1. Some questions of law regarding some of the sections of the Income-tax Act, 1961, hereinafter referred to as 'the Act', are involved in these three petitions and, therefore, we will dispose of the three special civil applications by this common judgment. The petitioner is Special Civil Application No. 294 of 1972 is a partnership firm which has been registered with the income-tax authorities in accordances with the provision of the Act. The petitioners in Special Civil Applications No. 655 of 1972 and 1112 of 1972 are partners of the said firm and they have challenged the orders of the respondents' levying of penal interest under the provisions of section 139(1) and section 139(4). The firsts respondent is the Income-tax Officer, Morvi, having jurisdiction over these three petitioners and the second respondent is the Additional Commissioner of Incomes-tax, Gujarat III, who has jurisdiction over the cases of the three petitioners.
2. The short facts giving rise to these three petitions are as follows. The partnership firm is carrying on its business at Morvi in Rajkot District. All the partners of the partnership firm are Indian citizens. The firm is registered under the provisions of the Indian Partnership Act. The firm maintains its books of account on mercantile basis and has adopted Samvat year as its accounting year. The relavent assessment year was 1967-68, the accoounting year being Samvat year 2022. The registered firm is an assessee under the Income-tax Act and it being assessed by the first respondent at Morvi. On September 4, 1970, the partnership firm filed its return in income under section 139 of the Income-tax Act along with a declaration in Form No. 12 under section 184, sub-section (7), for assessment year 1967-68. For the relevant assessment year 1967-68 the return of income under section 139(1) of the Income-tax Act had to be furnished before June 30, 1967. The partnership firm did not make any application to the first respondent for extension of time but under section 139(4) of the Act, the partnership firm filed the return and applied for extension of time before the assessment was made and it was done within the period of four years counted from the end of the assessment year to which the return related. Therefore, it was open to the partnership firm to apply for extension of time under section 139(4) before March 31, 1972. According to the petitioners, section 139(4) is only a proviso to section 139(1) and as such the return of income of the petitioner having been filed before the completion of the assessment and also having been filed before March 31, 1972, was within time and it is the contention that the penal interests which is chargeable under section 139(1), proviso, clause (iii)(a), could not be invoked and the question of penal interest under that section could not arise. The assessment order was passed by the first responded on September 16, 1970, assessing the income of the partnership firm and allowing the partnership firm to continue the registration for assessment year 1967-68. The Income-tax Officer at the time of passing the assessment order directed the issue of a notice under section 274 read with section 271 for late submission of return and he also directed that interest under section 139 should be charged. The petitioner-firm, therefore, received a demand notice and a notice under section 274 read with section 271 of the Act. The demand notice included an amount of Rs. 4,000 being the amount of interest under section 139 and the said amount of Rs. 4,000 was in due courses recovered from the petitioner-firm. The petitioner-firm then preferred a revision application under section 264 of the Income-tax Act to the second respondent for revising the order of the Income-tax Officer. The second respondent dismissed the application of the petitioner on July 28, 1971. Thereafter, the petitioner firm and its partners have challenged the orders in relation to levying of penal interest under section 139 and the orders passed by the Commissioner in revision applications. It is the contention of the petitioner the these orders levying interest are invalid and without the authority of law and various contentions haves been set out in the petitions challenging the orders levying interest. The petitioner-firm has, therefore, approached this court under articles 226 and 227 of the Constitution praying for a writ of certiorari and/or mandamus or any other appropriate writ, order or direction calling for the record of the case and to quash and set aside the orders charging interest and the orders passed in revision confirming the orders levying interest. The petitioner-firm has prayed for an order directing the respondents to refund to it the amount of interest of Rs. 4,000 charged under section 139(1) of the Act.
3. In the case of the petitioner in Special Civil Application No. 655 of 1972, penal interest has been levied by the Income-tax Officer for assessment year 1967-68, 1968-69 and 1969-70 and on the same grounds as the grounds on which the partnership-firm has challenged the order levying interest, the petitioner is Special Civil Application No. 655 of 1972 has prayed that the orders levying penal interests should be quashed and set aside.
