REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.  3704 OF 2012
K.L. Swamy           ...Appellant(s)
Versus
The Commissioner of Income Tax & Anr.      …Respondent(s)
WITH
CIVIL APPEAL NO.  3706 OF 2012
CIVIL APPEAL NO.  3705 OF 2012
CIVIL APPEAL NO.  3707 OF 2012
CIVIL APPEAL NO.  3708 OF 2012
CIVIL APPEAL NO.  3709 OF 2012
J U D G M E N T
 :  1  :

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   nut­shell   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
 :  2  :

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
 :  3  :

a   default.   The   appellant   –   assessee   being   aggrieved   by   the
order   of   CIT(A)   filed   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
 :  4  :

interest and never require to pay the self­assessment 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
 :  5  :

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
“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  XIV­B 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. 
 :  6  :

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
 :  7  :

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
pre­requisite 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   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
 :  8  :

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   non­est   inasmuch as
this Court in the aforesaid decision has laid down that where
a   section   requires   issuance   of   notice   such   notice   is   a
jurisdictional pre­requisite and in the absence of such notice,
the   entire   proceedings   are   liable   to   be   quashed.   Reliance   is
 :  9  :

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 :
“(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   pre­requisite,   and   hence   the   entire
 :  10  :

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  31 st
  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
 :  11  :

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   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
 :  12  :

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.
 :  13  :

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   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   1987­88   to   1997­98,
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
 :  14  :

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   non­filing   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
self­assessment   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
 :  15  :

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   XIV­B   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   XIV­B   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   XIV­B   are   self­contained   note,
providing for variation of 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   non­disclosure   coming   to   light   in
course of certain search proceedings etc. 
7.5 It   is   submitted   that   the   scheme   of   block   assessment
introduced   under   Chapter   XIV­B   has   been   explained   and
considered   by   the   Constitution   Bench   of   this   Court   in   the
 :  16  :

case   of   Vatika   Township   Private   Limited   (supra) .   It   is
submitted  that  as  observed  by   this  Court,  Chapter  XIV­B   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 XIV­B 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
 :  17  :

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   non­est   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   XIV­B
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   amendment   brought   in   vide   Finance
 :  18  :

Act,   2002,   Section   158BD   provided   that   provision   of
Chapter­XIV­B   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
 :  19  :

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
 :  20  :

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   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   XIV­B,   in   Section   140A   compelling   them   to
pay self­assessment 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   XIV­B   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   XIV­B   for   payment   of   self­assessment
 :  21  :

tax   at   the   time   of   filing   the   return.   It   is   submitted   that
therefore interest under Section 158BFA is leviable on stand­
alone   basis   for   non­filing   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
 :  22  :

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   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
 :  23  :

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.   However,
the   assessing   officers   were   indeterminative   about
the date with reference to which rates provided for
in   the   Finance   Act   were   to   be   made   applicable.
They   had   four   dates   before   them   viz.:   ( Suresh   N.
 :  24  :

Gupta   case   [ CIT   v.   Suresh   N.   Gupta ,   (2008)   4   SCC
362], SCC p. 379, para 35)
( i )   Whether   surcharge   was   leviable   with
reference   to   the   rates   provided   for   in   the
Finance Act of the year in which the search
was initiated; or
( ii )   the   year   in   which   the   search   was
concluded; or
( iii ) the year in which the block assessment
proceedings   under   Section   158­BC   of   the
Act were initiated; or
( iv )   the   year   in   which   block   assessment
order was passed.
39.1.   The   position   which   prevailed   before
amending   Section   113   of   the   Act   was   that   some
assessing   officers   were   not   levying   any   surcharge
and   others   who   had   a   view   that   surcharge   is
payable   were   adopting   different   dates   for   the
application   of   a   particular   Finance   Act,   which
resulted   in   different   rates   of   surcharge   in   the
assessment   orders.   In   the   absence   of   a   specified
date,   it   was   not   possible   to   levy   surcharge   and
there could not have been an assessment without
a   particular   rate   of   surcharge.   As   stated   above,
in   Suresh N. Gupta   [ CIT   v.   Suresh N. Gupta , (2008)
4   SCC   362]   itself,   the   Court   has   pointed   out   four
different dates which were bothering the assessees
as   well   as   the   Department.   The   choice   of   a
particular date would have material bearing on the
 :  25  :

