1. In these two writ petitions the constitutional validity of Section 140A(3) of the Income-tax Act, 1961 (hereinafter called 'the Act') is challenged. The petitioners are different but identical contentions have been raised. In the first case for the assessment year 1968-69 the petitioner filed on April 18, 1969, a return of income declaring a total income of Rs. 51,350. The tax payable thereon under Section 140A(1) was Rs. 15,506. Since the petitioner did not pay the tax within thirty days of furnishing the return as required under Section 140A(1), a notice under Section 140A(3) was issued to him to show cause why a penalty should not be imposed. The petitioner filed a written reply on October 28, 1969, stating that his funds were locked up in the business and that, therefore, the tax could not be paid in accordance with that section. But the Income-tax Officer rejected his explanation on the ground that the petitioner was showing large cash balance in his wealth-tax returns and that therefore there was no proper explanation for non-payment of tax under Section 140A. By his order dated October 31, 1969, the Income-tax Officer levied a penalty of Rs. 5,000 under Section 140A(3) of the Act. It may be mentioned that the regular assessment is stated to have been completed on September 30, 1969, and the tax payable on the regular assessment was determined at Rs. 17,501.
2. In the second case also the facts are almost identical except that there is slight difference in the total income returned and the amount of tax payable. The total income returned for the year 1968-69 was Rs. 51,310 and the tax pay able under Section 140A was Rs. 15,482. A sum of Rs. 5,000 was levied as penalty in this case also. In both these cases it appears that the penalty was reduced to Rs. 2,500 on appeal by each of the assessees to the Appellate Assistant Commissioner when these writ petitions were pending.
3. Thiru Kesava lyengar, the learned counsel for the petitioners, raised three main contentions in these writ petitions:
(1) Section 140A(3) of the Act enabling the Income-tax Officer to levy a penalty which may extend upto 50% of the amount of tax payable under Section 140A and not paid within 30 days of furnishing the return, is confiscatory in nature and unreasonable and offends Article 19(l)(f) of the Constitution of India.
(2) Though under the relevant provisions of the Act, the Government is liable to pay only interest at 9% (now 12%) per annum for failure to refund within the time specified any excess paid, assessees like the petitioners are made liable to pay penalty under Section 140A(3) for failure to pay tax in time. This amounts to an invidious and hostile discrimination against the petitioners and violates Article 14. The section also confers on the Income-tax Officer an arbitrary and unguided power in the matter of imposition of penalty for non-payment of the tax and therefore is discriminatory violating Article 14 of the Constitution.
(3) The power to levy a penalty for non-payment of tax which has become payable is not incidental or ancillary to the power to ' tax income ' and, therefore, Section 140A(3) is beyond the legislative competence of Parliament.
4. Elaborating the first point, the learned counsel submitted that Section 140A(3) of the Act, in the guise of a provision for enforcement of payment of tax, authorises the confiscation of property, that the provision is not compensatory for delayed payment or retention of tax payable, that the penalty could be imposed by statute only for concealment of tax which is in the nature of an offence, that the section authorises the levy of penalty by assuming an offence where there is none, that the non-payment of the amount of tax payable under Section 140A(1) creates only a civil liability and not an offence or criminal or quasi-criminal liability and that any penalty imposed for not discharging that civil liability amounts to confiscation of the property.
5. The relevant portions of the section read as follows :
' 140A. Self-assessment.--(1) Where a return has been furnished under Section 139 and the tax payable on the basis of that return as reduced by any tax already paid under any provision of this Act exceeds five hundred rupees, the assessee shall pay the tax so payable within thirty days of furnishing the return.........
(3) If any assessee fails to pay the tax or any part thereof in accordance with the provisions of Sub-section (1), he shall, unless a regular assessment under Section 143 or Section 144 has been made before the expiry of the thirty days referred to in that sub-section, be liable, by way of penalty, to pay such amount as the Income-tax Officer may direct, and in the case of a continuing failure, such further amount or amounts as the Income-tax Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed fifty per cent. of the amount of such tax or part, as the case may be: Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard. '
6. This is a new section which was introduced by Section 34 of the Finance Act of 1964, with effect from April 1, 1964. As per Sub-section (1), the moment a return is furnished the tax due, on the basis of the return as reduced by the tax already paid, becomes payable. With reference to the legal position prior to the introduction of Section 140A, the Supreme Court in Kesoram Industries and Cotton Mitts Ltd. v. Commissioner of Wealth-tax, : 59ITR767(SC) held that a liability to pay income-tax was a present liability, though the tax became payable after it was quantified in accordance with the ascertainable data and that there was a perfected debt at any rate on the last date of the accounting year and not a contingent liability. Again, in Commissioner of Wealth-tax v. Standard Vacuum Oil Co. Ltd., : 59ITR569(SC) , approving the decision of the Gujarat High Court in Commissioner of Wealth-tax v. Raipur Manufacturing Co., : 52ITR482(Guj) , the Supreme Court observed that a condition subsequent, the fulfilment of which may result in the reduction or even extinction of liability, would not have the effect of converting the liability which attaches into a contingent liability. This tax which was a present liability and a perfected 'debt' on the last date of the accounting year and, which would become payable after it was quantified in accordance with the provisions of the Act, has now been made payable oh furnishing of the return itself without waiting for the quantification in the assessment proceedings. After the tax became payable the relationship between the Government and the assessee is that of a creditor and debtor. In this respect there is no distinction between the tax payable under Section 140A and one payable under a demand notice made after a provisional assessment under Section 141 or a regular assessment under Section 143 or 144 of the Act. The only difference is that no demand notice under Section 156 could be issued in respect of the liability under Section 140A as Section 156 requires that the tax shall be payable 'in consequence of any order passed under the Act' before any notice of demand could be issued under that section. Section 140A speaks of self-assessment and no order is made by any assessing authority under that section. The consequences of non-applicability of Section 156 may result in the non-applicability of the tax recovery provisions under Sections 220 and 221 of the Act. But Section 232 saves the right of the Government to recover the same under the provisions of any other law for the time being in force relating to the recovery of debts due to the Government or the right of the Government to institute a suit for recovery of arrears due from the assessee. Thus, the tax payable under Section 140A(1), if not voluntarily paid, is recoverable as any other debt due to the Government.
