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Ganesh Das Sreeram v. Income-Tax Officer, A Ward, Shillong, And Others.

Gauhati High Court

Feb 16, 1973

Judgment

Subsequent
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Structured Summary of the Legal Opinion — Goswami, C.J.

Factual and Procedural Background

The matter concerns a civil rule relating to the assessment year 1965-66 involving a registered firm with its head office at Shillong (the petitioner).

Timeline and procedural history as stated in the opinion:

The petitioner submitted a return of income under section 139 of the Income-tax Act, 1961, to the Income-tax Officer, “A” Ward, Shillong, on 11 April 1966. A provisional assessment under section 141 was made on a total income of Rs. 4,25,393 and a demand notice followed (initially reduced by advance tax already paid).
The Income-tax Officer later made an assessment under section 143(3) determining total income at Rs. 4,22,111 and issued a demand notice on 16 December 1968 which included interest of Rs. 3,158 charged under section 139.
The petitioner applied on 15 March 1967 for waiver of interest under section 139(8) read with rule 117A of the Income-tax Rules.
The Income-tax Officer made a rectification under section 154 reducing total income to Rs. 4,17,954 but increasing tax charged to Rs. 56,372 and interest to Rs. 4,091; the net tax payable after adjustments was calculated as Rs. 2,916.
A notice under section 148 was issued on 30 March 1971. The petitioner filed a return on 25 May 1971 and the assessment was completed under section 147/143(3), resulting in a demand (after adjustments) of Rs. 21,023, which included Rs. 4,959 as interest under section 139.

Legal Issues Presented

Whether the Income-tax Officer could charge interest under proviso (iii) to section 139(1) where the assessee had not applied for an extension of time for filing the return (i.e., whether charging interest under clause (iii) requires an application and an order extending time).
Whether clause (a) of proviso (iii) to section 139(1) (which prescribes interest for registered firms based on the tax that would be payable if assessed as an unregistered firm) is violative of Article 14 of the Constitution.
Whether the computation of interest under proviso (iii) to section 139(1) must give credit for advance tax paid by the assessee (i.e., whether the words “reduced by the advance tax, if any, paid” apply to sub-clause (a) as well as sub-clause (b)).

Arguments of the Parties

Petitioner's (Mr. Baruah) Arguments

The Income-tax Officer could charge interest under proviso (iii) to section 139(1) only when an extension of time had been granted on an application by the assessee; in this case no such application had been made, so the charge of interest was without jurisdiction.
Clause (a) of proviso (iii) to section 139(1) discriminates in violation of Article 14 because a registered firm is made to pay interest on a notional higher tax (as if it were unregistered) rather than on the tax actually due.
The interest payable under proviso (iii) must be computed after deducting the advance tax paid by the assessee; the Income-tax Officer was bound to allow credit for advance tax in computing interest.

Respondent / Income-tax Officer (and departmental) Arguments

The interest charged was calculated strictly in accordance with section 139, treating the firm as an unregistered firm where appropriate, and the charge was consistent with the law.
The Income-tax Officer averred that a notice under section 139(2) dated 20 May 1965 was served on the petitioner on 28 May 1965 requiring a return within thirty days and that the petitioner did not comply, submitting the return only on 11 April 1966; consequently, interest was legally payable under the proviso to sub-section (2) read with clause (iii) of the proviso to section 139(1) as in force at the relevant time.
On the point of advance tax, departmental counsel (Mr. Bhattacharjee) submitted that the words “reduced by the advance tax, if any, paid” relate only to sub-clause (b) of clause (iii), and not to sub-clause (a) (this submission was considered by the Court).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Kishanlal Haricharan v. Income-tax Officer, [1971] 82 I.T.R. 660 (A.P. High Court)	Held (as relied upon by petitioner) that proviso to section 139(1) applies only when an assessee requests for time under clause (iii); i.e., penal interest under the third clause applies only if the assessee sought an extension.	The Court disagreed with that decision, observing that it failed to take account of section 139(4). The Court held that subsection (4) brings late returns (filed before assessment within the four-year window) within clause (iii), so the Andhra Pradesh High Court decision was inapplicable to the present facts.
Jain Brothers v. Union of India (Supreme Court)	Principle that legislature may give benefits to registered firms but withhold those benefits when the firm commits a default attracting penalty; treating a defaulting registered firm as unregistered for penalty purposes does not violate Article 14.	The Court applied this principle to hold that interest under section 139 partakes of a penal character (or twin penal-compensatory character) and that treating registered firms differently in respect of defaults is constitutionally permissible under Article 14.

