# K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX & ANR

- **Citation:** [2023] 1 S.C.R. 689
- **Court:** Supreme Court of India
- **Decided:** 2023-01-13
- **Case number:** Civil Appeal No. 3704 of 2012
- **Bench:** M. R. Shah, C. T. Ravikumar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/k-l-swamy-v-the-commissioner-of-income-tax-anr-36770
- **Pages:** 30

## Headnote

Income Tax Act, 1961: ss. 158BC, 158BD, 158 BFA(1) - Block
assessment - Undisclosed income of any other person - Levy of
interest - Assessee belatedly filed return for block period in response
to notice u/s. 158BD by including undisclosed income - Absence of
any notice u/s. 158BC - Liability for period prior to 01.06.1999 -
Levy of interest u/s. 158BFA(1) by the assessing officer -
Sustainability of - Held: Persons other than searched persons' liable
to pay interest on late filing of the return u/s.158BC even in the
absence of notice u/s. 158BC and even for the period prior to June
1999 -Chapter XIV-B prescribes a special procedure for
computation of income for the block period in search and seizure
cases - It is a complete code in itself providing for self-contained
machinery for assessment of undisclosed income for the block period
- s.158BD would be applicable in case of any person other than a
person with respect to whom search was made - Thus, in case of the
person other than searched person the notice u/s. 158BD would be
required and in case of late filing of the return u/s. 158BC, the
interest would be leviable u/s. 158BFA - Any other interpretation
would lead to s.158BD nugatory - By inserting the words "under
Section 158BC" in s. 158BD, the Parliament intended to clarify
that the assessment for the block period in case of the persons other
than searched persons would also be as per the procedure u/s.
158BC - In the instant case, the persons searched were issued notice
u/s. 158BC and in case of the appellant-director of the Company,
who is the "other person", the notice u/s. 158BD was issued - It
cannot be said that the in absence of any notice u/s. 158BC served
upon the persons other than searched persons for the period prior
to the amendment in s. 158BD vide Finance Act, 2002, there would
not be any liability to pay interest u/s. 158BFA.
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s.113 proviso - Surcharge - Levy of - Held: Assessee not
liable to pay the surcharge under proviso to s.113 - Order passed
by the High Court and the assessment order qua the surcharge under
proviso to s. 113 quashed and set aside.
Partly allowing the appeals, the Court
HELD: 1. As regards, the levy of the surcharge under
proviso to Section 113 of the Income Tax Act is held in favour of
the assessee and against the revenue. The assessee is not liable
to pay the surcharge under proviso to Section 113 of the Income
Tax Act. To that extent the impugned judgment and order passed
by the High Court and the assessment order qua the surcharge
under proviso to Section 113 of the Income Tax Act is quashed
and set aside.[Para 9.2][710-C-D]
2.1 Chapter XIV-B which deals with block assessment lays
down a special procedure for searched cases. The main reason
for adding the said provisions in the Act was to curb tax evasion
and expedite as well as simplify the assessment in such searched
cases. The essence of the new procedure under Chapter XIV-B
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 said
period. Therefore, a separate return covering the years of the
block period is a pre-requisite for making block assessment.
Chapter XIV-B 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.
[Para 10][710-F-H]
2.2 With respect to assessment of undisclosed income for
the block period including the filing of the return etc., the normal
assessment proceedings including under Section 140 of the
Income Tax Act shall not be applicable. Therefore, the submission
on behalf of the assessee that interest under Section 158BFA for
the period prior to 01.06.1999 in view of insertion of the words
"Section 158BC" in Section 140A w.e.f. 01.06.1999, shall not be
chargeable, cannot be accepted. It is the case on behalf o

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 [2023] 1 S.C.R. 689
689
K.L. SWAMY
v.
THE COMMISSIONER OF INCOME TAX & ANR.
(Civil Appeal No. 3704 of 2012)
JANUARY 13, 2023
[M. R. SHAH AND C. T. RAVIKUMAR, JJ.]
Income Tax Act, 1961: ss. 158BC, 158BD, 158 BFA(1) - Block
assessment - Undisclosed income of any other person - Levy of
interest - Assessee belatedly filed return for block period in response
to notice u/s. 158BD by including undisclosed income - Absence of
any notice u/s. 158BC - Liability for period prior to 01.06.1999 -
Levy of interest u/s. 158BFA(1) by the assessing officer -
Sustainability of - Held: Persons other than searched persons' liable
to pay interest on late filing of the return u/s.158BC even in the
absence of notice u/s. 158BC and even for the period prior to June
1999 -Chapter XIV-B prescribes a special procedure for
computation of income for the block period in search and seizure
cases - It is a complete code in itself providing for self-contained
machinery for assessment of undisclosed income for the block period
- s.158BD would be applicable in case of any person other than a
person with respect to whom search was made - Thus, in case of the
person other than searched person the notice u/s. 158BD would be
required and in case of late filing of the return u/s. 158BC, the
interest would be leviable u/s. 158BFA - Any other interpretation
would lead to s.158BD nugatory - By inserting the words "under
Section 158BC" in s. 158BD, the Parliament intended to clarify
that the assessment for the block period in case of the persons other
than searched persons would also be as per the procedure u/s.