7. The Government have certain special rights in the matter of recovery of the amounts due to them. Keeping in view that if a claim for recovery of tax becomes barred by limitation, the loss falls on the public, the Supreme Court upheld the constitutional validity of Article 149 of the Limitation Act, 1908, providing for a special period of limitation of sixty years for recovery of amounts due to the Government in the decision in Nav Rattanmal v. State of Rajasthan, : 2SCR324 . It is on this principle, the Supreme Court has also upheld the special provisions like the Revenue Recovery Acts for summary recovery of the amounts due to the Government without resorting to suit, in Mannalal v. Collector of Jhalawar, : 2SCR962 . Even arrest and detention of the defaulter under the said Revenue Recovery Acts in cases where the defaulter is guilty of fraudulent conduct in order to evade payment were upheld as provisions for enforcing payment in the decisions of the Supreme Court in Purshottam Goyindji Halai v. B.M. Desai, Addl. Collector of Bombay, : 1956CriLJ129 , and Collector of Malabar v. E. Ebrahim, : 1957CriLJ1030 . In Collector of Malabar v. E. Ebrahim, the Supreme Court considered the contention that the act of arrest was not a mode of recovery of arrears of tax but it is a punishment for failure to pay, and held :
' When dues in the shape of money are to be realised by the process of law and not by voluntary payment, the element of coercion in varying degrees must necessarily be found at all stages in the mode of recovery of the money due. The coercive element, perhaps in its severest form, is the act of arrest in order to make the defaulter pay his dues. When the Collector has reason to believe that withholding of payment is wilful, or that the defaulter has been guilty of fraudulent conduct in order to evade payment, obviously, it is on the supposition that the defaulter can make the payment, but is wilfully withholding it, or is fraudulently evading payment. In the Act (Madras Revenue Recovery Act) there are several sections (e.g., Sections 16, 18 and 21) which prescribe, in unambiguous language, punishment to be inflicted for certain acts done. It is clear, therefore, that where the Act intends to impose a punishment or to create an offence, it employs a language entirely different to that to be found in Section 48 (Madras Revenue Recovery Act). We are of the opinion, therefore, that where an arrest is made under Section 48 after complying with its provisions, the arrest is not for any offence committed or a punishment for defaulting in any payment. The mode of arrest is no more than a mode for recovery of the amount due.'
8. As a creditor, the Government is also entitled to priority of payment as held in Manickam Chettiar v. Income-tax Officer, Madurai, : 6ITR180(Mad) , Builders Supply Corporation v. Union of India, : 56ITR91(SC) and Collector of Aurangabad v. Central Bank of India, : 3SCR855 . In these cases, the Supreme Court and the other High Courts were concerned with the special rights of the Government in the matter of enforcing payment of the amounts due to them. But it is seen that that the amount became payable either under one or other of the provisions of a statute was only historical, and it was dealt with as essentially in the nature of a civil debt and that, therefore, any provision for the enforcement of or recovery of that debt including a coercive process would be valid.
9. Any provision intended to enforce payment or recovery of tax payable could also provide for inclusion and recovery of anything compensatory for delayed payment or retention of the amount of tax payable. It is also the ordinary rule in actions for recovery of money only, that the creditor recovers beyond the amount of the debt the interest on the money withheld or the value of the use of the money while he is kept out of it provided the agreement, express or implied, between the parties provided for it or there exists an express statutory provision to the effect that the interest may be allowed. The Income-tax Act itself has in various provisions imposed liability to pay interest on delayed payment of taxes. In this connection it is useful to refer to the following passage in American Jurisprudence, volume 51, page 850 :
' It is, however, undoubtedly within the power of the legislature to provide that taxes remaining unpaid shall bear interest from the time when they are due and payable and it is equally constitutional to provide that taxes which have already become delinquent shall bear interest from the time the delinquency commences.'
10. Thus, Parliament could validly provide for payment of interest on taxes remaining unpaid from the time when they are due and payable. In fact, the Act itself provides for payment of such interest under various sections. Thus far, there is no difficulty. But the question is whether Parliament could not provide for levy of a penalty of the nature stated in Section 140A(3) for failure to pay in time the tax payable.
11. Every citizen is entitled to retain his income ascertained after deduction of the taxes payable under the Income-tax Act. The Government is entitled for payment of only the taxes. Any provision which authorises the taking by the Government of the retained income of the citizen would be confiscatory unless it is saved under Article 19(5). It is now well-settled that tax laws also are subject to fundamental rights under Articles 14 and 19 of the Constitution--vide Purshottam Govindji Halai v. B.M. Desai, K.T. Moopil Nair v. State of Kerala, : 3SCR77 and Khandige Sham Bhat v. Agricultural Income-tax Officer, : 3SCR809 . The Supreme Court has also held that, in order to decide whether a particular legislative measure contravenes any of the fundamental rights, it is necessary to examine with some strictness the substance of the legislation in order to see what the legislation has really done. The legislation cannot bypass a constitutional prohibition by employing indirect methods and, therefore, the court has to look behind the form and appearance to discover the true character and nature of legislation : vide Dwarkadas Shrinivas v. Sholapur Spinning and Weaving Co. Ltd., : 1SCR674 and Hamdard Dawakhana v. Union of India, : 1960CriLJ671 .