payment   of   surcharge.   Not   only   the   surcharge   is
different   for   different   years,   it   varies   according   to
the   category   of   assessees   and   for   some   years,
there is no surcharge at all. This can be seen from
the   following   table   prescribing   surcharge   for
different assessment years:
PART I
Finan
ce Act Relevant
section of
the
Finance
Act Para
A Para
B Par
a C Para
D Para
E
IND,
HUF,
BOI,
AOP Cooperati
ve society Fir
m Local
authori
ty Companies
1995 Section
2(3) ­ ­ ­ ­
1996 Section
2(3) ­ ­ ­ ­ 15%
1997 Section
2(3) ­ ­ ­ ­ 7.50%
1998 Section
2(3) ­ ­ ­ ­ ­
1999 Section
2(3) ­ ­ ­ ­ ­
2000 Section
2(3) 10% 10% 10
% 10% 10%
2001 Section
2(3) 12%
or
17% 12% 12
% 12% 13%
2002 Section
2(3) 2% 2% 2% 2% 2%
2003 Section
2(3) 5% 5% 5% 5% 5%
39.2.   The   rate   at   which   tax,   or   for   that   matter
surcharge is to be levied is an essential component
of   the   tax   regime.   In   Govind   Saran   Ganga
 :  26  :

Saran   v.   CST   [1985   Supp   SCC   205   :   1985   SCC
(Tax) 447 : (1985) 155 ITR 144], this Court, while
explaining   the   conceptual   meaning   of   a   tax,
delineated   four   components   therein,   as   is   clear
from   the   following   passage   from   the   said
judgment: (SCC pp. 209­10, para 6)
“ 6 . The components which enter into the
concept of a tax are well known. The first is
the   character   of   the   imposition   known   by
its   nature   which   prescribes   the   taxable
event   attracting   the   levy,   the   second   is   a
clear indication of the person on whom the
levy   is   imposed   and   who   is   obliged   to   pay
the   tax,   the   third   is   the   rate   at   which   the
tax   is   imposed,   and   the   fourth   is   the
measure   or   value   to   which   the   rate   will   be
applied   for   computing   the   tax   liability.   If
those   components   are   not   clearly   and
definitely ascertainable, it is difficult to say
that   the   levy   exists   in   point   of   law.   Any
uncertainty   or   vagueness   in   the   legislative
scheme   defining   any   of   those   components
of the levy will be fatal to its validity.”
It   is   clear   from   the   above   that   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.   This   very
conceptualisation   of   tax   was   rephrased
in   CIT   v.   B.C.   Srinivasa   Setty   [(1981)   2   SCC   460   :
1981 SCC (Tax) 119 : (1981) 128 ITR 294], in the
following manner: (SCC p. 465, para 10)
 :  27  :

“ 10 .   …   The   character   of   computation   of
provisions in each case bears a relationship
to   the   nature   of   the   charge.   Thus   the
charging   section   and   the   computation
provisions together constitute an integrated
code.   When   there   is   a   case   to   which   the
computation provisions cannot apply at all,
it   is   evident   that   such   a   case   was   not
intended   to   fall   within   the   charging
section.”
39.3.   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.   From
the   aforesaid   table   showing   the   different   rates   of
surcharge in different years, it would be clear that
choice of date has to  be formed as in some of the
years, there would not be any surcharge at all.
40.   Pertinently,   the   Department   itself
acknowledged   and   admitted   this   fact   which   is
clear from the manner the issue was debated in a
Conference   of   Chief   Commissioners   which   was
held   sometime   in   the   year   2001.   In   this
Conference,   some   proposals   relating   to
simplification   and   rationalisation   of   procedures
and   provisions   were   noted   in   respect   of   block
 :  28  :