158BC - In the instant case, the persons searched were issued notice
u/s. 158BC and in case of the appellant-director of the Company,
who is the "other person", the notice u/s. 158BD was issued - It
cannot be said that the in absence of any notice u/s. 158BC served
upon the persons other than searched persons for the period prior
to the amendment in s. 158BD vide Finance Act, 2002, there would
not be any liability to pay interest u/s. 158BFA.
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s.113 proviso - Surcharge - Levy of - Held: Assessee not
liable to pay the surcharge under proviso to s.113 - Order passed
by the High Court and the assessment order qua the surcharge under
proviso to s. 113 quashed and set aside.
Partly allowing the appeals, the Court
HELD: 1. As regards, the levy of the surcharge under
proviso to Section 113 of the Income Tax Act is held in favour of
the assessee and against the revenue. The assessee is not liable
to pay the surcharge under proviso to Section 113 of the Income
Tax Act. To that extent the impugned judgment and order passed
by the High Court and the assessment order qua the surcharge
under proviso to Section 113 of the Income Tax Act is quashed
and set aside.[Para 9.2][710-C-D]
2.1 Chapter XIV-B which deals with block assessment lays
down a special procedure for searched cases. The main reason
for adding the said provisions in the Act was to curb tax evasion
and expedite as well as simplify the assessment in such searched
cases. The essence of the new procedure under Chapter XIV-B
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 said
period. Therefore, a separate return covering the years of the
block period is a pre-requisite for making block assessment.
Chapter XIV-B 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.
[Para 10][710-F-H]
2.2 With respect to assessment of undisclosed income for
the block period including the filing of the return etc., the normal
assessment proceedings including under Section 140 of the
Income Tax Act shall not be applicable. Therefore, the submission
on behalf of the assessee that interest under Section 158BFA for
the period prior to 01.06.1999 in view of insertion of the words
"Section 158BC" in Section 140A w.e.f. 01.06.1999, shall not be
chargeable, cannot be accepted. It is the case on behalf of the
assessee that the interest only follows the principal and in this
case the principal being the tax payable, there was no liability to
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pay the tax along with the return prior to 01.06.1999 which came
to be introduced by insertion of the words "Section 158BC" in
Section 140A and therefore the liability to pay interest cannot
arise if there was no liability to pay the tax itself along with the
return at the relevant time, has no substance. At this stage, it
requires to be noted that neither Section 158BC nor Section
158BFA required the assessee to pay tax along with the return.
Liability to deposit the tax along with return arises only under
Section 140A. However, at the relevant point of time Section
140A did not apply to Section 158BC and hence there was no
liability to deposit tax along with the return. The said lacunae
was noticed by the Parliament and by the Finance Act, 1999, the
words "Section 158BC" have been inserted in Section 140A w.e.f.
01.06.1999. That does not mean that interest under Section
158BFA would not be leviable in case of late filing of return. The
return under Section 158BC was required to be filed as per
Chapter XIV-B and on the delay in filing the return, there shall
be liability to pay interest leviable under Section 158BFA(1). [Para
10.1][713-D-H; 714-A-B]
2.3 On conjoint reading of the Notes on Clauses and
Memorandum, it is very clear that the Legislature originally
intended to make the assessee liable to pay taxes and interest
when the return was filed under Section 139 or under Section
142 or Section 148. By virtue of the amendment, the Legislature
thus proposed to make those assessees who are filing the return
under Section 158BC also liable to pay tax and interest under
Section 140A. The memorandum explaining the provisions of the
Finance Bill further makes it clear that the existing provisions of
Section 140A were not applicable to Chapter XIV-B relating to
assessment of income of the block period in search and seizure
cases. It further recognizes that the admitted tax declared in the
return cannot be collected till the assessment is completed.
Therefore, the Legislature intended to amend Section 140A by
incorporating Section 158BC so as to make liable those persons
who are filing return under Section 158BC also. Thus, by virtue
of the amendment, a new class of assessee was brought onto the
statute-book whose income are subject to be assessed under
Chapter XIV-B, in section 140A compelling them to pay
self-assessment tax. Thus, the interest under Section 158BFA is
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR.