12. Looking at the substance of Section 140A(3) of the Act, there could be no doubt that it deprives or takes away the owner of his retained income and thus it is confiscatory in nature. That the penalty levied under Section 140A(3) is not compensatory or interest for delayed payment of the tax or retention, is clear from the fact that it has no relation to the duration of the delay or the wilful or other nature of the violation to pay or the inability to pay the tax. There is not even a power to extend the time for payment. The moment thirty days given under Sub-section (1) of Section 140A is over, the liability for penalty is attracted. It is also not related to the quantum of the tax payable except that the penalty is attracted if the tax payable exceeds Rs. 500. Thus this section is not hedged in or circumscribed or limited by any condition other than the lapse of 30 days from the date of furnishing of the return and non-payment of the tax payable within those 30 days in order to attract the liability for penalty.
13. The learned counsel for the revenue contended that, though a discretion is vested in the Income-tax Officer to levy a penalty for failure topay tax, having regard to the nature of the provisions, he is expected toexercise a judicial discretion and impose a penalty only in those cases wherethe failure to pay was wilful by a person who had enough resources to paybut deliberately and fraudulently fails to pay. He also relied on theproviso to Sub-section (3) requiring the issue of notice and giving opportunity to the assessee of being heard. This will enable the assessee tobring to the notice of the assessing authority the mitigating circumstanceswhich would have to be taken into account by the assessing authority. Inthis connection he also relied on a Circular No. 20(LXXVI)D of 1964 datedJuly 7, 1964, issued by the Central Board of Direct Taxes, New Delhi,which contained an extract of the observation of the Minister of Finance inthe Lok Sabha in his reply to the debate on clause-by-clause considerationof the Finance Bill, 1964, which reads as follows :
'The amount of penalty is only the maximum that has been mentioned. The idea is, in cases where a man has assessed himself, he should remit the money along with the assessment. A time of one month is given ...... I can certainly assure honourable Members that while the intention is that the money should be, paid along with the assessment, the penalty of 50% is not something which is obligatory. It only gives the extent to which it can be imposed. I certainly agree to issue instructions to see that this should not be imposed unless other conditions are all adverse so far as collection is concerned, and some time should be given. .... I can give the assurance that instructions will be issued to officers that wherever it is justifiable, no penalty should be imposed.'
14. Apart from our doubt on the binding nature of this circular in spite of Section 119 of the Act, the authority of the Income-tax Officer under Section 140A(3) being quasi-judicial in nature we have no doubt that this instruction could not validate the provision if it is otherwise invalid.
15. The test is not what is actually done in exercise of the powers under Section 140A(3) but what the section enables to be done by the assessing authority. In this connection we may usefully quote the decision of the Supreme Court in Kantilal Babulal & Bros. v. H.C. Patel, Sales Tax Officer,  21 S.T.C. 174. This is what the Supreme Court has stated therein:
' The constitutional validity of a provision has to be determined on construing it reasonably. If it passes the test of reasonableness, the possibility of powers conferred being arbitrarily used is no ground for pronouncing it as invalid, and conversely, if the same properly interpreted and tested in the light of the requirements set out in Part III of the Constitution, does not pass the test, it cannot be pronounced valid merely because it is being administered in a manner which might not conflict with the constitutional requirements.'
16. In interpreting a fiscal statute, the court cannot proceed to make good deficiencies if there be any. The court must interpret the statute as it stands : vide C.A. Abraham v. Income-tax Officer, Kottayam, : 41ITR425(SC) . The power to levy penalty under Section 140A(3) is very wide and enables levy of penalty even in cases where the delay in payment was bona fide or due to inability or other good reasons and the amount of penalty is also not made dependent on the amount of tax payable or the length of time of the delay.
17. In Check Post Officer v. K.P. Abdulla and Bros.,  27 S.T.C. 1, the Supreme Court held that Section 42(3) of the Tamil Nadu General Sales Tax Act, 1959, which empowers the Check Post Officers to confiscate goods and levy penalty in lieu of confiscation without inspection of the goods found in a vehicle when the driver of the vehicle was not carrying with him the documents specified in the section, is not a provision which is ancillary or incidental to the power to tax sale of goods under entry 54 of List II of the Seventh Schedule to the Constitution, approving the decision of this court in K.P. Abdulla & Bros. v. Check Post Officer,  22 S.T.C. 552. Though the Supreme Court was concerned with the legislative competency of a State legislature under entry 54 of List II of the Seventh Schedule to the Constitution, the ratio of that judgment, in our opinion, is that a provision for confiscation or levy of penalty is not a provision for enforcement of payment of tax. Thus, the provision for confisaction of property for non-payment of tax arrears could not be sustained as a provision ancilliary or incidental for enforcement of payment and, therefore, a reasonable restriction under Clause (5) of Article 19 of the Constitution. Even as a punishment for failure to pay the tax within time, the legislation could not be sustained from the attack of Article 19(l)(f). The decision in Collector of Malabar v. E. Ebrahim is illustrative of this principle. In that case the constitutional validity of the provision for arrest and detention under the Madras Revenue Recovery Act, 1864, for recovery of arrears of income-tax was considered. The argument was that the act of arrest and detention was not a mode of recovery of tax but it was a punishment for failure to pay and, therefore, the provision is unconstitutional. The Supreme Court held that the mode of arrest is no more than a mode for recovery of the amount due. If really a punishment could have been imposed by the statute for failure to pay, the Supreme Court would have repelled that contention on that ground and would not have resorted to answer that contention by considering the various modes of recovery and treating arrest and detention also as a mode of recovery.