4. The petitioner in Special Civil Application No. 1112 of 1972 has been ordered to pay penal interest for assessment years 1967-68, 1968-69 and 1969-70 and she has also prayed that the orders levying penal interest should be quashed and set aside by this High Court.
Mr. Patel appearing on behalf of the petitioners in these three special civil applications has urged the following contentions before us :
(1) On a construction of section 139(1) read with proviso, clause (iii), of that sub-section two conditions precedent are required to be satisfied and since those conditions precedent are absent in the present case, charging of penal interest by the Income-tax Officer is without jurisdiction.
(2) There is a hostile discrimination by the legislature between assessees filing belated returns and assessee filing no returns at all, and, therefore, the provisions regarding levying of penal interest are violative of article 14 of the Constitution and the ultra vires and void.
5. These two points are common to all the three special civil applications. Over and above these two common points, there was one more point which Mr. Patel urged in connection with Special Civil Application No. 294 of 1972, filed by the partnership firm and that contention was that interest under section 139(1) is by way of compensation to the revenue and the provision that the registered firm should be treated as an unregistered firm for calculation of penal interest because of the late submission of return violates the objects of the Act and results in double penalty. It was contended by Mr. Patel in this connection that though ordinarily penal interest under the section is by way of compensation under ordinary circumstances still the action of withdrawing the privileges available to a registered firm when such registered firm does not file its return within time, on the same footing as an unregistered firm, imposes a great burden on the registered firm and hence the penal interests ceases to be by way of compensation only and amounts to a penalty. It was also contended in this connection that levying of double penalty, one under section 139(1) and the other under section 274 read with section 271 amounts to double jeopardy and, therefore, on the ground of double jeopardy, the provision of section 139(1) are ultra vires and invalid.
6. In order to appreciate the contentions urged by Mr. Patel, it is necessary to look at the provisions of section 139 as they stood at the relevant time. Under sub-section (1) of section 139, every person, if his total income or the total income of any other person in respect of which he is assessable which is not chargeable to income-tax, has to furnish a return of his income or the income of such other person during the previous year in the prescribed manner and setting forth such other particulars as may be prescribed. Proviso to sub-section (1) of section 139 is material and was in these terms :
'Provided that, on an application made in the prescribed manner, the Income-tax Officer may, in his discretion, extend the date for furnishing the return -......
(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 payable from October 1, or January 1, 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 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, reduced by the advance tax, if any, paid or by any tax deducted at source, as the case be.'
7. Under sub-section (4) of section 139, any person who has not furnished a return within the time allowed to him under sub-section (1) or subsection (2) may, before the assessment is made, furnish the return for any previous year at any time before the end of the period specified in clause (b), and the provisions of clause (iii) of the proviso to sub-section (1) shall apply in every such case. It is, therefore, clear that sub-section (4) of section 139 contemplates a situation which is altogether different from the situation contemplated by the proviso, clause (iii), to sub-section (1) of section 139. If the assessee concerned does not file a return within the time allowed under sub-section (1) or within the time specified in the notice issued under section 139(2), but files his return before the assessment order is made and if such return is filed within the period of four years from the end of the assessment year 1967-68, then the provisions of clause (iii) of the proviso to sub-section (1) are to apply, that is, the interest mention in clause (iii) of the proviso to sub-section (1) of section 139 has to be charged.