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leviable on standalone basis for late or non-filing of return, which
ceases on the day return is filed. In the impugned judgment and
order, the High Court has elaborately and comprehensively
explained the rationale behind introduction of Section 158BC in
Section 140A and has specifically observed and held that the
liability of payment of interest does not stop merely on filing of
the return but is attracted in terms of Section 140A till payment
of tax in terms of the section and even now the provisions of
Section 158BFA(1) and Section 140A operate independently. The
view taken by the High Court is concurred with. [Para 10.3][715C-H]
2.4 The submission on behalf of the assessee that in absence
of any notice under Section 158BC served upon the concerned
assessee and in view of insertion of the words "Section 158BC"
in Section 158BD inserted vide Finance Act, 2002, there shall
not be any liability to pay interest under Section 158BFA is
concerned, the aforesaid submission is absolutely erroneous and
has no substance. Prior to amendment in Section 158BD vide
Finance Act, 2002 and even thereafter, the provisions of Section
158BC would be applicable in case of "searched persons". Section
158BD would be applicable in case of persons "other than
searched persons". Therefore, in case of a person "other than
searched person", no notice under Section 158BC which is
required to be issued in case of "searched persons" was required
to be issued. For a person "other than searched person", notice
under Section 158BD is sufficient. [Para 10.4][716-A-C]
2.5 The submission on behalf of the assessee that the words
"under Section 158BC" has been inserted in Section 158BD vide
Finance Act, 2002 and therefore, in absence of any notice under
Section 158BC prior to the amendment, there shall not be any
liability to pay interest under Section 158BFA is concerned, a
perusal of the Notes on Clauses appended to Clause 64 of the
Finance Bill, 2002, it appears that the same is clarificatory in
nature. [Para 10.5][716-D-E]
2.6 Chapter XIV-B prescribes a special procedure for
computation of income for the block period in search and seizure
cases. Section 158BD shall be applicable in case of any person
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other than a person with respect to whom search was made. As
observed Chapter XIV-B is a complete code in itself providing
for self-contained machinery for assessment of undisclosed income
for the block period. Therefore, in case of the person other than
searched person the notice under Section 158BD would be
required/sufficient and in case of late filing of the return under
Section 158BC, the interest will be leviable under Section
158BFA. Any other interpretation would lead to Section 158BD
nugatory. It can be seen that by inserting the words "under
Section 158BC" in Section 158BD, the Parliament intended to
clarify that the assessment for the block period in case of the
persons other than searched persons would also be as per the
procedure under Section 158BC of the Income Tax Act. In the
instant case as such K Company - the persons searched were
issued notice under Section 158BC and in case of the appellantdirector of K Company, who is the "other person", the notice
under Section 158BD has been issued. [Para 10.6][716-H; 717A-D]
2.7 The submission on behalf of the assessee that in absence
of any notice under Section 158BC served upon the assessee -
persons other than searched persons for the period prior to the
amendment in Section 158BD vide Finance Act, 2002, there shall
not be any liability to pay interest under Section 158BFA, has no
substance and the same is required to be rejected and the said
question is required to be answered in favour of the revenue and
against the assessee. [Para 10.7][717-E]
3. The respective assessees are not liable to pay the
surcharge under proviso to Section 113 of the Income Tax Act.
The impugned judgment and order passed by the High Court is
required to be modified to the aforesaid extent. So far as the
liability to pay the interest under Section 158BFA of the Income
Tax Act for late filing of the return under Section 158BC of the
Income Tax Act, in absence of any notice under Section 158BC
upon the assessee-persons other than searched persons, the said
question is held in favour of the brevenue and against the
assessee. The impugned judgment and order passed by the High
Court is confirmed and it is observed and held that the assesseepersons other than searched persons would be liable to pay the
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR.
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interest on late filing of the return under Section 158BC even in
absence of a notice under Section 158BC of the Income Tax Act
and even for the period prior to 01.06.1999. To that extent, the
impugned judgment and order passed by the High Court is
confirmed. [Para 11][717-F-H; 718-A]
Commissioner of Income Tax (Central)-I, New Delhi v.
Vatika Township Private Limited 2015 (1) SCC 1 : [2014]
12 SCR 1037; Commissioner of Income Tax v. Suresh
N. Gupta (2008) 297 ITR 322 (SC) ; Mathuram Agrawal
v. State of Madhya Pradesh, (1999) 8 SCC 667 : [1999]
4 Suppl. SCR 195; Commissioner of Income Tax
(Central)-I, New Delhi Vs. Vatika Township Private
Limited 2015 (1) SCC 1 : [2014] 12 SCR 1037; Assistant
Commissioner of Income Tax and Anr. v. Hotel Blue
Moon (2010) 3 SCC 259 : [2010] 2 SCR 282;
P.P.Umerkutty v. ACIT (2005) 279 ITR 213 Kerala -
referred to.
