby having retrospective effect. The rule against retrospective operation is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication;

(iii) An assessment creates a vested right and an assessee cannot be subjected to reassessment unless a provision to that effect inserted by amendment is either expressly or by necessary implication retrospective;

(iv) 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 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.

(v) Though the Chief Commissioners in their Conference suggested that there should be a retrospective amendment to s. 113, the legislature chose not to do so even though other amendments were made with retrospective effect. The CBDT circular No.8 of 2002 dated 27.08.2002 also makes it clear that the amendment to s. 113 is prospective;

(vi) Consequently, the conclusion in Suresh N. Gupta 297 ITR 322 (SC) treating the proviso to s. 113 as clarificatory and giving it retrospective effect is not correct and is overruled.