18. The learned counsel for the revenue sought to sustain Section 140A(3) of the Act on the ground that this is a provision enabling coercive process for enforcement or effectuating the recovery of the tax. We are unable to see how this provision could be considered to be a provision for enforcement or recovery of the tax payable. The provision has no rationale or intelligent connection with the recovery of the tax itself. Actually, the Act itself does not provide for the issue of a demand notice under Section 156 of the Act. If it is intended to be a coercive process it must be to recover the debt itself but not to enhance it. The provision, far from enabling to recover the debt imposes an additional burden. It would be a contradiction to say ' you are trying to enforce and recover by imposing additional or new debt'. Far from effectuating recovery, the levy of penalty may even frustrate the very object. How could an addition of a burden help a person who is not able to pay He may not be a pauper, but may not have liquid cash to pay the tax in one month. All the provisions relating to recovery which the Supreme Court has upheld in the various cases cited above, are provisions for recovery of the debt itself against the person and property, but none of the Revenue Recovery Acts or other provisions which came up for consideration before the Supreme Court imposed any additional burden.
19. The learned counsel for the revenue, in this connection, relied on a number of decisions where the Supreme Court has upheld some of the provisions designed to prevent evasion of tax. In Balaji v. Income-tax Officer, : 43ITR393(SC) , the Supreme Court upheld Sections 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922, on the ground that it was designed to prevent evasion of tax by carrying on business nominally in the name of a wife or minor child. For the same reasons Sections 2(6A) and 12(1B) of the Indian Income-tax Act, 1922, were upheld in Navnit Lal C. Javeri v. Appellate Assistant Commissioner of Income-tax, : 56ITR198(SC) . In Sivagaminatha Moopanar & Sons v. Income-tax Officer, : 28ITR601(Mad) , this court had to consider the scope of Section 28 of the Indian Income-tax Act, 1922, which provided for a levy of penalty for failure to furnish a return without reasonable cause and for concealment of the particulars of his income or deliberate furnishing of inaccurate particulars. It was held that Section 28 was enacted for the purpose of rendering evasion unprofitable and of securing to the State compensation for damages caused by attempted evasion. It was also held that the expression ' taxes on income ' is of the widest import and would obviously include laws in relation to the taxation of evaded income, and that such a law may take the form of an appropriation not merely of the income evaded but even more as the tax or as the reparation for damage caused to the State by such attempted evasion. On this principle, the validity of the section was upheld. These decisions, which were relied on by the learned counsel for the revenue, are all directed against evasion of tax. The liability for penalty arises because of the contumacious or fraudulent conduct of the assessee. Mere failure to pay tax is not an offence. Failure to pay even for long time per se does not prove fraudulent conduct. It is the intent to defraud that attracts liability to penalty. The fraudulent evasion creates a right to the Government to claim damages. That the provision in Section 28(1) of the Indian Income-tax Act, 1922, is penal and quasi-criminal in nature and character is decided by the Supreme Court in Commissioner of Income-tax v. Anwar Ali, : 76ITR696(SC) . It may also be noted that Section 276 of the Income-tax Act, 1961, provides for prosecution and punishment for not filing return within time. It is this character of the evasion and the necessity in the interest of the general public to prevent the recurrence that makes the penalty valid. In this connection we may also quote a passage from 57 American Jurisprudence, page 630 :
'To make effective the power to levy and collect taxes, the state must necessarily have the power to discover and assess property on which to levy such taxes; if no penalty attached to the taxpayer's failure to return a true list of his property and to disclose its character and value to the officer whose duty it is to make the assessment, the taxpayer could readily conceal certain classes of property and suffer no loss when the property was discovered, for the state could then do no more than collect the taxes due .... Statutes usually impose a severe penalty of a criminal nature upon persons wilfully filing a false return, and the constitutionality of such statute is unquestionable.'
20. But the tax payable under Section 140A is a civil liability which could not attract any confiscation of property. Any provision enabling confiscation for failure to discharge that liability in time will be unreasonable and infringe Article 19(1)(f).
21. The learned counsel for the revenue then placed strong reliance on the decision of the Supreme Court in M.A. Rahman v. State of A.P., : 1SCR694 . The facts in that case were these. The petitioners therein, who were dealers in motor spirit in Hyderabad, did not submit their returns under the Madras Sales of Motor Spirit Taxation Act (Act 6 of 1939), which was extended to Andhra Pradesh. Thereupon, best judgment assessments were made against the petitioners and they were required to pay the tax, though liberty to pay in instalments was granted to them for that purpose. As the petitioners failed to pay the instalments, the registration certificate of one of the petitioners was cancelled and the other petitioners were threatened with cancellation of the registration certificate. Thereafter, petitions were filed challenging the provisions of the Act relating to cancellation of registration certificates on the ground that such cancellation was not a reasonable restriction on the fundamental rights of the petitioners to carry on business under Article 19(1)(g) of the Constitution. Section 4(1) of the Act provided that no person shall, after the commencement of the Act, cany on business in motor spirit at any place in the State unless he has been registered as such under the Act. Sub-section (6) of that section stated that any registration under Sub-section (1) may be suspended or cancelled by such authority for such reasons in such manner as may be prescribed. Under the rule making power, Rule 14 was made which provided, among other things, that the registration may be cancelled where the holder of a registration certificate, (a) fails to pay the tax or any other amount payable under the Act; and (b) fraudulently evades payment of tax. Section 4(1) and (6) and Rule 14 were attacked as offending Article 19(1)(g). The Supreme Court held that the provision for registration under Section 4(1) is an eminently reasonable provision in order to carry out the object of the Act, namely, the levy and collection of tax for the purpose of the Act and, therefore, the challenge to the constitutionality of Section 4(1) must fail. The argument on the question of constitutionality of Sub-section (6) of Section 4 and Rule 14 was that the effect of cancellation read with subsection (1) of Section 4 is that a person whose registration is cancelled cannot carry on business in motor spirit as he was doing before the cancellation. It was argued that the cancellation results in the total extinction of the business of the person whose registration is cancelled and that, therefore, it was an unreasonable restriction of the fundamental right to carry on business. The decision on this point of the Supreme Court may be quoted in full in order to understand the correct ratio :
