The impugned provision of Section 139(1) of the Income-tax Act, 1961, was found to be discriminatory and violative of art. 14 of the Constitution due to its arbitrary and unjust nature in imposing differential treatment on registered firms in the matter of levy of interest.

Rama Jois, J.

1. These are six connected writ appeals presented by the income-tax department against the judgment rendered by a single judge in W. Ps. Nos. 926 to 928 of 1972 and 3401 to 3403 of 1973, reported in M. Nagappa v. ITO [1975] 99 ITR 32 (Kar), declaring that sub-section (4) of s. 139 of the I. T. Act, 1961 (hereinafter referred to as " the Act"), to the extent it required a registered firm to pay interest at the rates specified, on the amount of tax though not payable by the registered firm but which would have been payable by it had it been assessed as an unregistered firm, if there was delay in fling the income-tax returns, as void as offending article 14 of the Constitution.

2. The respondents in all the appeals are registered firms, who are assessed to income-tax under the provisions of the Act. The assessment years, in the case of respondent in W. As. Nos. 427 to 429 of 1974, are 1965-66, 1966-67 and 1967-68, in the case of respondent in W. A. No. 426 of 1974 the assessment year is 2969-70, and in the case of the respondent in W. As. Nos. 424 and 425 of 1974 the assessment years are 1969-70 and 1970-71. There was some delay on their part to file the income-tax returns. On account of the delay in filing the returns, though the assessees were registered firms and they were liable to pay tax payable as registered firms, the interest was calculated on the basis of the tax which would have been payable had the assessee-firms been unregistered firms, in view of clause (iii) (a) of the proviso to sub-s. (1) of s. 139 of the Act (hereafter referred to as the "impugned provisions"). The respondents contended in the writ petitions that as the interest was required to be levied on all taxpayers who failed to file the returns within the due date irrespective of the fact that extension of time had been granted for purposes of filing the returns and the returns were filed within the extended time, on the amount of tax which was due to the department, after the deduction of advance tax, if any, out of the amount of tax assessed, but only in the case of registered firms they were required to pay interest on a notional amount, i.e., calculated on the basis of tax which would have been payable had the firms been unregistered firms, the impugned provision was violative of art. 24 of the Constitution. The contention of the respondents was resisted by the department relying on the decision of the Supreme court in Jain Brothers v. Union of India [1970] 77 ITR 107, in which the validity of sub-s. (2) of s. 271 of Act, which provides for imposition of penalty on a registered firm for failure to file the return before the due date on the basis of the tax, which would have been payable by the registered firm had it been assessed as an unregistered firm, was upheld. After considering the rival contentions, Venkataramiah J. (as he then was) held as follows:

The object of s. 271 of the Act was to provide for the imposition of penalty for failure to file the returns within the time prescribed by law, but the object of s. 139 of the Act was meant to compensate the revenue by way of interest for non-receipt of the tax within the due date. There was no justification for compelling registered firms to pay interest on an amount which was not payable as tax by the registered firms. The impugned provision was discriminatory as against registered firms. In view of the clear distinction between the nature of levy under s. 271 which is penal in character and the nature of levy under s. 139 which is compensatory in character, the ratio of the decision of the Supreme Court in Jain Brothers [1970] 77 ITR 107 cannot be extended to uphold the constitutional validity of s. 139 of the Act. The impugned provision which required a registered firm to pay interest on an amount, which was not at all due to the revenue, was violative of art. 14 of the Constitution. Aggrieved by the said judgment the department has presented these appeals.

(1) Sri S. R. Raja