Court's Reasoning and Analysis

The Court addressed each of the three principal submissions in turn, grounding its analysis in the text of section 139 as it stood at the relevant time.

Scope of proviso (iii) and requirement of an application/extension:
The Court examined section 139(1), the proviso thereto (clauses (i), (ii), (iii)) and subsection (4) of section 139. It concluded that subsection (4) permits a person who has not furnished a return within the time allowed under subsection (1) or (2) to furnish the return before assessment within four assessment years and that "the provisions of sub-clause (iii) of the proviso to sub-section (1) shall apply in every such case."

Because the petitioner had not filed under subsection (1) or (2) and had filed its return under subsection (4) (after service of a section 139(2) notice and before assessment), clause (iii) applied. Therefore the Income-tax Officer was empowered to charge interest under clause (iii) even though the petitioner had not applied for an extension of time under the proviso to subsection (1).

The Court expressly rejected the contrary view in the Andhra Pradesh High Court decision (Kishanlal Haricharan) on the basis that that decision did not consider subsection (4).
Article 14 challenge to clause (iii)(a):
The Court considered whether clause (a) of proviso (iii) offended Article 14. It observed that registered firms obtain certain benefits under the Income-tax Act (e.g., special reduced rates) and that it is reasonable to classify registered firms as a distinct class. The imposition of liabilities (including interest or penal consequences) where registered firms fail to perform statutory duties is a rational incidence of that classification.

Applying the intelligible differentia and rational relation test, the Court concluded there was a rational basis for subjecting registered firms to the specified liability when they default. The Court cited the Supreme Court's decision in Jain Brothers to support the proposition that benefits granted to registered firms can be withheld upon default without offending Article 14.
Whether interest computation must account for advance tax:
The Court analysed the language of clause (iii) of the proviso and specifically the phrase “reduced by the advance tax, if any, paid or by any tax deducted at source, as the case may be.” It rejected the departmental submission that this phrase related only to sub-clause (b).

The Court held that the qualifying words apply to both sub-clauses (a) and (b) of clause (iii). Consequently, in computing interest under clause (iii)(a) (the sub-clause applicable to registered firms treated as unregistered for this purpose), the amount of tax to be considered for charging interest must be reduced by advance tax paid (if any). The Income-tax Officer had therefore erred in not allowing credit for advance tax in computing interest.

Holding and Implications

Holding:

The civil rule was partly allowed.

Direct consequences and practical effects:

The Court upheld the power of the Income-tax Officer to charge interest under proviso (iii) to section 139(1) where the assessee had filed a return under subsection (4) (i.e., a late return filed before assessment), so the interest charge itself was valid.
However, the Court directed that the Income-tax Officer must re-determine the interest payable by the assessee after making an appropriate allowance (credit) for advance tax paid by the assessee. In other words, interest must be computed on the tax amount reduced by advance tax (if any).
Both parties were left to bear their own costs, reflecting that both sides had some success.

The opinion sets out the controlling statutory interpretation and applies existing precedent; it does not announce a novel legal principle beyond the application of those authorities and the statutory text to the facts at hand. The decision therefore has the direct effect described above on the parties in this proceeding.

Show all summary ...

Goswami, C.J:— This civil rule relates to the assessment year 1965-66.

