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PETITIONER: GANESH DASS SREERAM, ETC. A

       Vs.

RESPONDENT: INCOME TAX OFFICER, ’A’ WARD, SHILLONG AND OTHERS ETC.

DATE OF JUDGMENT30/10/1987

BENCH: DUTT, M.M. (J) BENCH: DUTT, M.M. (J) PATHAK, R.S. (CJ) MISRA RANGNATH

CITATION:  1988 AIR  427            1988 SCR  (1) 689  1987 SCC  Supl.  442     JT 1987 (4)   208  1987 SCALE  (2)894

ACT:      Income Tax  Act, 1961-Interest  charged by  Income  Tax officer  for  delayed  filing  of  returns-Legality  of-Sub- section (4)  of section  139 of  the Act, as it stood before April l, 1971-Constitutional validity of. c

HEADNOTE: %      The appellants,  registered firms  under the Income Tax Act, 1961,  filed delayed  returns. The  Income Tax  officer assessed the  appellants under section 143(3) of the Act and determined the  total incomes  of  the  appellants  and  the amounts of  the tax  payable by them. The Income Tax officer also determined  and added, under sub-section (4) of section 139 of  the Act,  the amounts  of interest on the amounts of tax payable by the appellants. The appellants challenged the charging of  interest in  the High  Court by writ petitions. The High  Court dismissed  all but some writ petitions which were allowed  in part  to the  extent that  the  Income  tax officer was  directed to  take into  account the advance tax paid by  the assessees  while calculating  the interest. The appellants have  filed Civil Appeals Nos. 1032-1036 of 1973, 1927-1933 of  1978 and  1288 and  1289 of  1980 against  the decision of the High Court.      Allowing Civil  Appeal No.  1035 of 1973 and dismissing all the other appeals, the Court, ^      HELD: Sub-section  (4) of section 139 of the Income Tax Act is  a substantive  provision, which does not provide for the making  of an  application to the Income Tax officer for extention of the date for furnishing return. The sub-section provides that  even though  a person  does not  furnish  the return within  the time allowed under sub-section (1) or (2) of section  139, yet  he may furnish the same before the end of  four   assessment  years   concerned.  The   substantive provisions of  subsections (1)  and  (2)  specify  the  time within which the return has to be filed. The provisos to the sub-sections confer  power  on  the  Income-tax  officer  to extend the date for filing the return on an application. The expression "time allowed" in sub-section (4) is not confined

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only to  the extension  of time  granted by  the  Income-tax officer but also to the time originally fixed for 690 filing the  returns under  sub-section(1)  and  (2).  [694G- H;695A-D]      The Income-Tax  officer is  entitled to charge interest in accordance  with the  provisions of  clause (iii)  of the proviso to  sub-section (1)  of section  139 in a case where time has  been extended  by the  Income Tax  officer to file returns on  application made  by the assessee and the return is not filed within the time allowed, and in a case where no such application  has been  made by  the assessee,  and  the return is  filed beyond  the time allowed but before the end of the four assessment years concerned. [695D-F]      Secondly, as decided by this Court in Central Provinces Manganese Ore Co. Ltd. v. Commissioner of Income-Tax, [1986] 160 ITR  961, and Commissioner of Income Tax A.P. v. Chandra Sekhar, (1955) 151 ITR 433, the interest is levied by way of compensation, and  not by way of penalty as contended by the appellants. [696A]      The contention of the appellants that the provisions of Sub-Section (4)  of section  139, read with clause (iii) (a) of  the  proviso  to  Sub-Section  (1)  of  section  139  is discriminatory  and   violative  of   Article  14   of   the Constitution  because   Sub-Section  (4)   has  placed   the registered firms  in a  separate category  inasmuch as  they have to pay interest calculated on the amount of tax payable by them  as unregistered  firms, and  a registered  firm  is treated  as   an  unregistered   firm,   for   purposes   of qualification of  interest, is  not comprehensible,  Section 139 (4)  read with clause (iii)(a) of the proviso to section 139(1), as  it stood  prior to April 1, 1971, has placed the registered firms  and the  unregistered firms  on  the  same footing  and   is  not   violative  of  Article  14  of  the Constitution and is quite legal and valid. [697H; 698A-D]      Where advance  tax duly covers the entire amount of the tax assessed,  there is no question of charging a registered firm with  interest if  the return  is filed beyond the time allowed, regard  being given  to the  fact that  payment  of interest is  only compensatory  in  nature.  As  the  entire amount of  the tax  is paid  by  way  of  advance  tax,  the question of  payment of any compensation does not arise, and accordingly, in  the facts  and circumstances of the case in the C.A. No. 1035 of 1973, the Income Tax of officer was not justifed in charging interest, and the assessee in that case is entitled to refund of the amount paid by way of interest. [699B-C, E]      Commissioner of  Income- Tax,  A .  P.  v.  M.  Chandra Sekhar, [1955]  151 ITR 433, Central Provinces Manganese ore Co. Ltd.  v. Commissioner  of Income  Tax, [1986] 160 I.T.R. 961; Jain Brothers 691 and others  v. Union of India and others, [1970] 77 ITR 109; M.  Nagappa   v.  Income  Tax  officer,  Central  Circle  I, Bangalore, [1975]  99 ITR  33; Mahendra  Kumar Ishwarlal and Co. v,  Union of  India, [1973] 91 ITR 101 and [1974] 94 ITR 65; Chhotalal  & Co.  v. Income-Tax  officer; [1976] 105 ITR 230; Jiwanmal Hospital v. Income-Tax officer, [1979] 119 ITR 439; Hindustan  Steel Forges  v. Commissioner of Income-Tax, [1980] 121  ITR 793  and Mohanlal  Soni v.  Union of  India, [1983] 143 ITR 436, referred to.