Case Law Reference
[1999] 4 Suppl. SCR 195
referred to
Para 6.1
[2014] 12 SCR 1037
referred to
Para 6.3
[2010] 2 SCR 282
referred to
Para 6.4
CIVIL APPELLATE JURISDICTION : Civil Appeal No.3074
of 2012.
From the Judgment and Order dated 09.12.2009 of the High Court
of Judicature of Karnataka at Bangalore in Income-tax Appeal No.268
of 2004.
With
Civil Appeal Nos.3706, 3705, 3707, 3708 and 3709 of 2012.
Balbir Singh, ASG, Preetesh Kapur, Arijit Prasad, Sr. Advs., Senthil
Jagadeesan, Ms. Sonakshi Malhan, Sajal Jain, Rupesh Kumar, H.R. Rao,
Prahlad Singh, Ms. Shradha Deshmukh, Dharma Datta Verma, Prasenjeet
Mohapatra, Raj Bahadur Yadav, Advs. for the appearing parties.
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The Judgment of the Court was delivered by
M. R. SHAH, J.
1. As common question of law and facts arise in this group of
appeals, all these appeals are decided and disposed of together by this
common judgment and order.
2. In all these appeals, the dispute is with respect to levy of interest
under Section 158BFA(1) of the Income Tax Act in respect of assessment
completed under Section 158BD of the Act for belatedly filing the return
of income for the block period and also the levy of surcharge under
Section 113 of the Income Tax Act.
3. For the sake of convenience Civil Appeal No.3706 of 2012
arising out of the impugned judgment and order passed by the High
Court in ITA No.277 of 2004, is being treated and considered as a lead
matter.
4. The facts leading to the present appeal in nut-shell are as under:
4.1 That the appellant is an individual and Director Partner in
Khoday Group of Company concerns. A search under Section 132 was
conducted in the residential premises of the family members of Khoday
Group and the warrant was issued in the name of M/s. Khoday India
Limited. The appellant was served with the notice under Section 158BD
to file the return of income for the block period of 01.04.1986 to
13.02.1997. The appellant filed return for the block period in response to
notice under Section 158BD by including the undisclosed income of
Rs.45,00,000/- for the block period. The Assessing Officer levied interest
under Section 158BFA(1) for the period from 18.01.1998 to 19.01.1999
at the rate of 2% per month for 13 months and levied interest of
Rs.7,12,296/- on the tax amount of Rs.27,49,600/-.
4.2 The appellant being aggrieved by the order of the Assessing
Officer filed an appeal before the learned CIT (A). It was the case on
behalf of assessee that levy of interest under Section 158BFA(1) was
not justified. The learned CIT (A) held that Section 158BFA provides
for levy of interest for late filing of return of block assessment in response
to the notice under Section 158BC similar to the provisions of Section
234A. The CIT(A) also held that levy of interest under Section 234A is
compensatory in nature and is attracted the moment there is a default.
The appellant - assessee being aggrieved by the order of CIT(A) filed
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
ANR.
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an appeal before the ITAT, Bangalore. Before the ITAT, it was contended
on behalf of assessee that provisions of Section 158BFA(1), the levy of
interest would be attracted only in a case where there was a failure or
delay in filing the return in response to notice under Section 158BC. It
was contended that in absence of any notice under Section 158BC, the
Assessing Officer was not justified in levying interest. It was also
contended that in Section 158BD after the words "that Assessing Officer
shall proceed" the words "under Section 158BC" was inserted w.e.f.
01.06.2002 by the Finance Act, 2002. It was contended that the
amendment was specifically brought to cure the anomaly and the fact
that it has been made prospective w.e.f. 01.06.2002 and therefore, the
interest cannot be validly levied under Section 158BFA(1) in a case
where notice under Section 158BD was issued prior to 31.05.2002 and
in the present case the notice was issued on 28.11.1997. The learned
ITAT allowed the appeal preferred by the assessee by observing that
Section 158BFA(1) inserted w.e.f. 01.01.1997, prescribes levy of interest
and never require to pay the self-assessment tax due along with the
return of income. Interest is leviable on undisclosed income determined
with the assessment. It was observed that 140A requiring to pay selfassessment tax along with the return of income filed under Section
158BC(a) was amended w.e.f. 01.06.1999 only. It was observed that in
the present case the return was filed on 19.01.1999 and at the relevant
point of time there was no provision to pay self-assessment tax along
with the return of income and therefore no interest was leviable under
Section 158BFA(1).
