The Constitution Bench of the Supreme Court in the case of  CIT Vs Vatika Township has overruled an earlier ruling by the Division Bench and has held that levy of surcharge on Block Assessment cases as introduced by Finance Act 2002 is only prospective and cannot be applied retro-actively.

The Controversy

Chapter XIV-B of the Income-tax Act contains special provisions which are applicable to assessment of undisclosed income of a Taxpayer pursuant to a Search operation carried out by the Tax authorities.

Section 113 provided the rate which is applicable to Block Assessment cases. The section did not initially provide for levy of Surcharge and consequently there was no clarity on:

a) whether surcharge was applicable to Block assessments at all, and

b) If applicable, whether the rate of surcharge would be that prevailing as of the date of the search (or) the date of conclusion of search (or) the date of when Block proceedings were initiated (or)  the date when the assessment order for the Block period was passed

Finance Act 2002 inserted a proviso to the said section to the effect that the rate specified under the section has to be increased by Surcharge applicable to the year in which the Search was initiated.

This led to another confusion – whether the proviso applied prospectively or was the same applicable even for prior years.

Earlier Ruling of the Supreme Court

The Supreme Court in CIT Vs Suresh N Gupta had held that the insertion of the proviso to Section 113 was clarificatory in nature and therefore had retrospective application – i.e. Surcharge was applicable even for years prior to its insertion in the Act. The above ruling was also followed by another Division Bench in the case of CIT Vs. Sanjiv Bhatra

Ruling of the Constitution Bench

The Constitution Bench of the Supreme Court has now overruled the earlier rulings pronounced by the Division Benches. The Apex Court took the view that since Chapter XIV-B of the Income-tax Act lays down a separate code for charge and imposition of tax for Block assessments, the rate of surcharge which is applicable to the ‘normal’ income cannot be applied to the income which is taxed under Block assessment. The Court held that retrospectivity cannot be readily imputed to taxing provisions, which have to be interpreted strictly and the language used by the legislature while inserting the proviso to section 113 also did not support the view that the same was meant to be retrospectively applied.