assessment. The foofaraw made in the Conference
by  those  who   had   to  apply   the  provision,  was  not
without   substance   because   of   the   garboil   [ Ed. :
From   the   French   word   gérable:   meaning   a
confused   disordered   state;   turmoil.]   situation
which   this   provision   had   created   and   is   amply
reflected in the proposals which were submitted in
the following terms:
“In the case of a block assessment, there
are   two   problems   in   relation   to   the   levy   of
surcharge.   The   first   is   that   Section   113
does   not   mention   a   Central   Act.   In   the
absence   of   a   reference   to   another   Central
Act   in   the   charging   section,   it   becomes
difficult to justify levy of surcharge. Even if
it is assumed that reference in the Finance
Act   to   Section   113   is   a  sufficient   authority
to   levy   surcharge,   the   second   problem   is
that   the   Finance   Act   levies   surcharge   on
the amount of income tax on the income of
a   particular   assessment   year   whereas   in
the   block   assessment   tax   is   levied   on   the
undisclosed   income   of   the   block   period.
Absence   of   a   specific   assessment   year   in
the   block   assessment   may   render   the   levy
suspect. Yet another problem is the rate of
surcharge   applicable.   To   illustrate,   if   the
search   took   place   on,   say,   4­4­1996,
whether   the   rate   of   surcharge   is   to   be
adopted   as   applicable   to   the   assessment
year   1996­1997   or   the   assessment   year
1997­1998,   the   rate   of   surcharge   being
different   for   the   two   years?   The   provisions
 :  29  :

of   Section   113   or   the   provisions   of   the
Finance   Act   do   not   offer   any   guidance   on
the issue.
Suggestions
The   foregoing   problem   indicates   that
levy of surcharge on undisclosed income is
a   matter   of   uncertainty   and   is   prone   to
litigation.   In   the   circumstances,   it   is
suggested   that   Section   113   may   be
amended retrospectively in order to provide
for   levy   of   surcharge   at   the   rate   applicable
to   the   assessment   year   relevant   to   the
financial   year   in   which   the   search   was
concluded.”
The Chief Commissioners accepted the position, in
no   uncertain   terms,   that   as   per   the   language   of
Section 113, as it existed, it was difficult to justify
levy   of   surcharge.   It   was   also   acknowledged   that
even   if   Section   113   empowered   to   levy   surcharge,
since   block   assessment   tax   is   levied   on   the
undisclosed income of the block period, absence of
specific   assessment   year   in   the   block   assessment
would render the levy suspect.
XXXXXXXXXXXX
44.   The   Finance   Act,   2003,   again   makes   the
position   clear   that   surcharge   in   respect   of   block
assessment   of   undisclosed   income   was   made
prospective. Such a stipulation is contained in the
second   proviso   to   sub­section   (3)   of   Section   2   of
 :  30  :

the   Finance   Act,   2003.   This   proviso   reads   as
under:
“Provided   further   that   the   amount   of
income   tax   computed   in   accordance   with
the   provisions   of   Section   113   shall   be
increased   by   a   surcharge   for   purposes   of
the   Union   as   provided   in   Paras   A,   B,   C,   D
or   E,   as   the   case   may   be,  of   Part   III   of   the
First   Schedule   of   the   Finance   Act   of   the
year  in which the search  is initiated  under
Section   132   or   requisition   is   made   under
Section 132­A of the Income Tax Act:”
Addition   of   this   proviso   in   the   Finance   Act,   2003
further   makes   it   clear   that   such   a   provision   was
necessary  to  provide for surcharge in the cases of
block   assessments   and   thereby   making   it
prospective in nature. The charge in respect of the
surcharge,   having   been   created   for   the   first   time
by   the   insertion   of   the   proviso   to   Section   113,   is
clearly a substantive provision and hence is to be
construed   prospective   in   operation.   The
amendment   neither   purports   to   be   merely
clarificatory   nor   is   there   any   material   to   suggest
that   it   was   intended   by   Parliament.   Furthermore,
an   amendment   made   to   a   taxing   statute   can   be
said  to  be  intended   to   remove  “hardships”   only   of
the   assessee,   not   of   the   Department.   On   the
contrary,   imposing   a   retrospective   levy   on   the
assessee   would   have   caused   undue   hardship   and
for   that   reason   Parliament   specifically   chose   to
make the proviso effective from 1­6­2002.
 :  31  :