JUDGMENT:

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    CIVIL APPELLATE  JURISDICTION: Civil  Appeal Nos  1032- 1036 of 1973.      From the  Judgment and  order dated  16.2.1973  of  the Gauhati High Court in Civil Rule Nos. 1142 to 1146 of 1971      S.T. Desai,  R.P Agarwala,  Mrs Kum  Kum  Sen,  Praveen Kumar, D.N.  Mukherjee, Ranjan  Mukherjee and N.R. Choudhary for the Appellants.      Dr. V.  Gauri Shanker  and Miss  A. Subhashini  for the Respondents.      The Judgment of the Court was delivered by      DUIT, J.The  appellants, who  are all  registered firms within the  meaning of  section 2(39) of the Income-Tax Act, 1961, hereinafter  referred to  as ’the Act’, have preferred these appeals  against the  judgments of  the  Gauhati  High Court overruling  the challenge  of the appellants as to the legality of  the interest  charged by the Income-tax officer for the  delayed filing  of  returns  and  also  as  to  the constitutional validity of sub-section (4) of section 139 of the Act, as it stood before April 1, 197 l      The relevant  provisions of  section 139,  as it  stood prior to April 1. 1971, are as follows:-           "S. 139(1).  Every person,  if his total income ..           ......  during  the  previous  year  exceeded  the           maximum amount  which is not chargeable to Income-           tax,  shall   furnish  a   return  of  his  income           .................                (a)  in the case of every person .. .. before                     the expiry of six months from the end of                     the previous 692                     year ...  , or  before the  30th day  of                     June of  the assessment  year, whichever                     is later;                (b)  in  the  case  of  every  other  person,                     before the  30th  day  of  June  of  the                     assessment year:                Provided that,  on an application made in the           pre scribed manner, the Income-tax officer may, in           his discretion, extend the date for furnishing the           return-                (i)  in the  case of  any person  whose total                     income includes any income from business                     or  profession   the  previous  year  in                     respect of  which expired  on or  before                     the 31st  day of  December of  the  year                     immediately  preceding   the  assessment                     year, and  in the  case  of  any  person                     referred to  in  clause  (b),  up  to  a                     period not extending beyond the 30th day                     of  September  of  the  assessment  year                     without charging any interest;                (ii) in the  case of  any person  whose total                     income includes any income from business                     or  profession   the  previous  year  in                     respect of  which expired after the 31st                     day of  December of the year immediately                     preceding the assessment year, up to the                     31st day  of December  of the assessment                     year without charging any interest; and                (iii)up to  any  period  falling  beyond  the                     dates mentioned in clauses (i) and (ii),                     in which case, interest at nine per cent                     per annum shall be pay able from the 1st                     day  of   October  or  the  1st  day  of                     January, as  the case  may  be,  of  the