'The reasonableness of this provision as to cancellation of registration certificate has to be judged in the background of what we have already said about the purpose of the levy and its liability on the seller. It is true that there are other provisions in the law for realisation of public dues from those who default in making payments ; but generally speaking cancellation of registration in cases like these is one more method of compelling payment of tax which is due to the State. Collection of revenue is necessary in order that the administration of the State may go on smoothly in the interest of the general public. The State has therefore armed itself with one more coercive method in order to realise the tax in such cases. It is true that cancellation of registration may result in a dealer being unable to carry on the business, but the same result may even follow from the application of other coercive processes for realisation of dues from a trader, for his assets may be sold off to pay the arrears of tax and he may thereafter be not in a position to carry on the business at all. Therefore, the provision for cancellation of registration for failure to pay the tax or for fraudulently evading the payment of it is an additional coercive process which is expected to be immediately effective and enables the State to realise its revenues which are necessary for carrying on the administration in the interest of the general public. The fact that in some cases restrictions may result in the extinction of the business of a dealer would not by itself make the provision as to cancellation of registration an unreasonable restriction on the fundamental right guaranteed by Article 19(1)(g). We may in this connection refer to Narendra Kumar v. Union of India, : 2SCR375 , where it was held that:
'the word 'restriction' in articles 19(5) and 19(6) of the Constitution includes cases of ' prohibition ' also; that where a restriction reaches the stage of total restraint of rights special care has to be taken by the court to see that the test of reasonableness is satisfied by considering the question in the background of the facts and circumstances under which the order was made, taking into account the nature of the evil that was sought to be remedied by such law, the ratio of the harm caused to individual citizens by the proposed remedy, the beneficial effect reasonably expected to result to the general public, and whether the restraint caused by the law was more than was necessary in the interest of the general public.' Applying these tests we are of opinion that the cancellation of registration will be justified even though it results in the extinction of business as such cancellation is in respect of a tax meant for the general revenues of the State to carry on the administration in the interest of the general public. '
22. The Supreme Court further held that the provision for cancellation of registration for failure to pay the tax was all the more reasonable because in actual practice the sellers like the petitioners include the tax in the price and thus pass it on to the consumer and there is no justification for failing to pay it over to the State or evading payment thereof fraudulently. The Supreme Court upheld the requirement of registration as a reasonable provision. The validity of the conditions under which the registration could be cancelled, which were also upheld, has to be considered with reference to the fact that the registration itself was held by the court as valid. If the requirement of registration is valid on the ground that such requirement imposes reasonable restriction in the public interest, it must follow that reasonable provisions for cancellation of such licence or permit must also be valid. The provision for cancellation of the registration for failure to pay the tax or fraudulently evading payment of tax was considered as an additional coercive process which is expected to be immediataly effective and enables the State to realise its revenues. The Supreme Court also relied on the fact that in some cases restrictions may result in the extinction of the business of the dealer. This decision will have to be understood with reference to the fact that the petitioners had already collected the tax which they have fraudulently failed to pay over to the State, that the extinction of the business itself under certain circumstances is permitted under Article 19(1)(g) read with Article 19(6) and that the impugned provision did not impose any additional burden or liability in respect of the tax payable. It is also very important to note that there is no provision in the Madras Sales of Motor Spirit Taxation Act as extended to Andhra Pradesh or the Rules framed thereunder, prohibiting or debarring a person whose licence has been cancelled, from applying for a fresh licence. This case is, in our opinion, similar to those cases where the arrest and detention for recovery of arrears of tax under the Revenue Recovery Act were upheld. A law with respect to the recovery of debts is also not one with respect to carrying on of any trade or business, though the debtor might be a trader as held in Lachhman Das on behalf of the firm Tilak Ram Ram Bux v. State of Punjab, : 2SCR353 . Confiscation of property is also not allowed under Articles 19(1)(f) and 19(5).
23. The learned counsel for the revenue also referred to the decision in Western Union Telegraph Co. v. State of Indiana, 41 L. Ed. 725. In that case a penalty of 50 per cent. for non-payment of taxes by a telegraph company which was imposed by an Indiana Act of 1893, was held not unconstitutional as a denial to such company of the equal protection of the law, or as an arbitrary classification, or as a deprivation of property without due process of law. It is seen from the judgment that the ordinary remedies by way of levy, distraint and sale of the properties of the company were not available for recovery of the property tax levied by a municipality in cases of failure or refusal to pay. In view of this the Supreme Court of the United States held:
' The ordinary remedies by levy, distraint and sale were manifestly believed by the general assembly to be open, as to these companies and their properties, to objection as interfering with the exercise of their public functions, and directly impeding the transaction of inter-state commerce ; and the impracticability of pursuing the ordinary methods of collection, in view of that objection, furnished sufficient ground for the adoption of another mode as better suited to the exigency because not involving the suspension of the discharge of public duty in that regard.'
24. In fact, one of the cases relied on in the judgment showed that in respect of rail-road companies under the existing statutes in Indiana, neither the franchise and the privileges of such companies nor any lands, easements or things essential to their existence or necessary to the enjoyment of their franchise could be sold in execution to satisfy judgments at law against them. The penalty also was considered to be reasonable as, in view of the non-availability of the other normal remedies against these companies, ' the legislature had deemed it the wiser course to leave the method of coercing payment in each case to the flexible jurisdiction of a court of chancery rather than to prescribe a method which might be suited to one case and not to another '. In view of the peculiar provisions relating to these public utility concerns, the decision could not be relied on as an authority upholding the constitutional validity of penalty for non-payment of the taxes, assessed and payable.