8. It was contended by Mr. Patel on behalf of the petitioners in these three special civil applications that the proviso to sub-section (1) of section 139 cannot be dissected into three separate categories and he further contended that in the absence of an application for extension and grant of time, the proviso would not come into operation at all. In support of this contention he relied on certain observations of the Andhra Pradesh High Court in Kishanlal Haricharan v. Income-tax Officer. In that particular case the assessee had failed to submit a return of his income, in spite of notice issued to him, under section 139(2) and had failed to comply with a notice under section 142(1) of the Act. Thereafter, the Income-tax Officer made a best judgment assessment under section 144 levying, in addition to the tax, penal interest under section 139(1)(b), proviso clause (iii). On appeal the Appellate Assistant Commissioner granted some slight relief to the assessee regarding the quantum of tax, but otherwise dismissed the appeal. Thereafter, the assessee preferred of tax, but otherwise dismissed the appeal. Thereafter, the assessee preferred an application to the High Court for issue of a writ challenging the levy of penal interest and it was held by the Andhra Pradesh High Court that the assessee was liable to pay penal interest under clause (iii) of the third proviso to section 139(1)(b), only if he had asked for extension of time for submitting a return. Where the assessee did not request for time for submitting a return, clause (iii) of third proviso to section 139(1)(b) would not apply. Therefore, the Income-tax Officer was not justified, according to the Andhra Pradesh High Court, in levying penal interest and the levy of penal interest was liable to be quashed. At page 662 of the report it has been observed :
'A perusal of the proviso makes it clear that it is only when an assessee requests for time under the third clause that he can be directed to pay penal interest as provided in the clause. Where the assessee does not request for time for submitting a return, the third clause has no application. Other consequences may follow. For example, the petitioner may subject himself to the penalty provided in section 271 of the Act. The petitioner may also subject himself to a best judgment assessment by the Income-tax Officer. Those consequences may follow when the assessee fails to submit a return, but the consequences of paying penal interest does not follow. An assessee is liable to pay penal interest under the third clause of the proviso to section 139(1)(b) only if he asks for extension of time under that clause.'
9. With respect, may be pointed out that there was no provision in section 144 similar to the provision of section 139(4) making the provisions of the third clause of the proviso to section 139(1) applicable when an order of best judgment assessment is made under section 144. The best judgment assessment can be made, inter alia, if any person fails to make the return required by any notice given to him under sub-section (2) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of section 139. But there was no provision in section 144 as is to be found in section 139(4) stating that the provisions of clause (iii) of the proviso to sub-section (1) of section 139 is to apply to every such case falling within section 144(a) of the Act. Under these circumstances the final decision of the Andhra Pradesh High Court can be supported on the ground that there was no provision in law making clause (iii) of the proviso to sub-section (1) of section 139 applicable when best judgment assessment was made under section 144. With respect, we are unable to agree with the conclusions of the learned judge of the Andhra Pradesh High Court that 'an assessee is liable to pay penal interest under the third clause of the proviso to section 139(1)(b) only if he asks for extension of time under that clause'. On a plain reading of the third clause of the proviso, when it is to be read in the context of section 139(4), it does not necessarily follow that first an application for extension of time must have been made by the assessee before the penal interest can be charged.
We find that the Mysore High Court in Indian Telephone Industries Co-operative Society Ltd. v. Income-tax Officer has held to the same effect regarding this decision of the Andhra Pradesh High Court in Kishanlal Haricharan v. Income-tax Officer observed :
'In the said case, the assessee did not at any time furnish a return of his income. Section 139 as it stood before its amendment by the Taxation Laws (Amendment) Act, 1970, did not empower the levy of interest where the assessment is completed without the assessee furnishing a return of his income. Such an assessee may be subject to other liabilities under the Act but was not chargeable to interest. Therefore, the decision of the Andhra Pradesh High Court holding that no interest could be levied on the petitioner was right on the merits of the case. But the observation made therein that sub-clause (iii) of the proviso to sub-section (1) of section 139 has no application where the assessee does not request for time for submitting his return is too wide a statement from which we respectfully dissent.'
10. In the case before the Mysore High Court the assessee failed to submit returns for the assessment years 1963-64 to 1969-70. Notice under section 139(2) was served on the assessee for the assessment year 1969-70 and a notice under section 148 was served with regard to the other assessment years. The assessee field the returns within the dates specified in the notices under section 139(2) and 148. The Income-tax Officer levied interest under section 139 and 217 and issued notices for penalty for late submission of returns and non-filing of estimates of advance tax. The assessee applied to the Commissioner to waive the penalty under section 271(4A) and requested for oral hearing. The Commissioner rejected the application without giving the hearing. Thereupon, the assessee filed a writ petition challenging the levy of interest and the order of the Commissioner rejecting the application. It was held by the Mysore High Court, dismissing the writ petition, that the levy of interest was legal and the order of the Commissioner rejecting the application was valid.