4.3 The revenue being aggrieved by the order passed by the ITAT,
filed an appeal before the High Court being ITA No.277 of 2004. By the
impugned judgment and order, the High Court has reversed the decision
of the ITAT. The High Court has observed that the amendment to Section
140A is of no consequence so far as determination of interest under
Section 158BFA(1) is concerned. The High Court negatived the
submission on behalf of the assessee that in absence of any specific
notice under Section 158BC, there shall not be any levy of interest under
Section 158BFA(1) on the submission that prior to the amendment by
including Section 158BC within the scope of Section 158BD by Finance
Act, 2002 w.e.f. 01.06.2002. So far as a notice under Section 158BD,
provision of Section 158BFA(1) was not attracted. The High Court has
observed and held that levy of provisions of Section 158BD prior to the
amendment in terms of Finance Act, 2002 i.e. before adding the words
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"under Section 158BC", section itself indicates the procedure that was
required to be followed by the Assessing Officer, is only in terms of the
very provisions of Chapter XIV-B of the Act and therefore Section
158BC as well as 158BFA(1) are even otherwise attracted and just
because the Legislature thought it fit to add or to mention Section 158BC
by way of amendment through Finance Act, 2002, it would not make
any difference to the earlier provision of Section 158BD which even
otherwise envisages within itself the provisions and applicability of Section
158BD and 158BFA(1). Consequently, the High Court has answered
the questions of law in favour of the revenue and against the assessee
and consequently allowed the said appeal.
4.4 Now so far as the levy of surcharge under Section 113 of the
Income Tax Act, the High Court has held the said question also in favour
of the revenue relying upon the decision of this Court in the case of
Commissioner of Income Tax vs. Suresh N. Gupta - (2008) 297
ITR 322 (SC).
4.5 Being aggrieved and dissatisfied with the impugned judgment
and order passed by the High Court, the assessee has preferred the
present appeals.
5. Shri Preetesh Kapur, learned Senior Advocate has appeared
on behalf of the assessee - appellant and Shri Balbir Singh, learned
ASG has appeared on behalf of the Revenue.
6. Now, so far as the liability to pay the interest - applicability of
Section 158BFA to persons who have not been issued notice under Section
158BC prior to the amendment in Section 158BD by Finance Act, 2002,
it is vehemently submitted by Shri Kapoor, learned Senior Counsel
appearing on behalf of assessee that in the present case admittedly the
present assessee was never issued notice under Section 158BC, but
was issued notice only under Section 158BD. It is submitted that in fact
prior to amendment in Section 158BD by Finance Act, 2002, there was
no requirement to issue notice to the "other person" under Section 158BC.
It is submitted that in view of the above factual position, Section 158BFA
applies only where a return "as required by notice under Clause (a) of
Section 158BC" has not been furnished within time. It is further submitted
that in absence of such notice under Clause (a) of Section 158BC, the
fundamental pre-requisite of the section is not fulfilled.
6.1 It is submitted that if on its plain words a section does not
apply then liability under that section cannot be imposed. It is submitted
K.L. SWAMY v. THE COMMISSIONER OF INCOME TAX &
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that as consistently being held by this Hon'ble Court that for liability to
be fastened upon the assessee, it must be shown that he unambiguously
falls within the letter of the section. Reliance is placed on the decision of
this Court in the case of Mathuram Agrawal Vs. State of Madhya
Pradesh, (1999) 8 SCC 667 (Paras 13 and 14).
6.2 It is submitted that therefore since Section 158BFA does not
cover a situation where notice has been issued under Section 158BD, no
interest under that section can be recovered from the present assessee.
6.3 It is further submitted that the department's argument before
the High Court was that amendment in Section 158BD vide Finance
Act, 2002, introducing the requirement of issuing notice under Section
158BC to the "other person", applied even to pending proceedings is
erroneous and against the Constitution Bench decision of this Court in
the case of Commissioner of Income Tax (Central)-I, New Delhi
Vs. Vatika Township Private Limited - 2015 (1) SCC 1 (Para 28),
wherein the Constitution Bench has clearly laid down that the
presumption is that every amendment is prospective and the amendment
applies from the assessment year in which it is introduced.
6.4 It is further submitted that in any event, consequence of the
said argument will be that the entire block assessment (not just levy of
interest) would be rendered non-est inasmuch as this Court in the
aforesaid decision has laid down that where a section requires issuance
of notice such notice is a jurisdictional pre-requisite and in the absence
of such notice, the entire proceedings are liable to be quashed. Reliance
is placed on the decision of this Court in the case of Assistant
Commissioner of Income Tax and Anr. Vs. Hotel Blue Moon,
(2010) 3 SCC 259 (Para 22). It is submitted that in other words if the
amendment applied retrospectively, then issuance of notice under Section
158BC was mandatory even to the "other person" (being the assessee
herein) and in the absence thereof the entire block assessment would
fail.
