1980 (6) TMI 9 - HC - Income Tax

Summary

Issues Involved:
1. Validity of sub-section (4) of section 139 of the Income-tax Act, 1961 regarding interest payment by registered firms.
2. Discrimination under Article 14 of the Constitution.
3. Applicability of the Supreme Court decision in Jain Brothers v. Union of India.
4. Nature of interest levied under section 139 as compensatory or penal.

Issue-wise Detailed Analysis:

1. Validity of sub-section (4) of section 139 of the Income-tax Act, 1961 regarding interest payment by registered firms:
The primary issue was whether sub-section (4) of section 139 of the Income-tax Act, 1961, which required registered firms to pay interest on the notional tax amount as if they were unregistered firms, was valid. The respondents, who were registered firms, argued that this provision was void as it violated Article 14 of the Constitution by being discriminatory. The court observed that while all taxpayers were required to pay interest on the actual tax withheld, registered firms were uniquely burdened with interest on a notional amount, which was not due to the revenue. The court held that this provision was discriminatory against registered firms and thus violative of Article 14.

2. Discrimination under Article 14 of the Constitution:
Article 14 guarantees equality before the law. The court applied the principles of reasonable classification and rational nexus to determine if the differential treatment of registered firms was justified. The court found that while registered firms enjoyed certain tax benefits, the differential treatment in the matter of interest levy under section 139 was not justified. The court noted that the interest under section 139 was compensatory, meant to compensate for the delay in tax payment, and not penal. Therefore, requiring registered firms to pay interest on a notional amount was arbitrary and lacked a rational nexus to the object of compensating the revenue.

3. Applicability of the Supreme Court decision in Jain Brothers v. Union of India:
The department relied on the Supreme Court decision in Jain Brothers v. Union of India, which upheld the validity of section 271(2) of the Act, imposing penalties on registered firms on the basis of tax payable if they were unregistered. The court distinguished this case, noting that section 271 dealt with penalties, which are penal in nature, whereas section 139 dealt with interest, which is compensatory. The court highlighted several differences, such as the exemption of registered firms from penalty under certain conditions, which did not apply to interest under section 139. Therefore, the court held that the ratio in Jain Brothers was inapplicable to the validity of section 139.

4. Nature of interest levied under section 139 as compensatory or penal:
The court emphasized that the interest under section 139 was compensatory, meant to compensate the revenue for the delay in receiving tax payments. The court cited various judgments supporting this view. The court explained that interest is typically payable for the use of another sum of money and should be proportional to the amount and duration of non-payment. The court found that the impugned provision required registered firms to pay interest on a notional amount, which was not due to the revenue, thus making it arbitrary and unjust. The court concluded that the provision was discriminatory and violative of Article 14.

Conclusion and Order:
The court dismissed the appeals, struck down the words "a registered firm or" in sub-clause (a) of clause (iii) of the proviso to sub-section (1) of section 139 of the Income-tax Act, 1961, and affirmed the consequential orders made in the writ petitions. The court held that the impugned provision was violative of Article 14 of the Constitution and declared it void.