In Ganesh Das Sreeram v. Income-tax Officer the Gauhati High Court has distinguished the Andhra Pradesh High Court decision on the same lines as the Mysore High Court and it has held :
'Where the assessee has failed to furnish a return either under section 139(1) or section 139(2) but files one before the expiry of the period mentioned in section 139(4), provisions of clause (iii) of the proviso to section 139(1) empowering the Income-tax Officer to charge interest for late filing of returns are immediately attracted.'
It dissented from the view taken by the Andhra Pradesh High Court in Kishanlal Haricharan v. Income-tax Officer. In connection with this decision of the Andhra Pradesh High Court it was observed :
'With respect we are unable to agree with the above decision which has taken no note of section 139(4) of the Act. For the reasons given by us and in view of the provisions of sub-section (4) of section 139 there is escape from the conclusion that clause (ii) of the proviso is attracted to the case of the present assessee and the Income-tax Officer is fully justified in charging interest in the case.'
11. In our opinion the only way of construing section 139(4) is to hold that those provisions of clause (iii) of the proviso to sub-section (1) of section 139 which provide that interest at nine per cent per annum shall be payable from October 1, or January 1, as the case may be, of the assessment year to the date of the furnishing of the return apply whenever the return is not filed within the time allowed to the assessee under sub-section (1) or sub-section (2) but is filed before the assessment is made within the period of four years from the end of the registered firm, interest will be charged on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm.
12. It was contended that in order to appreciate the correct impact of clause (iii) of the provision to sub-section (1) of section 139, we must take not of the fact that the provisions of clauses (i) and (ii) of the proviso to section 139(1) have to be looked at in order to find out the significance of the dates, October 1, and January 1, occurring in clause (iii). In our opinion, the legislature has incorporated by reference the provisions of clause (iii) of the proviso to sub-section (1) in section 139(4) and once those provisions are read as having been so incorporated, so much of these provisions of clause (iii) of the proviso have to be read in section 139(4) as may be applicable and as may be consistent with the language of the two provisions. Under these circumstances, on a mere construction of the provisions of section 139(4) read with the third clause of the proviso to sub-section (1) of section 139, it must be held that an assessee who does not furnish his return within the time mentioned in sub-section (1) of section 139 or within the time given to him under the notice under section 139 (2) may filed his return before the assessment is made so long as it is filed within the period of four years from the end of the assessment year under consideration. But such belated filing would attract the provisions of clause (iii) of the proviso to sub-section (1) and would compel the Income-tax Officer to levy penal interest as mentioned in clause (iii) of the proviso to sub-section (1).
13. It was contended that there is a hostile discrimination between the assessees filing belated returns and assessees filing no return at all. If an assessee does not file any return at all, then under section 144 best judgment assessment can be made but as the law stood at the relevant time, there was no provision in the Income-tax Act, 1961, by which penal interest could be levied by the Income-tax Officer in such cases of non-filing of returns. It may be pointed out that with effect from April 1, 1971, as a result of the necessary amendments a new sub-section has been added in section 139, namely, section 139(8), and under that sub-section, 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 penal interest can be levied and the assessee shall be liable to pay simple interest at nine per cent. per annum, reckoned from October 1, of the assessment year 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, paid and any tax deducted at source. The principle of parliamentary exposition cannot be applied to the subsequent amendment but it merely shows that the lacuna which till then existed in cases of best judgment assessment under section 144 where no return had been filed by the assessee is now filled up by the legislature by making the necessary amendment.
14. It is true that interest payable under section 139(1) is neither a tax nor a penalty but is by way if compensation only. It has been held by a Division Bench of this High Court in Additional Commissioner of Income-tax v. Santosh Industries that the interest which a person filing his return under sub-section (4) of section 139 is required to pay is not by way of penalty but it is only by way of compensation for delay in realisation of tax. It is very much different from penalty for default in furnishing return of income within the time allowed under sub-section (1) or sub-section (2) of section 139. When, therefore, over and above the penal interest it is proposed to levy penalty under section 271, there is no question of imposition of double penalty. It is true that this compensation amount could be charged as the law then stood at the time of the relevant assessment year from assessees who filed belated returns but assessees filing no returns at all were not required to pay any such compensation in the shape of interest.