6.5 It is submitted that even the submission on behalf of department
that issuance of notice under Section 158BC is a mere formality and
that no notice under Section 158BC is required to be issued to "other
person" even after the amendment to Section 158BD vide Finance Act,
2002, is concerned, it is submitted that the said submission is also erroneous
for the following reasons :
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"(i) The said argument goes against the specific mandatory
language of section 158BD as it stands now namely. ".....and
that Assessing Officer shall proceed [under section 158BC]
against such other person ......."
{As submitted above, in view of the judgment of this Hon'ble
Court in Hotel Blue Moon, the issuance of a notice under the
specified section, would be a jurisdictional pre-requisite, and
hence the entire block assessments would be rendered nonest.}
(ii) Furthermore, the argument renders otiose the specific
amendment in section 158BD adding the words "under Section
158BC" vide Finance Act, 2002. If the Department's
contention is correct then this amendment was unnecessary.
(iii) In any event, this argument does not answer the contention
of the assessee that section 158BFA on a plain reading, applies
only where a return "as required by a notice under clause (a)
of section 158BC" has not been furnished within time. In the
present case we are concerned with the limited issue of levy
of interest under section 158BFA. Even if {for the sake of
argument} notice under section 158BC is not mandatory, that
does not change the specific words of section 159BFA and
cannot bring within its net a person who has not been issued
a notice under section 158BC. On the other hand, the
argument being raised by the assessee ensures that post 2002
even the "other person" comes within the purview of section
158BFA.
(iv) This argument of the Department also goes against the
specific pari materia provision namely section 153C. as rightly
pointed out by the learned ASG, post 31st May, 2003, in case
of a search, the provisions of 153A to 153C apply and that
section 153C is pari materia with 158BD."
6.6 Making above submissions, it is prayed to hold that in absence
of the notice under Section 158BC, served upon the assessee - "other
person", the Assessing Officer was not justified in levying the interest
under Section 158BFA.
6.7 Now, so far as the levy of surcharge under proviso to Section
113 of Income Tax Act is concerned, it is vehemently submitted that as
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such the said question is now covered in favour of the assessee by the
Constitution Bench decision of this Court in the case of Vatika Township
Private Limited (supra) (Para 37 to 40). It is submitted that the decision
of this Court in the case of Suresh N. Gupta (supra) that has been
relied upon by the High Court in the impugned judgment has been
specifically overruled by the Constitution Bench in Vatika Township
Private Limited (supra).
6.8 Now, so far as chargeability of interest under Section 158BFA
prior to 01.06.1999 in the case of persons issued notice under Section
158BC is concerned, it is submitted that interest only follows the principal.
In this case the principal being the tax payable. It is submitted that in
other words the liability to pay interest cannot arise if there was no
liability to pay the tax itself along with the return, at the relevant point of
time. It is submitted that interest only being an element to compensate
the revenue for having been deprived of the tax, interest can start running
only once a liability to deposit tax arises.
6.9 It is submitted that in the present case it is clear that neither
Section 158BC nor Section 158BFA require the assessee to pay tax
along with the return. It is submitted that this liability to deposit the tax
along with return arises only under Section 140A. However, at the relevant
point of time Section 140A did not apply to Section 158BC and hence
there was no liability to deposit tax along with the return. It is submitted
that this lacuna was noticed by Parliament and by the Finance Act, 1999,
the words "Section 158BC" have been inserted in Section 140A w.e.f.
01.06.1999. It is submitted that for the period prior to 01.06.1999 the
submission on behalf of the department that Section 158BFA is to be
seen independently from Section 140A may not be accepted. It is
submitted that therefore at the relevant point of time there being no
liability to deposit tax along with the return, there can be no levy of
interest" on that tax for mere failure to file return.
6.10 Making above submissions, it is prayed to allow the present
appeals and answer the issues / questions of law in favour of the assessee
and against the revenue.
7. All these appeals are vehemently opposed by Shri Balbir Singh,
learned ASG appearing on behalf of the revenue.
7.1 It is submitted that the present appeals arise out of search
conducted on 13.02.1997 in the Khoday Group of companies. All appeals
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raised one common question regarding the levy of interest under Section
158BFA on the undisclosed income of the assessee. It is submitted that
pursuant to the search conducted on 13.02.1997, Section 158BD notice
was issued to the assessee ("other person") to file return for the block
period 1987-88 to 1997-98, whereafter the Assessing Officer passed
the order of assessment under Section 158BD and determined the income.
The Assessing Officer also levied interest under Section 158BFA(1) for
different periods, depending on the date of filing of return in each case.
