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TMI Blog1984 (4) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... that sub-section, as if it was an unregistered firm for the purpose of computing the interest. The registered firm is thus singled out for discriminatory treatment among the various categories of taxpayers and is required to pay interest on amounts to which it is not liable to be assessed. The interest levied on a registered firm with reference to the tax payable by an unregistered firm, the petitioners contend, has resulted in an unreasonable classification having no rational nexus with the object sought to be achieved, and is arbitrary, unfair and violative of article 14 of the Constitution. Section 139 casts an obligation on every person liable to be assessed under the Act, to furnish the return of his income on or before a specified date mentioned under sub-s. (1). In the case of a person who, in the opinion of the ITO, is assessable under the Act, notices may be served on him under sub-s. (2) requiring him to furnish within 30 days the return of his income. It is up to the officer, under sub-s. (1) or (2), to extend the date for furnishing the return. Notwithstanding such extension, interest is chargeable in accordance with the provisions of sub-s. (8). However, as stated in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt, for the purpose of assessment, so long as the registration continues in force; but is withheld only for the purpose of computation of the interest. To that limited extent, the lower rate of tax will not avail in the event of default to file the return on the due date. The question is whether Explanation 2 to s. 139(8)(a) which so provides is violative of article 14 of the Constitution ? I shall now read sub-s. (8)(a) of s. 139 and Explanation 2 to that subsection. " 139(8)(a). Where the return under sub-section (1) or sub-section (2) or sub-section (4) for an assessment year is furnished after the specified date, or is not furnished, then whether or not the Income-tax Officer has extended the date for furnishing the return under subsection (1) or subsection (2), the assessee shall be liable to pay simple interest at twelve per cent. per annum, reckoned from the day immediately following the specified date to the date of the furnishing of the return or, where no return has been furnished, the date of completion of the assessment under section 144, on the amount of the tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if any, pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. " (emphasis supplied) If the word "penalty" in the above passage were to be substituted by "interest", then the principle stated by the Supreme Court would be as much applicable to interest as to penalty. If this were the position, the challenge against Explanation 2 to sub-s. (8)(a) of s. 139 would be totally unsustainable. It has been so held by several High Courts : Mahendrakumar Ishwarlal & Co. v. Union of India [1973] 91 ITR 101 (Mad); Mahendrakumar Iswarlal & Co. v. Union of India [1974] 94 ITR 65 (Mad); Ganesh Das Sreeram v. ITO [1974] 93 ITR 19 (Gauhati); Chhotalal & Co. v. ITO [1976] 105 ITR 230 (Guj); Jiwanmal Hospital v. ITO [1979] 119 ITR 439 (MP); Hindustan Steel Forgings v. CIT [1980] 121 ITR 793 (Punj): Mohanlal Soni v. Union of India [1983] 143 ITR 436 (Cal). However, counsel for the petitioners, Shri. P.C. Chacko, argues ably to the contrary. He says that the principle applicable to penalty is not applicable to interest, for penalty is a punishment in the nature of a deterrent while interest is a compensation commensurate with the loss. Interest is levied under the Act to compensate the loss suffered by the Revenue on account of the delayed furnishing of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not be wrong to say that such interest is compensatory in character and not Penal." (emphasis supplied) It would seem from the above observation that the object of a provision in a taxing statute charging interest is to compensate the Revenue for the tax withheld by the assessee. Interest is normally calculated at the prescribed rate on the basis of the actual amount of the tax withheld and the extent of delay in paying it. The question, however, is whether the legislature in specifically providing, as it does under Explanation 2 to s. 139(8)(a), that interest has to be calculated, not with reference to the tax withheld by the registered firm, but with reference to the tax which the assessees would have been liable to pay had it been an unregistered firm, imposes a penalty, and, if so, whether such a provision is ultra vires ? In M. Nagappa v. ITO [1975] 99 ITR 32, E. S. Venkataramiah J. of the Karnataka H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such as Maneka Gandhi (Smt.) v. Union of India, AIR 1978 SC 597; Ramana Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628 and Ajay Hasia v. Khalid Mujib Sehravardi, AIR 1981 SC 487, can it be said that the impugned provision suffers from the vice of ultra vires ? In C. A. Abraham v.ITO [1961] 41 ITR 425, the Supreme Court characterised the penalty payable under s. 28 of the Indian I.T. Act, 1922, as an additional tax. The court said (p. 430): " By section 28, the liability to pay additional tax which is designated penalty is imposed in view of the dishonest contumacious conduct of the assessee. It is true that the liability arises only if the Income-tax Officer is satisfied about the existence of the conditions which give him jurisdiction and the quantum thereof depends upon the circumstances of the case." (emphasis supplied) This principle was restated by the Supreme Court in CIT v. Bhikaji Dadabhai & Co. [1961] 42 ITR 123. In CIT v. Anwar Ali [1970] 76 ITR 696, the Supreme Court referring to the observation in C. A. Abraham [1961] 41 ITR 425 (SC), held that one of the principal objects in enacting s. 28 (1922 Act) was to provide a deterrent against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objectives, all the three elements denote the whole procedure for imposing liability under the Act. In that sense, like in the case of penalty, so in the case of interest, the levy is in the nature of an additional tax or at any rate an amount payable in addition to tax. Section 271 does not authorise the imposition of penalty until the competent officer is satisfied that a person has without reasonable cause failed to furnish the returns or comply with the notice or direction or has concealed the particulars of his income or furnished inaccurate particulars of such income. The satisfaction of the officer is a condition precedent to the imposition of penalty. Section 139(8), on the other hand, provides for automatic accrual of interest in the event of default in furnishing the return. Interest accrues whether or not the period for furnishing the return has been extended, although the ITO has the power in certain cases to reduce or waive the interest. While the object of s. 271 is sanction or deterrence, even when it enriches the Revenue, the object of s. 139(8) is basically compensatory, although, as I shall presently show, it is neither fully compensatory nor is it totally withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of revenue. At the same time, although s. 139(8) is not intended to be penal, as in the case of s. 271, the very fact that a registered firm would be compelled to pay higher interest computed with reference to the tax payable by an unregistered firm is a discouragement and in that sense a deterrence against default as well as its statutorily intended consequence (See Mahendrakumar Ishwarlal & Co. v. Union of India [1973] 91 ITR 101 (Mad)). In V. Venugopala Ravi Varma Rajah v. Union of India [1969] 74 ITR 49, the Supreme Court stated (p. 54): " Equal protection clause of the Constitution does not enjoin equal protection of the laws as abstract propositions ...... Again tax laws are aimed at dealing with complex problems of infinite variety necessitating adjustment of several disparate elements ...... A taxing statute is not, therefore, exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations or objects. " [See also Twyford Tea Co. Ltd. v. State of Kerala AIR 1970 SC 1133]. The legislature had an object in classifying the registered firms as group apart and separate f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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