25. A case very near to our present case was decided by the Supreme Court in State of Madhya Pradesh v. Panchulal, C.A. No. 665 (N) of 1968 decided on 22-4-69. The rules for the recovery of State demand in force in the State of Madhya Pradesh provided by Rule 3 that a State demand shall have precedence over any other debt, demand or claim whatsoever including a mortgage or judgment debt, whether a court has issued an attachment or not. The question for consideration was whether this rule entitling the State to have priority in respect of its dues over the claim of a usufructuary mortgagee, infringed Article 19(1)(f). The Supreme Court held that that rule created an unreasonable restriction on the mortgagee' sright under Article 19(1)(f) and, therefore, was void under Article 13. Though the Supreme Court itself has held in a number of cases that the State is entitled to priority of payment of its dues over private unsecured debts that right was held not available to the State and could not be given even by statute so as to affect the prior mortgagee's right, which was held to be property. Even for a public demand, the recovery of which will be in the public interest, the Supreme Court refused to uphold the confiscation of property and held it to be an unreasonable restriction on the right to property. In K.T. Moopil Nair v. State of Kerala the Supreme Court struck down a taxing provision on the ground that it is confiscatory. Again in Assistant Commissioner of Urban Land Tax v. Buckingham & Carnatic Co. Ltd., : 75ITR603(SC) , the Supreme Court held that where the taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy of the tax, or that it is confiscatory, courts would be justified in striking down the impugned statute as unconstitutional.
26. The learned counsel for the revenue then relied on the procedural safeguards in the Act in support of his plea that the penalty provision under Section 140A(3) is reasonable and valid and does not offend Article 19(1)(i). As seen from the proviso to Section 140A(3), before levying any penalty, the assessee shall be given a reasonable opportunity of being heard. An appeal is provided to the Appellate Assistant Commissioner against the order levying penalty under Section 246(o) and a further appeal to the Tribunal under Section 253. If any question of law arises a reference could be made to the High Court also and a further appeal to the Supreme Court. It is true that Section 140A(3) could not be attacked on the ground of procedural unreasonableness but, as held by the Supreme Court in Dr. N.B. Khare v. State of Delhi, : 1SCR519 , whether the restrictions imposed by a legislative enactment upon a fundamental right guaranteed by Article 19(1) are reasoable within the meaning of Article 19(5) would depend as much on the procedural portion of the law as the substantive part of it. Again, in State of Madras v. V.G. Row, : 1952CriLJ966 the Supreme Court reiterated this principle and held that, in considering the reasonableness of laws imposing restrictions on fundamental rights, both the substantive and procedural aspect of the impugned law should be examined from the point of view of reasonableness. If the penalty under Section 140A(3) is confiscatory in nature that could not be taken out of the purview of Article 19(1)(f) by providing procedural safeguards alone.
27. Our attention was not drawn to any provision in the taxing statute of any other country where the law has provided for penalty of this character for failure or non-payment of the tax payable. On the other hand, we find, the legislative provisions in the Income Tax Acts of the United States of America, the United Kingdom, Australia and Sweden, contain only provision for payment of compensatory interest at the rates varying up to 10 per cent. of the tax in arrear. These compensatory interests are also to be paid with respect to the period of the delay in payment. We find the following passages in 57 American Jurisprudence, pages 848 and 850 :
' The continuance of regular and uniform receipt of the public revenue is essential to the continued existence of the state ; it cannot tolerate delay in the payment of taxes, and to induce prompt payment of taxes when due, the legislatures of the several states have very generally imposed penalties upon taxpayers who fail to pay their taxes within a specified period. Such an imposition is doubtless within the constitutional power of the legislature. Tne state may provide a penalty for failure promptly to pay a corporate fianchise tax ....
The power to exact interest on delinquent taxes is an incident of the power to tax, and many jurisdictional statutes impose liability for interest on delinquent taxes in the nature of a penalty for non-payment of taxes when due. However, the imposition of liability for interest for non-payment of taxes when due is not necessarily equivalent to a penalty thereon. This depends upon the wording and context of the statute. In many instances the legislature in imposing liability for interest uses that term in its ordinary sense of a charge imposed for the use of money; this may be indicated by the fact that the amount of interest imposed is fixed at the legal rate of interest and chargeable on other obligations.'
28. In the book Introduction to Taxation by Ray N. Sommerfeld, Hershel N. Anderson and Horace R. Brock, we find the following passages at pages 461 and 462 :
' Penalties :
The Internal Revenue Code includes a number of penalties intended to encourage taxpayers to file a timely and accurate return and to pay their tax. The more important penalties are :--
2. Failure to pay tax.--If the taxpayer fails to pay his tax on time, a penalty of 6 per cent. per annum is added to the tax. The 6 per cent. runs from the due date of the return without considering extensions of time for filing.'
29. In the book World Tax Series, relating to Sweden, at page 602, we find :
' Any one who fails to pay a tax when due, whether preliminary or final, is subject to a penalty of 4% of the amount due (UF 58). Distraint procedures are available against taxpayers who fail to pay a tax when due.'
30. We also find in World Tax Series, relating to Australia, at page 261, the following :
' If tax is not paid when due, additional tax may be assessed at the rate of 10% per annum on the amount unpaid (207). The additional tax is computed from the original due date to the date of payment, or, where an extension of time has been granted, from such later date as the Commissioner determines. Underestimation of provisional tax is subject to penalty as explained at 12/1.4d.'
31. It is seen from these provisions that, though the word 'penalty' is used, it provides only for compensatory interest. As held by this court in M.R. Vidyasagar v. Income-tax Officer, : 31ITR173(Mad) it is the nature and substance of the levy that determines whether it is compensatory or otherwise. There the phrase ' penal interest' was considered and it was construed that though it is termed as 'penal interest' it is not a penalty; in essence it is compensatory interest.
32. It seems to. us that in testing the standard of reasonableness in order to validate a provision under Article 19(5), we have to keep in mind that there are certain basic and well-recognised principles known to law and have been the law and procedure for over a century in the matter of recovery of amounts due to the Government that they have gained the standard of reasonableness. The basic approach in the matter of recovery of Government dues in this country had always been consistent with the law relating to recovery of debts and the procedure never included recovery of anything more than the debt with compensatory interest and costs. Any law relating to the recovery of tax due, contrary to this basic principle, unless substantial grounds are made out for a departure, is, in our opinion, unreasonable. We are not satisfied that there are any such substantial grounds for varying this provision of levying interest for delayed payment into one of penalty.
