GANESH DASS SREERAM, ETC. v. INCOME TAX OFFICER, 'A' WARD, SHILLONG AND OTHERS ETC.

The Judgment of the Court was delivered by

DUTT, J.The appellants, who are all registered firms within the E 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, F 1971.

The relevant provisions of section 139, as it stood prior to April 1, 1971, are as follows:-

"S.139(1).Everyperson,ifhistotalincome ............. G 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 H

p. 692 Copy page pinpoint

year ...... ., or before the 30th day of June of A the assessment year, whichever is later; ·. 'r-·_,..

(b) in the case of every other person, before. the 30th day of June of the assessment year:

B Provided that, on an application made in the pre- scribed manner, the Income-tax Officer may, in his discre- tion, extend the date for furnishing the return-

c (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 E to the 31st day of December of the assessment year without charging any interest; and

f (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 assessment year to the date of the furnishing of the return- ( a) in the case of a registered firm or an unre- gistered firm which has been assessed under G 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 pay- H able on the total income,

G.D. SREERAM v. l.T. OFFICER SHILLONG [DUTT, J.J 693

reduced by the advance tax, if any, paid or by A

- 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 B 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 pre- "" vious year, in the prescribed form and verified in the pre- scribed manner setting forthwith such other p•rticulars as may be prescribed; c Provided that on an application in the prescribed marukr 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 assess- ment 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 F s,uch case-."

In all these cases, it is not disputed that no application for exten- sion 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 G 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

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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 prq_~iso to sub-section ( 1) of section 139 of the Act, the appellants filed writ petitions before the Gauhati High Court, challenging the charging of interest and the validity of sub- section (4) read with clause (iii)( a) of the proviso to sub-section (1) of B 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 Offic- ers to take into account the advance tax paid by the assessees before calculating the interest. Hence lhese appeals.

c 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 1 - return of income and whether the cancellation of the penalties levied )_ under section 27( l)(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.

G 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 tne furnishing of the return. What is provided in sub-section (4) is that even though a person does not furnish the 'A--.' return within the time allowed to him under sub-section ( 1) or sub- section (2), yet he may furnish the same before the end of the ·four H assessment years concerned.

G.D. SREERAM v. l.T. OFFICER SHILLONG (DUTT, J.J 695

'\..; ' The substantive provision of sub-sections (1) and (2) of section A 139 specify the time within which the return has to be filed. The pro- visos 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 B time originally fixed for the filing of returns under sub-sections ( 1) and - -f (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 i 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 c assessee without filing any application for exteDsion 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 of clause (iii) of the proviso to sub-section (1) 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 applica- E tion has been made by the assessee, hilt 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, there- fore, no substance in the contention of the appellants that as the appel- F -\ [ants 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 (!)of section 139 of the Act.

The next question that requires consideration relates to the vali- G dity of sub-section (4) read, with clause (iii)(a) of the proviso to sub- section (I) of section 139. It is submitted by the learned Counsel '\.A 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 H

696 SUPREME COURT REPORTS [ 1988] I S.C.R.

need not detain us long, for it has already been decided by this Court A in Central Provinces Manganese Ore Co. Ltd. v. Commissioner of Income-tax, [ 1986] 160 !TR 1961 that interest is levied by way of com- pensation 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 13 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 !TR 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( I) of the Act was in the nature of penalty or not, c was not considered by this Court. Indeed, the subject-matter was different from that with which we are concerned. In view of the deci- sions 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. D It is urged on behalf oLthe appellants that all the assessees who are charged with interest for the late filing of returns, should be clas- sified 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 inas- much as for the late filing of returns by such firms they are saddled

- with interest to be calculated on the amount of taJ 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 sec- tion 139, does not bear any 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 I, 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 x_..,- (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 Govern- H ment which is sought to be compensated by the legislative measure

G.D. SREERAM v. I.T. OFFICER SHILLONG [DUTT, J.J 697

should be the same in all cases, irrespective of the fact that the assessee A 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 pay- B men! 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 unre- gistered 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 unre- C gistered firm, whenever the registered firm did not file the return within the specified time, was violative of Article. 14 of the Constitu- tion 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 !TR 516. D 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 E 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 respec- tive 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 unre- F gistered 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 G 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. Jn other words, the registered firm is treated as an unregistered firm for purposes of quantification of interest.

The contention of the appellants that by treating the registered H

698 SUPREME COURT REPORTS [ 1988] l S.C.R.

A 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 pro- viso 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. D 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 E India, [1973] 91 ITR 101, since affirmed on an appeal reported in [1974] 94 ITR 65; Chhotalal & Co. v. Income-tax Officer, 11976] 105 ITR 230; Jiwanmal Hospital v. Income-tax Officer, [ 1979] 119 ITR 439; Hindustan Steel Forges v. Commissioner of Income-tax, [ 1980] 12 llTR 793 and Mohan/al Soni v. Union of India, [1983] 143 ITR 436 respec- tively have taken the view that treating of registered firms as unre- F gistered 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 G 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 drsctimination has been made between a registered firm and an unregistered firm and, accordingly, the provision of sub-section (4) of section 139 re~d· with clause (iii)(a) of the proviso to sub-section (I) of section 139 of... H the Act is not violative of Article 14 of the Constitution and is quite

G.D. SREERAM v. LT. OFFICER SHILLONG [DUTT, J.] 699

legal and valid. The decision of the Karnataka High Court in Nagappa's A 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 B one situation, namely, where the advance tax duly paid covers the entire amount of tax assessed, there is no question of charging the -1 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 compensa- tion does not arise. C

In C.A. No. 1035 of 1973, it appears that total tax for the assess- ment 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 rernaining 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.