1974 (4) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Constitutionality of Section 139(1) read with Section 139(4) of the Income-tax Act, 1961, concerning the levy of interest on registered firms.
2. Whether the interest levied under Section 139(1) is compensatory or penal in nature.
3. Classification of registered firms for the purpose of interest calculation under Section 139(1) and its validity under Article 14 of the Constitution.

Detailed Analysis:

1. Constitutionality of Section 139(1) read with Section 139(4) of the Income-tax Act, 1961:

The petitioners, all registered firms, challenged the levy of interest under Section 139(1) read with Section 139(4) of the Income-tax Act, 1961, arguing that it was discriminatory and violative of Article 14 of the Constitution. They contended that interest should be levied on the actual tax payable by them, not on the tax that would have been payable if they were unregistered firms. The court noted that for a classification to be valid under Article 14, it must satisfy two tests: intelligible differentia and reasonable nexus with the object intended to be achieved.

2. Nature of Interest Levied under Section 139(1):

The court examined whether the interest levied under Section 139(1) was compensatory or penal. It referred to various judgments, including the Gujarat High Court's decision in Additional Commissioner of Income-tax v. Santosh Industries, which held that the interest levied under Section 139(1) was compensatory. The court agreed with this view, stating that the interest was intended to compensate the government for the delay in tax payment caused by the delayed filing of returns, rather than to penalize the assessee.

3. Classification of Registered Firms and Article 14:

The court noted that the loss suffered by the government due to delayed tax payment was the same regardless of the type of assessee. Therefore, the interest should be correlated to the amount of tax withheld, not the type of assessee. The court found that levying interest on registered firms as if they were unregistered firms resulted in a higher interest burden, which was more in the nature of a penalty than compensation. This classification did not bear a reasonable relationship to the object of Section 139(1), which was to compensate for the delay in tax payment.

The court distinguished this case from the Supreme Court's decision in Jain Brothers v. Union of India, which upheld the constitutionality of Section 271(2) concerning penalties. The court noted that the object of Section 271(2) was to levy penalties on erring assessees, whereas the object of Section 139(1) was to compensate for delayed tax payments. Therefore, the rationale in Jain Brothers could not be extended to Section 139(1).

The court disagreed with the decisions of the Madras High Court and the Gauhati High Court, which had upheld the validity of Section 139(1) as it applied to registered firms, finding that those decisions were based on the incorrect assumption that the interest was penal in nature.

Conclusion:

The court held that Section 139(1) read with Section 139(4), to the extent it required registered firms to pay interest on the tax assessed as if they were unregistered firms, was violative of Article 14 of the Constitution and therefore void. The orders of assessment were quashed to the extent that interest was levied as if the petitioners were unregistered firms. The assessing authorities were directed to amend the orders by levying interest on the arrears of tax payable by the petitioners as registered firms.

A writ was issued accordingly, with no order as to costs.