15. It is now well-settled that while article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to pass the test of permissible classification, two conditions musts be fulfilled, namely : (i) that the classifications must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group, and (ii) that differentia must have a rational relation to the object sought to be achieved by the statute in question. In East India Tobacco Co. v. State of Andhra Pradesh and Twyford Tea Co. v. State of Kerala, the Supreme Court has held that in order to be able to succeed on the charge of discrimination and in order to sustain the attack on the ground of violation of article 14, so far as taxation statutes are concerned, a person challenging the legislation must establish conclusively that persons equally circumstances have been treated unequally and vice versa. Unless the petitioner succeeds in establishing that there was a clear and hostile discrimination by virtue of the impugned legislation, the challenge on the ground of article 14 cannot be sustained so far as taxation statutes are concerned. The burden of establishing such hostile discrimination is on the person attacking the legislative arrangement and he has to negative every conceivable basis which might support it. In V. J. Ferreira v. Bombay Municipality, the Supreme Court has held that a taxing statute is not invalid on the grounds of discrimination merely because other objects could have been but are not taxed by the legislature. It was held that when a statute divides the objects of tax into groups or categories, so long as there is equality and uniformity within each group, the tax cannot be attacked on the ground of its being discriminatory, although due to fortuitous circumstances or a particular situation some included in a class or group may get some advantage over others, provided of course they are not sought out for special treatment. Likewise, the mere fact that a tax falls more heavily on some in the same group or category is by itself not a ground for its invalidity, for then hardly any tax, for instance, sales tax and excise tax, can escape such a charge.
16. In view of these decisions of the Supreme Court, it is clear that the provisions regarding penal interest set out in clause (iii) of the proviso to sub-section (1) of section 139 which has been put in the statute book as a deterrent measure and to compensate the exchequer for the loss which occurs because of delay in completing the assessments which delay in turn is caused by the respective assessee not filing his return within time, is a supplementary measure enacted with a view to enforce the machinery of tax collection. Therefore, it is not possible for us to say that there is any such hostile discrimination as is contemplated by the different authorities referred to above, when a distinction was made between persons filing delayed returns and persons filing no return at all. It is, therefore, clear that the challenge on the ground of article 14 of the Constitution must fail.
17. The third submission applies only to the petitioner in Special Civil Application No. 294 of 1972, because the petitioner in that special civil application is a firm registered under the provisions of the income-tax Act and under clause (iii) of the proviso to sub-section (1) of section 139, the registered firm has to pay penal interest on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm. Under the scheme of the income-tax Act, a registered firm as distinguished from an unregistered firm pays tax at a special rate on its total income and such special rate is a concessional rate whereas an unregistered firm pays income-tax on the total income of the firm and at a higher rates. The concession which is given to a registered firm is withdrawn in the case of penal interest and we find that a similar withdrawal of privileges of a registered firm is also provided for in the cases of levying of penalty under section 271 of the Income-tax Act.
In Jain Brothers v. Union of India Grover J., delivering the judgment of the Supreme Court, has pointed out :
'According to that provision when the person liable to penalty is a registered firm then notwithstanding anything contained in the other provisions of the Act of 1961, the penalty imposable under sub-section (1) shall be the same amount as would be imposable on that firm if that firm were an unregistered firm. It is pointed out that in the case of assessees other than registered firms the maximum penalty imposable under section 271(1)(i) cannot exceed in the aggregate 50% of the tax payable by the assessee whereas in the case of a registered firm the maximum penalty is not made to depend upon the tax assessed on or payable by such firm. On the contrary the registered firm will have to pay the same penalty as an unregistered firm which may far exceed the maximum limit of 50% prescribed by the above provision. This, according to the appellants, constitutes discrimination under article 14 of the Constitution. Now, a firm when registered is treated as a separate entity liable to tax. After 1956 it has to pay tax at a special reduced rate. If a firm got itself registered the partners were entitled to certain benefits and advantages. It was, however, open to the legislature to say that once a registered firm committed a default attracting penalty, it should be deemed or considered to be an unregistered firm for the purpose of its imposition. No question of discrimination under article 14 can arise in such a situation.'