45.   The aforesaid discursive of ours also makes
it   obvious   that   the   conclusion   of   the   Division
Bench in   Suresh N. Gupta   [ CIT   v.   Suresh N. Gupta ,
(2008)   4   SCC   362]   treating   the   proviso   as
clarificatory and giving it retrospective effect is not
a   correct   conclusion.   The   said   judgment   is
accordingly overruled.”
9.1 While   passing   the   impugned   judgment   and   order,   the   High
Court   has   relied   upon   earlier   decision   of   this   Court   in   the
case of  Suresh N. Gupta (supra) . However, the said decision
has   been   specifically   overruled   by   this   Court   in   the   case   of
Vatika Township Private Limited (supra) .
9.2 In view of the above, the question of law with respect to levy
of the surcharge under proviso to Section 113 of the Income
Tax   is   held   in   favour   of   the   assessee   and   against   the
revenue. It is observed and held that in the present case 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   deserves   to   be   quashed
 :  32  :

and set aside.
10. Now so far as levy of the interest under Section 158BFA(1) of
the Income Tax Act in absence of any notice served upon the
assessee under Section 158BC of the Act and the liability to
pay   the   interest   under   said   provision   for   the   period   prior   to
01.06.1999   is   concerned,   while   considering   the   issue   the
reason for adding Chapter XIV­B for the block assessment is
required to be considered. The reason, object and purpose of
Chapter   XIV­B   has   been   adequately   dealt   with   and
considered   by   this   Court   in   the   case   of   Vatika   Township
Private   Limited   (supra) .   It   is   observed   and   held   that
Chapter XIV­B 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.   It   is   observed   and   held   that   the   essence   of
the new procedure under Chapter XIV­B is a separate single
assessment of the “undisclosed income”, detected as a result
of search and this separate assessment has to be in addition
 :  33  :

to   the   normal   assessment   covering   the   said   period.
Therefore,   a   separate   return   covering   the   years   of   the   block
period   is   a   pre­requisite   for   making   block   assessment.   It   is
observed and held that Chapter XIV­B is a complete code in
itself   providing   for   self­contained   machinery   for   assessment
of   undisclosed   income   for   the   block   period   of   10   years   or   6
years   as   the   case   may   be.   In   paragraphs   22   to   25,   it   is
observed and held as under:
“Scheme of Chapter XIV­B
22.   Before   we   proceed   to   answer   the   question,   it
would be necessary to keep in mind the scheme of
block   assessment  introduced   in   Chapter   XIV­B   to
the Finance Act, 1995 w.e.f. 1­7­1995.
23.   As   already   mentioned   in   brief   by   us,   Chapter
XIV­B   of   the   Act   which   deals   with   block
assessment   lays   down   a   special   procedure   for
search   cases.   The   main   reason   for   adding   these
provisions in the Act was to curb tax evasion and
expedite   as   well   as   simplify   the   assessments   in
such search cases:
23.1.   Undisclosed   incomes   have   to   be   related   in
different years in which income was earned under
block   assessment.   This   is   because   in   such   cases,
the “block period” is for previous years relevant to
10/6 assessment years and also the period of the
 :  34  :

current previous year up to the date of the search
i.e. from 1­4­2000 to 17­1­2001, in this case. 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 prerequisite for making block
assessment.   Under   the   said   procedure,   the
Explanation   is   inserted   in   Section   158­BB,   which
is the computation section, explaining the method
of   computation   of   “undisclosed   income”   of   the
block   period.   It   is   now   well   accepted   that   this
Chapter   is   a   complete   code   in   itself   providing   for
self­contained   machinery   for   assessment   of
undisclosed   income   for   the   block   period   of   10
years or 6 years, as the case may be.
23.2.   In   case   of   regular   assessments   for   which
returns   are   filed   on   yearly   basis,   Section   4   of   the
Act is the charging section. However, at what rate
the income is to be taxed is specified every year by
Parliament   in   the   Finance   Act.   In
contradistinction, when it comes to payment of tax
on   the   undisclosed   income   relating   to   the   block
period,   the   rate   is   specified   in   Section   113   of   the
Act.   It   remains   static   at   60%   of   the   undisclosed
income   which   is   the   categorical   stipulation   in
Section   113   of   the   Act.   Section   158­BA(2)   of   the
Act   clearly   states   that   the   total   undisclosed
income   relating   to   the   block   period   “shall   be
charged   to   tax”   at   the   rates   specified   under
Section   113   as   income   of   the   block   period
 :  35  :