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                   assessment  year  to  the  date  of  the                     furnishing of the return-                     (a)  in the case of a registered firm or                          an unregistered firm which has been                          assessed  under   clause   (b)   of                          section 183,  on the  amount of tax                          which would  have been  payable  if                          the firm  had been  assessed as  an                          unregistered firm and                     (b)  in any other case, on the amount of                          tax payable on the total income. 693                          reduced by the advance tax, if any,                          paid or by any tax deducted at                          source, as the case may be.                (2). In  the case  of any  person, who in the           Income-tax officer’s  opinion, is assessable under           this Act,  whether on  his own  total income or on           the total  income of  any other  person during the           previous year,  the Income-tax officer may, before           the end  of the  relevant assessment year, serve a           notice upon  him requiring  him to furnish, within           thirty days  from  the  date  of  service  of  the           notice, a  return of  his income  or the income of           such other person during the previous year, in the           prescribed form  and verified  in  the  prescribed           manner setting forthwith such other particulars as           may be prescribed;                Provided  that   on  an  application  in  the           prescribed manner  the Income-tax  officer may, in           his discretion, extend the date for the furnishing           of the  return, and  when the  date for furnishing           the  return,   whether  fixed   originally  or  on           extension, falls  beyond the 30th day of September           or, as  the case  may be, the 31st day of December           of the  assessment year,  the provisions  of  sub-           clause (iii)  of the  proviso to  sub-section ( 1)           shall apply.                (4). Any  person  who  has  not  furnished  a           return within  the time  allowed to him under sub-           section (1)  or sub-section  (2)  may  before  the           assessment is  made furnish  the  return  for  any           previous year  at any  time before the end of four           assessment years  from the  end of  the assessment           year  to   which  the   return  relates,  and  the           provisions of  sub-clause (iii)  of the proviso to           sub-section (1) shall apply in every such case."      In  all  these  cases,  it  is  not  disputed  that  no application for  extension of  time to file returns was made by the  appellants for  the relevant  assessment years.  The returns were  submitted before  the assessment  was made and also  before  the  end  of  the  four  assessment  years  as mentioned in  sub-section (4) of section 139 of the Act. The Income-tax officer  assessed the  appellants  under  section 143(3) of  the Act  and determined  the total incomes of the appellants and  the amounts  of tax payable by them. In view of sub-section  (4) of  section 139,  the Income tax officer also added  to the  amount of tax interest calculated at the rate of  six per  cent per  annum on the amount of tax which would have H 694 been payable  if the firms had been assessed as unregistered firms. A  Being aggrieved  by the charging of interest under sub-section (4)  read with clause (iii)(a) of the proviso to sub-section (  I) of  section 139 of the Act, the appellants

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filed  writ   petitions  before   the  Gauhati  High  Court, challenging the  charging of  interest and  the validity  of subsection (4)  read with  clause (iii)(a) of the proviso to sub-section (  1) of  section 139 of the Act as violative of Article 14  of the  Constitution The  Gauhati High Court, as stated already,  overruled the  challenge and  dismissed the writ petitions  except that some writ petitions were allowed in part  only as  the High  Court  directed  the  Income-tax officers to  take into  account the  advance tax paid by the assessees  before  calculating  the  interest.  Hence  these appeals.      The first  contention made  on behalf of the appellants is that  it is  clear from the provisos to sub-sections ( 1) and (2) of section 139 of the Act that unless an application is made for extension of the date for furnishing the return, the question  of charging  any interest on the amount of tax does not  at all arise. A similar contention was made before the High  Court  by  the  appellants,  but  the  High  Court overruled the same.      Much  reliance   has  been  placed  on  behalf  of  the appellants on  an observation  of this Court in Commissioner of Income-tax,  A.P. v.  M. Chandra  Sekhar, [1955]  151 ITR 433. In  that case,  this Court has observed that it is only where the Income-tax officer extends the time for furnishing the return  beyond September 30, or December 31, as the case may be,  the interest  becomes payable  The said observation has been  made by this Court relating to clause (iii) of the proviso to  sub-section ( 1) of section 139 of the Act while considering  the   question  whether  charging  of  interest indicated that  the Income-tax  officer was  satisfied  that there was  sufficient cause  for the  delay  in  filing  the return  of  income  and  whether  the  cancellation  of  the penalties levied  under section  27(1)(a)  of  the  Act  was justified. Nothing  has, however, been said by this Court in respect of sub-section (4) of section 139 of the Act.      Sub-section (4)  is a substantive provision and it does not provide  for making  an application  to  the  Income-tax officer for  the purpose  of extension  of the  date for the furnishing of  the return.  What is  provided in sub-section (4) is that even though a person does not furnish the return within the  time allowed  to him  under sub-section  (I)  or subsection (2),  yet he  may furnish the same before the end of the four assessment years concerned. 695      The substantive  provision of  sub-sections (l) and (2) of section  139 specify the time within which the return has to be  filed The provisos to sub-sections (1) and (2) confer power on  the Income-tax  officer to  extend  the  date  for filing the  return on  an application in that regard made by the assessee.  So, it  is clear  that the  expression  ’time allowed’ in  sub-section (4)  of section 139 is not confined only to  the extension  of time  granted by  the  Income-tax officer, but  also to  the time  originally  fixed  for  the filing of returns under sub-sections ( 1) and (2) of section 139 of the Act.      There may  be two types of cases for the late filing of returns, namely  ( 1)  the assessee  after getting  the date extended by the Income tax officer under sub-section ( 1) or sub-section (2) of section 139 of the Act, does not file the return within  the extended  date, but files the same before the end  of four  assessment years  concerned  and  (2)  the assessee without  filing any  application for  extension  of time, files  the return  beyond the period mentioned in sub- section (  1) or  sub-section (2) but before the end of four assessment years  in question. In either case, the provision