It is submitted that pursuant to the notice issued to file return, there was
delay in filing return and Section 158BFA(1) being mandatory in nature
as per which the interest became payable and was liable to be paid by
the assessee after the due date stipulated in the notice and the date of
actual filing of return.
7.2 It is submitted that the interest under Section 158BFA(1) of
the Act is levied to compensate the government for delay in filing or
non-filing of return by the assessee pursuant to determination under
Section 158BC / 158BD of the Act.
7.3 It is further submitted that subsequently, Section 140A (1) of
the Income Tax Act was amended by the Finance Act, 1999, w.e.f.
01.06.1999 incorporating Section 158BC making the assessee liable to
pay tax before furnishing return under Section 158BC and also file the
proof of payment along with return. By insertion of Section 158BC in
Section 140A, the Legislature casts an additional onus on the assessee
to pay self-assessment tax under Section 140A (1) of the Income Tax
Act when the return of income was filed in response to the notice under
Section 158BC. It is submitted that therefore it is very clear that when
the return was filed by the assessee for the block period under Section
158BC, there was no requirement to pay tax under Section 140A (1) of
the Income Tax Act and the entire liability was limited to period of delay
and not be delayed in payment of tax.
7.4 It is submitted that Chapter XIV-B of the Income Tax is a
special provision with respect to "searched person" and "other than
searched person". It is submitted that the scope and intent behind
introduction of Chapter XIV-B has been explained in detail by the Kerala
High Court in the case of P.P.Umerkutty Vs. ACIT - (2005) 279
ITR 213 Kerala. It is submitted that as explained by the Kerala High
Court in the aforesaid decision, the provision relating to block assessment
under Chapter XIV-B are self-contained note, providing for variation of
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the manner in which the liability for payment of tax is determined and
covering a situation where undisclosed income relatable to the block
period had not suffered tax only due to non-disclosure coming to light in
course of certain search proceedings etc.
7.5 It is submitted that the scheme of block assessment introduced
under Chapter XIV-B has been explained and considered by the
Constitution Bench of this Court in the case of Vatika Township Private
Limited (supra). It is submitted that as observed by this Court, Chapter
XIV-B of the Act deals with block assessment which lays down a special
procedure for search cases. It is submitted that as observed, the main
reason for adding this provision in the Act was to curb tax evasion and
expedite as well as simplify the assessment in such searched cases. It is
submitted that even as observed and held by this Court in the aforesaid
decision Chapter XIV-B is a complete code in itself providing for selfcontained machinery for assessment of undisclosed income for the block
period of ten years or six years as the case may be.
7.6 It is submitted that the levy of interest under Section 158BFA(1)
is linked to the period of filing of return and that period alone is to be
taken into consideration particularly as the levy of interest being only for
delayed period of filing return. It is submitted that delay of interest is not
linked to delay in payment of taxes but due to delay in filing the return.
7.7 Insofar as the submission on behalf of the assessee that in
absence of any notice under Section 158BC to the "other person" prior
to the amendment in Section 158BD vide Finance Act, 2002 and thereby
entire block assessment would be rendered non-est and the submission
on behalf of the assessee that the amendment vide Finance Act, 2002 in
Section 158BD adding the words "under Section 158BC" would become
otiose it is vehemently submitted that the said contentions are without
any merit. Relying upon Notes of Clauses appended to Clause 64 of the
Finance Bill, 2002, whereby said words "under Section 158BC" was
inserted it is submitted that the words "under Section 158BC" in Section
158BD has been inserted so as to clarify that Assessing Officer shall
proceed against such "other person" under Section 158BC. It is further
submitted that Chapter XIV-B prescribes a special procedure for
computation of income for the block period in search and seizure cases.
Section 158BD indicates the procedure that was required to be followed
by Assessing Officer when any person other than a person with respect
to whom search was made. It is submitted that even bereft of clarificatory
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amendment brought in vide Finance Act, 2002, Section 158BD provided
that provision of Chapter-XIV-B of the Act would apply accordingly
and therefore the provision of Section 158BC and 158BFA was attracted.
It is submitted that insertion of "under Section 158BC" only makes it
clear what was always existing under Section 158BD.
7.8 It is submitted that if the contention of the assessee that Section
158BFA would not be attracted unless notice under Section 158BC is
provided then for the period prior to the clarificatory amendment brought
in prior to Finance Act, 2002, is accepted, in that case, the provision of
Section 158BD will be rendered nugatory qua Section 158BFA. It is
submitted that such an interpretation will result in absurdity and the whole
intention behind Section 158BD being on the statute book will be lost.