irrespective   of   previous   year   or   years.   Under
Section   113  of  the   Act,  the   undisclosed   income  is
chargeable to tax at the rate of 60%.
24.   From   the   above,   it   becomes   manifest   that
Chapter   XIV­B   comprehensively   takes   care   of   all
the   aspects   relating   to   the   block   assessment
relating   to   undisclosed   income,   which   includes
Section   156­BA(2)   as   the   charging   section   and
even the rate at which such income is to be taxed
is mentioned in Section 113 of the Act. No doubt,
Section   4   of   the   Act   is   also   a   charging   section
which   is   made   applicable   on   “total   income   of
previous year”. As per Section 2(45), “total income”
means   the   total   amount   of   income   referred   to   in
Section   5,   computed   in   the   manner   laid   down   in
the Act. Section 5 of the Act enumerates the scope
of   total   income   and   prescribes,   inter   alia,   that   it
would   include   all   income   which   is   received   or   is
deemed   to   be   received   in   India   in   any   previous
year by or on behalf of a person who is a resident.
No   doubt,   undisclosed   income   referred   to   in
Chapter   XIV­B   is   also   an   income   which   was
received   but   not   disclosed,   therefore,   in   the   first
blush,   the   argument   of   the   Department   that
undisclosed   income   referred   to   in   Chapter   XIV­B
is   also   a   part   of   total   income   and   consequently
Section 4 becomes the charging section in respect
thereof   as   well.   However,   a   little   closer   scrutiny
leads   us   to   conclude   that   that   is   not   the   position
as   per   the   scheme   of   Chapter   XIV­B.   In   the   first
place, income referred to in Section 5 talks of total
income of any “previous year”. As per Section 2(34)
of the Act, “previous year” means previous year as
 :  36  :

defined   in   Section   3.   Section   3   lays   down   that
previous   year   means   “the   financial   year
immediately   preceding   the   assessment   year”.
Undisclosed   income   referred   to   in   Chapter   XIV­B
is   not   relatable   to   the   previous   year.   On   the
contrary, it is for the block period which may be 6
years or 10 years, as the case may be.
25.   Consequently,   as   already   mentioned,   while
analysing   the   scheme   of   Chapter   XIV­B,   such
chapter   is   a   complete   code   in   respect   of
assessments   of   “undisclosed   income”.   Not   only   it
defines   what   is   undisclosed   income,   it   also   lays
down   the   block   period   for   which   undisclosed
income   can   be   taxed.   Further,   it   also   lays   down
the   procedure   for   taxing   that   income.   It   is   very
pertinent   to   note   at   this   stage   that   for   this
purpose,   specific   provision   in   the   form   of   Section
158­BA(2) is inserted making it a charging section.
Thus,   a   diagnostic   of   Chapter   XIV­B   of   the   Act
leads   to  irresistible  conclusion  that it  contains  all
the   provisions   starting   from   charging   section   till
the   completion   of   assessment,   by   prescribing   a
special   procedure   in   relation   thereto,   making   it   a
complete   code   by   itself.   Looking   at   it   from   this
angle,   the   character   and   nature   of   “undisclosed
income”   referred   to   in   Chapter   XIV­B   becomes
quite   distinct   from   “total   income”   referred   to   in
Section 5. It is of some significance to observe that
when   a   separate   charging   section   is   introduced
specifically,   to   assess   the   undisclosed   income,
notwithstanding   a   provision   in   the   nature   of
Section 4 already on the statute book, this move of
the   legislature   has   to   be   assigned   some   reason,
 :  37  :

otherwise,   there   was   no   necessity   to   make   a
provision in the form of Section 158­BA(2). It could
only be that for assessing undisclosed income, the
charging provision is Section 158­BA(2) alone.”
10.1 Thus,   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. At
this   stage,   it   is   required   to   be   noted   that   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  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
 :  38  :

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 XIV­B
and on the delay in filing the return, there shall be liability to
pay interest leviable under Section 158BFA(1).
10.2 At   this   stage,   the   Notes   on   Clauses   and   the   memorandum
explaining   the   said   provision   which   is   reported   in   (1999)
236 ITR (St) 141 and 187  are required to be considered and
reproduced, which read as under:
“Clause   63   seeks   to   amend   section   140A   of   the
Income Tax Act relating to self­assessment.
 :  39  :