33. To sum up : Tax due and payable under Section 140A(1) of the Act is a civil debt. Any provision in the Act for enforcing payment of that debt would be valid. This provision for enforcing payment and recovery of the tax payable may include or impose anything compensatory for delayed payment or retention of the tax. It is not the nomenclature, which the legislature has used in the provision, that decides the issue as to whether the provision is compensatory or penal, but the substance of the provision. A power to levy penalty which is not compensatory is neither incidental nor ancillary to the power of recovery, and it is not inherent in the power to recover the tax payable. The levy of penalty could be sustained only in cases of concealment or evasion of taxes. Penalty for concealment or evasion is a punishment and intended as a deterrent against repetition of the same which is criminal or quasi-criminal in nature. Concealment of income or evasion of tax and non-payment of a tax ascertained or determined and payable are different in nature and character. Failure to pay tax due and payable, attracts only a civil liability.
34. Every citizen has a fundamental right to retain his income after payment of taxes. Any provision in the Act which authorises the taking away of this retained income would be confiscatory unless it is saved under Article 19(5). The penalty levied under Section 140A(3) of the Act is not compensatory for delayed payment or retention of tax. In the guise of a deterrent provision for enforcing payment of tax due and payable, Section 140A(3) authorises confiscation of property. Confiscation of property for non-payment in time of a tax ascertained and payable is an unreasonable restriction on the fundamental right to property of an assessee.
35. Section 140A(3) of the Act authorising the levy of penalty for failure to pay within 30 days of the tax payable under Section 140A(1) is confiscatory and is not saved under Article 19(5) of the Constitution.
36. Under Section 214 of the Act, the Government shall pay simple interest at 9 per cent. per annum on the excess amount of advance tax over the tax determined on regular assessment from a particular date as provided in that section up to the date on which the refund was made. Under Section 237 an assessee, who has paid more tax than was properly chargeable under the Act for that year shall be entitled to a refund of the excess. The amount that was found refundable under Section 237 shall be paid within three months from the date on which the total income is determined under the Act in certain cases and in certain other cases within six months from the date on which the claim for refund is made under Chapter XIX. Section 243 provides that if the Income-tax Officer does not grant the refund within the time specified above, the Government shall pay the assessee simple interest at 9 per cent. per annum on the amount directed to be refunded from the date immediately following the expiry of the period. Section 244 further states that in cases where the assessee becomes entitled to a refund of the amount, as a result of any order passed in appeal or other proceedings under the Act and the Income-tax Officer does not grant the refund within a period of six months from the date of such order, the Government shall pay the assessee simple interest at 9 per cent. per annum on the amount of refund due from the date immediately following the expiry of the period of six months aforesaid to the date on which the refund is granted. Thus, while these provisions make the Government liable for interest only, for failure to refund within time the excess amount of tax collected, Section 140A(3) makes the assessee liable for penalty. This, according to the learned counsel for the petitioners, is an invidious and hostile discrimination against the assessees like the petitioners and therefore Section 140A(3) is violative of Article 14. We are unable to accept this argument. Section 140A(3) treats all these persons who fail to pay the tax as provided under Section 140A(1) as a class by itself and makes them liabte to pay the penalty. In our opinion, there can be no comparison between that class of persons and the Government. Government can be legitimately treated as a class by itself. It is well known that governmental machinery does not move as quickly as nongovernmental bodies or individuals. Government being an impersonal body, there have to be departmental correspondence, consultations, obtaining sanction, etc., and these necessarily take some time. The Government have to depend on the efficiency and promptness of a team of officials. Loss or damage to the Government is a loss or damage to the public, that is, the community in general. The question whether a State can be treated as a class by itself has been considered in several cases and the overwhelming weight of authorities support the conclusion that for most, if not all purposes, State is a class by itself. This position of the State was recognised in the Indian law long before the Constitution came into force and continues to be recognised under our Constitution. To quote only a few cases, for instance, in the matter of recovery of amounts due to the Government, the Supreme Court held in Manna Lal v. Collector of Jhalawar that 'it seems to us that the Government, even as a banker, can be legitimately put in a separate class. The dues of the Government of a State are the dues of the entire people of the State. This being the position a law giving special facility for the recovery af such dues cannot, in any event, be said to offend Article 14 of the Constitution'. Again in Baburao v. Bombay Housing Board, : 1SCR572 the exemptions granted to the Government from the Bombay Rent Act was upheld. In Nav Kattanmal v. State of Rajasthan, the Supreme Court held that Article 149 of the Limitation Act, 1908, prescribing a period of 60 years, did not violate Article 14 on the ground that the loss by reason of the claim becoming barred fell on the public and ' that itself would appear to indicate a sufficient ground for differentiating between the claims of an individual and the claim of the community at large '. We are, therefore, unable to discover any hostile discrimination in Section 140A(3) against the petitioners.
37. It is next contended by the learned counsel that the section confers an arbitrary and unguided power on the Income-tax Officer to levy penalty and it is capable of exercise in a discriminatory manner and, therefore, the provision infringes Article 14. In M.M. Ipoh v. Commissioner of Income-tax, : 67ITR106(SC) , referring to the earlier decision in Jyoti Pershad v. Administrator for Union Territory of Delhi, : 2SCR125 , the Supreme Court observed that :
' Where the legislature lays down the policy and indicates the rule or line of action which should guide the authority, Article 14 is not violated, unless the rules of the policy indicated lay down different criteria to be applied to persons or things similarly situate. It is not however essential for the legislature to comply with the guarantee of equal protection that the rules for the guidance should be laid down in express terms. Such guidance may be obtained from or afforded by, (a) the preamble read in the light of the surrounding circumstances which necessitated the legislation, taken in conjunction with well-known facts of which the court might take judicial notice or of which it is apprised by evidence before it in the form of affidavits, (b) or even from the policy and purpose of the enactment which may be gathered from other operative provisions applicable to analogous or comparable situations or generally from the object sought to be achieved by the enactment.'