7.9 Now so far as the chargeability of interest under Section
158BFA prior to 01.06.1999 in case of persons issued notice under Section
158BC and the submission on behalf of assessee that since the interest
only follows principal, the liability of payment of interest does not arise
as there was no liability to pay tax along with return, since at the relevant
point of time, Section 140A did not apply to Section 158BC , there was
no liability to deposit tax along with return, hence, there can be no levy
of interest on that tax for mere failure to file return, it is submitted that
the said contention runs contrary to the mandatory and compensatory
language of Section 158BFA(1). Reliance is placed on Notes on Clauses
and the memorandum explaining amendment to Section 140A of the Act
more particularly Clause 63 by which it was sought to amend Section
140A of the Income Tax Act. It is submitted that a conjoint reading of
the Note on Clauses and the memorandum it is very clear that Legislature
originally intended to make assessee liable to pay taxes and interest
when the return was filed under Section 139 or under Section 142 or
under Section 148. It is submitted by virtue of amendment the Legislature
proposed to make those assessees who are filing return under Section
158BC also liable to pay tax and interest under Section 140A. It is
submitted that memorandum explaining the provisions of Finance bill
further makes it clear that the existing provisions of Section 140A are
not applicable to Chapter XIV-B relating to assessment of income of
block period in search and seizure cases. The said memorandum also
recognizes that the admitted tax declared in return cannot be collected
till the assessment is completed. Therefore, the Legislature intended to
amend Section 140A by incorporating Section 158BC so as to make
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liable those persons who are filing return under Section 158BC also.
Thus, by virtue of the amendment, a new class of assessee was brought
to the statute book whose income are subject to the assessment under
Chapter XIV-B, in Section 140A compelling them to pay self-assessment
tax. It is submitted that therefore if the Legislature wanted to apply the
provisions of Section 140A, they would have expressly stated so. The
very fact that there is no provision in Chapter XIV-B for applying provision
of Section 140A, clearly shows that Legislature never intended to apply
the provisions of Section 140A before 01.06.1999. This was also made
clear in the memorandum explaining the Finance Bill, 1999, by saying
that there is no corresponding provision in Chapter XIV-B for payment
of self-assessment tax at the time of filing the return. It is submitted that
therefore interest under Section 158BFA is leviable on stand-alone basis
for non-filing of return which ceases on the day return is filed. It is
submitted that said provision is similar to Section 234A.
7.10 It is submitted that in the impugned judgment and order the
High Court has explained the rationale behind introduction of Section
158BC in Section 140A and has specifically held that "the liability of
payment of interest does not stop merely on filing of return but it is
attracted in terms of Section 140A in payment of tax in terms of Section
and even now the provision of Section 158BFA(1) and 140A operate
independently". It is submitted that in view of the same, the submission
on behalf of assessee to refute its liability to pay interest under Section
158BFA deserves to be negatived.
7.11 Now insofar as the levy of surcharge under proviso to Section
113 of the Income Tax Act is concerned Shri Balbir Singh, learned ASG
appearing for revenue has fairly conceded that the said issue has been
decided in favour of the assessee in terms of the decision of this Court in
the case of Vatika Township Private Limited (supra).
8. Heard the learned counsels appearing on behalf of the
respective parties at length. The questions of law posed for the
consideration of this Court in the present appeals are:(i) levy of interest
under Section 158BFA(1) of the Income Tax Act for late filing of the
return for the block period in absence of any notice under Section 158BC
 of the Act and for the period prior to 01.06.1999? and (ii) the levy of the
surcharge under proviso to Section 113 of the Income Tax Act.
9. Now insofar as the levy of the surcharge under proviso to
Section 113 of the Income Tax Act is concerned, the said issue is now
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not res integra in view of the decision of this Court in the case of Vatika
Township Private Limited (supra). In paragraphs 37 to 40, 44 and
45, it is observed and held as under:
"Answer to the reference
37. When we examine the insertion of the proviso in Section 113
of the Act, keeping in view the aforesaid principles, our irresistible
conclusion is 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.
38. There are various reasons for coming to this conclusion which
we enumerate hereinbelow.
Reasons in support
39. The first and foremost poser is as to whether it was possible
to make the block assessment with the addition of levy of
surcharge, in the absence of proviso to Section 113? In Suresh N.
Gupta [CIT v. Suresh N. Gupta, (2008) 4 SCC 362] itself, it was
acknowledged and admitted that the position prior to the
amendment of Section 113 of the Act whereby the proviso was
added, whether surcharge was payable in respect of block
assessment or not, was totally ambiguous and unclear. The Court
pointed out that some assessing officers had taken the view that
no surcharge is leviable. Others were at a loss to apply a particular
rate of surcharge as they were not clear as to which Finance Act,
prescribing such rates, was applicable. It is a matter of common
knowledge and is also pointed out that the surcharge varies from
year to year.