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of clause (iii) of the proviso to sub-section (l) of section 139 will  apply. In other words, the Income-tax officer will be entitled  to charge  interest on  the amount  of  tax  in accordance with the provision of clause (iii) of the proviso to sub-section  ( 1)  of section  139. Thus,  where time has been extended  by the  Income-tax officer  on an application made in  that regard  by the  assessee and the assessee does not file  the return  within the  time allowed  and where no such application  has been  made by  the assessee,  but  the return is  filed by  him beyond the time allowed, but before the end  of the  four assessment  years concerned, in either case, the  Income-tax officer  will be  entitled  to  charge interest in accordance with the provision of clause (iii) of the proviso  to sub-section  (1) of  section 139 of the Act. There is,  therefore, no  substance in the contention of the appellants  that   as  the   appellants  had  not  made  any application praying for the extension of time for the filing of returns,  the Income-tax  officer  had  no  authority  to charge interest  under the  provision of clause (iii) of the proviso to sub-section ( I) of section 139 of the Act      The next  question that  requires consideration relates to the validity of sub-section (4) read with clause (iii)(a) of the  proviso to  subsection (I)  of section  139.  It  is submitted by  the learned Counsel appearing on behalf of the appellants that  as, in  view of  the  late  filing  of  the returns, there is postponement of the payment of tax and the Revenue suffers  loss on  account of delayed payment of tax, the interest when levied takes the character of penalty This contention 696 need not  detain us long, for it has already been decided by this Court  in Central  Provinces Manganese ore Co. Ltd.. v. Commissioner of  Income-tax,  [  1986]  160  ITR  1961  that interest is  levied by way of compensation and not by way of penalty. In  Chandra Sekhar’s  case (supra?  this Court also has taken a similar view. The High Court, however, has taken the view  that the interest charged partakes also of a penal character. In  expressing that  view,  the  High  Court  has placed reliance  upon a  decision  of  this  Court  in  Jain Brothers and others v. Union of India and others, [ 1970] 77 ITR 109.  In that  case, this Court was mainly considering a challenge to  section 271(2)  of the  Act, which  is a penal provision, on  the ground  of contravention of Article 14 of the Constitution.  The question whether charging of interest under the  proviso to  section 139(1)  of the Act was in the nature of  penalty or not, was not considered by this Court. Indeed, the  subject-matter was  different  from  that  with which we  are concerned.  In view  of the  decisions of this Court in  Chandra Sekhar’s  case (supra)  and in the case of Central Provinces  Manganese ore  Co. Ltd.  (supra), we hold that the  charging of interest did not become transformed to penalty.      It is  urged on  behalf of  the appellants that all the assessees who  are charged with interest for the late filing of returns,  should  be  classified  in  one  and  the  same category inasmuch  as they  are similarly situated, but sub- section (4)  read with  clause (iii)  of the proviso to sub- section (  I) of  section 139  of the  Act has  without  any reasonable justification  placed the  registered firms  in a separate category inasmuch as for the late filing of returns by  such   firms  they   are-saddled  with  interest  to  be calculated  on   the  amount  of  tax  payable  by  them  as unregistered firms.  It  is  submitted  that  such  separate classification of  the registered  firms for  the purpose of payment of  interest under  section 139,  does not  bear any