Under the existing provisions, if any tax is payable
on the basis of any return required to be furnished
under section 139 of section 142 or section 148, the
assessee shall be liable to pay such tax along with
interest payable under the Act before furnishing the
return   and   the   return   shall   be   accompanied   by
proof of payment of such tax and interest.
It   is   proposed   to   provide   that   any   person   before
filing   of   the   return   under   section   158BC   shall   also
be liable to pay tax and interest in accordance with
the   provisions   contained   in   sub­section   (1)   of
section 140A.
It   is   further   proposed   to   provide   that   after   a   block
assessment   under   section   158BC   has   been   made,
any   amount   paid   under   sub­section   (1)   of   section
140A   shall   be   deemed   to   have   been   paid   towards
the block assessment under section 158BC.
These   amendments   will   take   effect   from
01.06.1999.”
Further,   the   Memorandum   Explaining   the
Provisions reads as follows,
“Under   section   140A   of   the   Income   Tax   Act,   the
assessee   is   required   to   pay   tax   on   the   basis   of
income   declared   in   the   return   and   such   tax   is
required   to   be   paid   before   the   return   is   furnished
and the return is accompanied by the proof of such
payment.   The   existing   provisions   of   section   140A
are   not   applicable   to   Chapter   XIV­B   relating   to   the
assessment   of   the   income   of   the   block   period   in
search   and   seizure   cases.   There   is   also   no
corresponding   provision   in   Chapter   XIV­B   for
payment of self­assessment tax at the time of filing
the   return.   Therefore,   the   tax   on   the   admitted
income   declared   in   the   return   cannot   be   collected
 :  40  :

till   the   assessment   is   completed.   In   view   of   the
above,   it   is   proposed   to   amend   section   140A   of
Income   Tax   Act   to   provide   for   the   requirement   of
payment of self­assessment tax at the time of filing
the   return   under   section   158BC   relating   to   block
assessment of search cases.”
10.3 Thus, on conjoint reading of the above 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   XIV­B   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
 :  41  :

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 statute­book whose income
are   subject   to   be   assessed   under   Chapter   XIV­B,   in   section
140A compelling them to pay self­assessment tax. Thus, the
interest   under   Section   158BFA   is   leviable   on   standalone
basis for late or non­filing 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.   We   are   in   complete   agreement   with   the   view
taken by the High Court.
10.4 Now so far as the main 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
 :  42  :

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.
It is required to be noted that 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. 
10.5 Now so far as 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
 :  43  :

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.
Clause 64 of the Finance Bill 2002, provides that:­
“In   section   158BD   of   the   Income­tax   Act,   after   the
words   “that   Assessing   Officer   shall   proceed”,   the
words,   figures   and   letters   “under   Section   158BC”
shall   be   inserted   with   effect   from   the   1 st
  day   of
June, 2002.”
The Notes on Clauses appended to Clause 64 of the Finance
Bill 2002 states the following:­
“It   is   proposed   to   insert   the   words   “under   section
158BC”   after   the   words   “that   Assessing   Officer
shall   proceed”   so   as   to   clarify   that   the   Assessing
Officer   shall   proceed   against   such   other   person
under section 158BC”.
10.6 At   this   stage,   it   is   required   to   be   noted   that   as   observed   by
this Court in the case of   Vatika Township  Private Limited
(supra) ,   Chapter   XIV­B   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 other than a person with respect to whom search
 :  44  :

was made. As observed Chapter XIV­B is a complete code in
itself   providing   for   self­contained   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. At this stage, it
is required to be noted that in the present case as such M/s.
Khoday India Limited, and M/s. Khoday Breweries Limited –
the   persons   searched   were   issued   notice   under   Section
158BC and in case of K.L. Swamy, who is the “other person”,
the notice under Section 158BD has been issued.
10.7 Therefore,   the   submission   on   behalf   of   the   assessee   that   in
absence of any notice under Section 158BC served upon the
 :  45  :

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.
11 In   view   of   the   above   and   for   the   reasons   stated   above,   the
present appeals succeed  in part.  It is observed and  held that
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
revenue   and   against   the   assessee.   The   impugned   judgment
and order passed by the High Court is hereby  confirmed and
 :  46  :

it is observed and held that the assessee – persons other than
searched   persons   shall   be   liable   to   pay   the   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
hereby confirmed. Present appeals are accordingly disposed of
in terms of the above. There shall be no orders as to costs. 
………………………………….J.
[M.R. SHAH]
NEW DELHI;    ………………………………….J.
JANUARY 13, 2023. [C.T. RAVIKUMAR]
 :  47  :