18. The Supreme Court pointed out that there was nothing to prevent the legislature from giving the benefit of reduced rate to a registered firm for the purpose of tax but withhold the same when it committed a default and became liable to imposition of penalty.
19. Applying the above reasoning of the Supreme Court in Jain Brothers v. Union of India to the cases before us, it is clear that the legislature can also withhold the benefits which is otherwise available to a registered firm, when the firm commits a default by failing to file return in time and becomes liable to payment of penal interest. It was contended by Mr. Patel that in the case of a registered firm, the penal interest cases to be an amount of compensation to the revenue authorities for late collection of tax but amounts to a penalty but that argument cannot be sustained because all that the legislature has done in clause (iii)(a) of a proviso to section 139(1) is to withhold privileges which is otherwise extended to a registered firm. We find that the same view which we are taking in this case regarding a registered firm has been taken by the Madras High Court in Mahendrakumar Ishwarlal & Co. v. Union of India. The Madras High Court has held :
'It is open to the legislature to say that once a registered firm fails to submit its returns within the prescribed time and applies for extension of time before the officer, it can prescribe certain conditions for the exercises of such a discretion if favour of the defaulting assessee and consequentially impose an additional burden of paying interest at the prescribed rate for the period of extension. No question of discrimination under article 14 of the Constitution can, therefore, arise in such a situation.'
In Ganesh Das Sreeram v. Incomes-tax Officer, the Gauhati High also has taken a similar view. In paragraph 10 of its judgment the Gauhati High Court has pointed out :
'It is obvious that registered firms are entitled to certain privileges under the provisions of the Income-tax Act vis-a-vis other assessable entities. There is, therefore, a reasonable classification in placing them in one group subjecting them to certain liabilities in the case of some defaults. Since there can be no grievance on the score of the registered firms being placed in an advantageous position in certain matters including the quantum of tax payable by them, there is no discrimination amongst entities similarly placed or equally circumstanced in the matter of payment of interest for late submission of return in their case. The justice and reasonableness of the registered firms being placed in one class for the purpose of enjoyment of certain privileges go hand in hand with certain liabilities imposed under the law in the case of non-performance of legal obligations under the Act. The classification being founded on an intelligible differentia and the said differentia having a rational relation to the object of the provisions for charging interest, there is no discrimination to make it void for violation of article 14 of the Constitution.'
20. It is obvious that the legislature has placed the registered firms in a special category for purpose of payment of tax. That special category has been treated favourably so far as the payment of tax is concerned as compared to other associations of persons and unregistered firms. But there is nothing wrong if the legislature at the same time poses a condition that the entity such a privileged position must conform to the provisions of law and abide by the provisions of law in order to continue enjoying such privileges. Therefore, the same reasoning which justifies the creation of such a class amongst the assessees, namely, calls of registered firms, also sustains the provision in clause (iii)(a) of the proviso to sub-section (1) of section 139 to the effect that if there is a belated filing of a return by a registered firm, then the firm shall be treated for the purposes of payment of penal interest as an unregistered firm and the penal interest is to be calculated on the total amount of tax which it would have been called upon to pay if it were an unregistered firm. Under these circumstances it cannot be said that in the case of a registered firm penal interest ceases to be an amount of compensation and it cannot be said that there is violation of the object of the Income-tax Act nor does it result in payment of double penalty. The payment of double penalty is out of the question because penal interest is not penalty at all as has been explained by this High Court in Santosh Industries case. It is only by way of compensation and since penalty is not not being imposed twice over, there cannot be any question of double jeopardy so far as registered firms are concerned.
21. All the three submissions urged by Mr. Patel on behalf of the different petitioners before us fail and rejected. These three special civil application, therefore, fail and are dismissed. Rule is discharged in each matter. The respective petitioners will pay the costs of the respondents in each of the three matters.