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nexus to  the object  sought to  be achieved  by the section and, accordingly, the provision of sub-section (4) read with clause (iii)(a) of the proviso to sub-section (1) of section 139 of  the Act  is  discriminatory  and  violative  of  the provision of Article 14 of the Constitution and, as such, is void.      In support  of  the  contention,  the  appellants  have placed much  reliance upon  a decision of the Karnataka High Court in M. Nagappa v. Income-tax officer, Central Circle 1, Bangalore, [ 1975] 99 ITR 33. In that case, a learned Single Judge of  the Karnataka  High Court  has struck down as void the provision  of sub-section  (4) read with clause (iii)(a) of the proviso to sub-section ( 1) of section 139 The reason that weighed  with  the  learned  Judge  is  that  the  loss suffered by the Government which is sought to be compensated by the legislative measure 697 should be  the same  in all  cases, irrespective of the fact that the  assessee who is responsible for it is a registered firm or.  any other  kind of  assessee. If that is the case, then the  amount  claimed  by  way  of  interest  should  be directly correlated  to the  amount of  tax withheld  by the assessee without reference to the kind of assessee concerned in a  given case.  It is observed that the object of levy of interest being  just reimbursement  of what  the  Government would lose  by delayed  payment of  tax resulting  from  the delayed filing  of the  return, it is clear that the levy of interest in  the case  of a registered firm on the tax which would have  been payable if the firm had been assessed as an unregistered firm,  is outside the said object. Accordingly, it has  been held  that section  139(4)  to  the  extent  it required a  registered firm to pay interest at the specified rate on the tax assessed as if it were an unregistered firm, whenever the  registered firm did not file the return within the specified  time, was  violative of  Article  14  of  the Constitution and  is, therefore,  void. That decision of the learned Single  Judge has been upheld by a Division Bench of the Karnataka  High Court  and is  since reported in [ 1981] 129 ITR 516.      The  Karnataka   High-  Court,   before  holding   that provision of sub-section (4) of section 139 read with clause (iii)(a) of  the proviso  to sub-section ( 1) of section 139 of the  Act as  violative of Article 14 of the Constitution, has not  considered the  reason why,  when a registered firm submits a  return beyond  time, it  is charged with interest calculated on  the amount  of  tax  which  would  have  been payable if  the firm  had been  assessed as  an unregistered firm. It  is because  of certain  privileges which have been conferred on  a registered  firm. One  of the  privileges is that the  firm is  considered as  an assessable  unit and is taxed at  a reduced  rate and  the partners  are assessed on their respective  shares in  the income  of the  firm.  This privilege which  has been  conferred on a registered firm by the Act,  is not  available to  an  unregistered  firm.  The Legislature is,  however, competent  to withhold  any of the privileges conferred on a registered firm if it violates any of the  provisions of the Act. A registered firm is required to file its return within the time as prescribed by the Act. Clause (iii)(a)  of the  proviso to section 139(1) read with sub-section (4)  of section  139 in effect only provides for the withdrawal of the privilege of the registered firm to be assessed at  a reduced  rate because  of its  non-compliance with the  provisions of  sub-sections (1) and (2) of section 139 of  the Act.  In other  words, the  registered  firm  is treated  as   an   unregistered   firm   for   purposes   of