38. The Supreme Court further held that the guidance may be gathered fromthe provisions of the Act, its scheme, policy and purpose and the surroundingcircumstances which necessitated the legislation. The question for consideration in that case was whether Section 3 of the Indian Income-taxAct, 1922, vested in the Income-tax Officer an arbitrary and unguidedpower to assess to tax the income of an association of persons in the handseither of the association or of the persons constituting that association.Though the Supreme Court expressed the view that Section 3 itself doesnot lay down any policy for the guidance of the Income-tax Officer inselecting the association or the members individually as entities in bringingto tax the income earned by the association, the power conferred underthat section was held not to infringe Article 14. For upholding theprovision, the Supreme Court relied on the following circumstances: TheIncome-tax Officer in the matter of assessment functions as a quasi-judicialauthority. The duty of the Income-tax Officer is to administer the provisions of the Act in the interest of the public revenue and to prevent evasion or escapement of tax legitimately due to the State. The order of the Income tax Officer is not final and is open to appeal to the Appellate Assistant Commissioner and the Tribunal. These were held to be adequate enunciation of the principles and policy for the guidance of the Income-tax Officer. All these considerations are also applicable to the case on hand. The provision is intended to be a deterrent against failure to pay tax under Section 140A(1) of the Act. The Income-tax Officer is bound to issue a notice to the assessee before passing any order under that provision. This gives an opportunity to the assessee to bring to the notice of the Income-tax Officer any grounds in his favour for not levying the penalty or the mitigating circumstances which have to be taken into account in determining the amount of penalty payable by him. Under Section 246(o) there is an appeal provided to the Appellate Assistant Commissioner against the order of the Income-tax Officer under Section 140A(3). There is a further appeal to the Tribunal under Section 253. If the case involves any question of law, the assessee could ask for a reference to the High Court with a further right of appeal to the Supreme Court. Thus the nature of the authority exercised by the Income-tax Officer and his duty to levy and effectively enforce payment of tax are, in our judgment, adequate enunciations of the principles and policy for guidance of the Income-tax Officer. Abuse of power is not to be readily assumed. Normally, it is presumed that public officials will discharge their duties honestly and in accordance with law. The discretion vested in the Income-tax Officer has also to be exercised in a judicial manner. It must be governed by rule and not by whim. Whether in a given case the power has been properly exercised or not is open to question in appeals and further appeals. Thus, there is an effective check on the exercise of the power by the Income-tax Officer. We are, therefore, of opinion that Section 140A(3) does not infringe Article 14 of the Constitution on this ground.
39. Regarding the legislative competency of Parliament, the submission of the learned counsel for the petitioners was that a power to levy penalty or confiscation of property for non-payment or failure to pay in time of the tax payable is not a power incidental or ancillary to the power to legislate on ' taxes on income ' under entry 82 of List I to the Seventh Schedule to the Constitution. Regarding Article 248 and entry 97 of List I to the Seventh Schedule, his submission was that if there is a specific entry and the particular power is not comprehended within that entry no resort to residuary power is permitted. Entry 82, according to him, is definitive and exhaustive of the power of legislation on ' taxes on income '. The residuary power could be invoked only if it is not enumerated in List I. Entry 82 of List I prohibits, so to say, according to the learned counsel, levying penalty or confiscation for non-payment of the tax payable. This point is concluded against the petitioners in the decisions of the Supreme Court in Union of India v. Harbhajan Singh Dhillon,  83 I.T.R. 532 and Second Gift-tax Officer v. D.H. Nazareth, : 76ITR713a(SC) . It was held in Second Gift-tax Officer v. D.H. Nazareth that the sovereignty of Parliament and the legislature is a sovereignty of enumerated entries. But, within the ambit of an entry, the exercise of power is as plenary as any legislature can possess, subject, of course, to the limitations arising from the fundamental rights. If a piece of legislation does not fall in any of the three Lists, then it must be regarded as a matter not enumerated in any of the three Lists and in such a case it belongs exclusively to Parliament under entry 97 of the Union List as a topic of legislation. The test, as laid down in Union of India v. Harbhajan Singh Dhillon, is to find out whether the impugned taxing provision is with respect to any of the entries in List II. If a taxing provision is not a law with respect to any of the entries in List II, it must necessarily fall within the legislative competence of Parliament under entry 97 of List I read with Article 248 of the Constitution. The Supreme Court also held that there is no principle which debars Parliament from relying on its powers under specified entries 1 to 96 of List I and supplementing them with the powers under entry 97 and Article 248. It is also well settled that a power to legislate could be found in more than one entry--vide K.L. Johar & Co. v. Deputy Commercial Tax Officer, : AIR1965SC1082 and Commissioner of Commercial Taxes v. Ramkishan Shrikishan Jhaver, : 1SCR148 . It is not the contention of the learned counsel for the petitioners that the matter sought by Parliament to legislate is included in any of the entries in List II. Clearly, therefore, the power to legislate on penalty for failure to pay the tax is comprehended in entry 97 of List I and Article 248 of the Constitution. Sectfon 140A(3) of the Act is, therefore, not beyond the legislative competence of Parliament.
40. In the result, we hold that Section 140A(3) of the Income-tax Act, 1961, is not beyond the legislative competence of Parliament and it does not also infringe Article 14 of the Constitution. But, it offends Article 19(I)(f) and is not saved by Article 19(5) of the Constitution. The writ petitions are, therefore, allowed. The order levying the penalty is quashed and the rule in each case is made absolute. There will be no order as to costs.