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quantification of interest.      The contention  of the  appellants that by treating the registered 698 firms as  unregistered firms  for the  charging of interest, the  Legislature  has  placed  the  registered  firms  in  a separate category is not at all comprehensible. On the other hand, by  treating  the  registered  firms  as  unregistered firms, the  Legislature has  avoided the discrimination that would have  been there  if the  registered firms were not so treated for  the purpose  of charging  of interest. In other words,  if  the  registered  firms  had  been  charged  with interest on the amount of tax assessed at a reduced rate for the late  filing of  the  returns,  there  would  have  been discrimination  between  registered  firm  and  unregistered firms. When  a registered  firm  and  an  unregistered  firm commit the  same default  in filing  returns beyond the time allowed under  sub-sections (  1) and  (2) of section 139 of the Act,  it would  be unreasonable and unjust to charge two different rates  of interest-one  at a  reduced rate for the registered firm  and the  other at  a higher  rate  for  the unregistered firm.  So, in  our opinion, section 139(4) read with clause (iii)(a) to the proviso of section 139(1) of the Act, as  it stood  prior to  April 1,  1971, has  placed the registered firms  and the  unregistered firms  on  the  same footing as,  for the purpose of interest, they are similarly situated.      Dr. Gouri  Shankar, learned  Counsel appearing  for the Revenue, has  pointed out  to us  that except  the Karnataka High Court,  other High  Courts, namely,  Madras High Court, Gujarat High  Court, Madhya  Pradesh High  Court,  Punjab  & Haryana  High   Court  and   the  Calcutta   High  Court  in Mahendrakumar Ishwarlal  & Co.  v. Union of India, [1973] 91 ITR 101,  since affirmed  on an appeal reported in [1974] 94 ITR 65;  Chhotalal &  Co. v.  Income-tax officer, [1976] 105 ITR 230; Jiwanmal Hospital v. Income-tax officer, [1979] 119 ITR 439;  Hindustan Steel  Forges v. Commissioner of Income- tax, [  1980] 121  ITR 793  and Mohanlal  Soni v.  Union  of India, [  1983] 143 ITR 436 respectively have taken the view that treating  of registered firms as unregistered firms for the purpose  of charging  of interest for the late filing of returns cannot  be said  to be  arbitrary and  violative  of Article 14  of the Constitution. The view expressed in these decisions, in  our opinion,  is correct. As has been noticed already, the  Karnataka High  Court  did  not  consider  the question of  withholding of  the privileges conferred on the registered firm  on their  default in  filing returns within the time  allowed under  sub-sections (1) and (2) of section 139 of the Act, so that they may be treated on equal footing with unregistered  firms making  the same  default.  In  the circumstances, no  discrimination has  been made  between  a registered firm  and an  unregistered firm and, accordingly, the provision  of sub-section  (4) of  section 139 read with clause (iii)(a) of the proviso to sub-section (1) of section 139 of  the Act  is not  violative  of  Article  14  of  the Constitution and is quite 699 legal and valid. The decision of the Karnataka High Court in Nagappa’s  case  (supra),  as  affirmed  on  appeal  by  the Division Bench  of that High Court, in so far as it declares the  said  provision  as  ultra  vires  Article  14  of  the Constitution, is erroneous.      Before we  part with  these appeals, we think we should clarify one  situation, namely,  where the  advance tax duly paid covers  the entire  amount of tax assessed, there is no

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question of  charging the registered firm with interest even though the  return is  filed by  it beyond the time allowed, regard being  had to  the fact  that payment  of interest is only compensatory  in nature. As the entire amount of tax is paid by  way of  advance tax, the question of payment of any compensation does not arise.      In C.A. No. 1035 of 1973, it appears that total tax for the assessment year 1968-69 was assessed at RS.. 16,288. The assessee paid  advance tax  amounting to  Rs.39,018 in three instalments on  25.9.1967, 24.1.1968  and  2.3.1968.  It  is apparent that the amount of advance tax paid by the assessee fully covered  the amount  of tax payable by it. In spite of that, the  Income-tax officer  charged the  assessee for the said assessment  year a  sum of Rs. 14,233 as interest under section 139 of the Act for the delayed filing of the return. As has  been observed  earlier, when  the amount  of tax and already been  paid in the shape of advance tax, the question of payment of compensation by way of interest does not arise and the  Income-tax officer was not, therefore, justified in charging interest.  The assessee  is, therefore, entitled to get refund  of the  amount paid  by way  of interest for the said assessment  year. The Income-tax officer is directed to refund to  the  assessee  the  amount  paid  on  account  of interest.      In the result, C.A. No. 1035 of 1973 is allowed and the remaining appeals  are dismissed. There will, however, be no order as to costs in any of these appeals. S.L.        Appeal No. 1035/73 allowed and others dismissed. 700