2. The petitioner is a registered firm having its head office at Shillong. For the assessment year 1965-66, the petitioner submitted the return of income under section 139 of the Income-tax Act, 1961 (briefly “the Act”), to the Income-tax Officer, “A” Ward, Shillong (respondent No. 1), on 11th April, 1966, and it was provisionally assessed under section 141 on a total income of Rs. 4,25,393 on the basis of its return and a demand notice was accordingly issued for payment of Rs. 61,379.21 and actually Rs. 22,219.21 being reduced by the advance tax of Rs. 39,160, already paid. Thereafter, the respondent No. 1 made an assessment under section 143(3) of the Act and determined the total income of the petitioner as Rs. 4,22,111 (annexure “A”). A demand notice accordingly was issued on 16th December, 1968, for a sum of Rs. 56,142 which, after adjustment of the amounts paid earlier, came to Rs. 2,584. The calculation arrived at included a sum of Rs. 3,158 charged as interest under section 139 (annexure “B”). The petitioner submitted an application to the respondent No. 1 on 15th March, 1967, for waiver of the interest under section 139(8) read with rule 117A of the Income-tax Rules (annexure “C”). The respondent No. 1 also made an order under section 154 of the Act rectifying his earlier assessment made under section 143(3) and thereby the total income was reduced to Rs. 4,17,954. Although the total income was reduced, the total tax charged was enhanced to Rs. 56,372 and the interest charged under section 139 was also enhanced to Rs. 4,091 from Rs. 3,158. After calculating the amounts already paid, the amount of tax payable was determined at Rs. 2,916 (annexures “D” and “E”). Thereafter, the respondent No. 1 issued a notice on 30th March, 1971, under section 148 of the Act and the petitioner filed the return of income on 25th May, 1971, and the assessment was completed by the respondent No. 1 under section 147/143(3). In accordance with the reassessment order, the tax demand after adjustment of payments came to Rs. 21,023 which included Rs. 4,959 as interest under section 139 (annexures “F”, “G” and “H”).

3. The petitioner avers that the amount of interest charged under section 139 has been calculated not on the amount of tax payable or required to be paid by the petitioner-firm, but has been calculated on the amount of tax which would have been payable if the petitioner-firm had been assessed as an unregistered firm (para. 13). The petitioner further avers that while charging interest under section 139, the respondent No. 1 has calculated interest on the gross amount of tax without allowing the deduction of advance tax paid by the petitioner (para. 15). The petitioner also avers that it never made any application to the Income-tax Officer praying for extending the time to file the return of income and as such no extension of time was granted (para. 22).

4. The Income-tax Officer has in his counter-affidavit submitted that the interest charged on the petitioner has been calculated strictly in accordance with the provisions of section 139 of the Act treating the firm as an unregistered one and that such charge of interest is not at all inconsistent with the provisions of law. In a further affidavit, the same officer has averred, without any replication by the petitioner, that a notice dated 20th May, 1965, under section 139(2) of the Act was served on the petitioner on 28th May, 1965, requiring it to furnish a return of its income during the previous year within thirty days from the date of service of the notice and that the petitioner did not submit any return in pursuance to that notice, but submitted the same only on 11th April, 1966, and hence the “interest was legally payable by the petitioner under the proviso to sub-section (2) of section 139 read with clause (iii) of the proviso to section 139(1) of the Act, as was in force during the relevant assessment year”.

5. In the above premises, Mr. Baruah, the learned counsel for the petitioner, made the following submissions:

(1) The Income-tax Officer can charge interest under proviso (iii) to section 139 only when he allows extension of time for filing the return to the assessee on an application made by him and, in the instant case, the petitioner not having applied for extension of time, the charging of interest for delayed return is without jurisdiction.

(2) Clause (a) of proviso (iii) to section 139 is violative of article 14 of the Constitution inasmuch as while all other assessees are liable to pay compensatory interest on the balance of tax actually found due, the petitioner, a registered firm, has to pay interest on a much more onerous basis and not on the amount due from it but on a very much higher amount that would have been due if the assessee had been assessed as an unregistered firm.

(3) The Income-tax Officer is bound in law to allow the petitioner credit for advance tax paid by it while computing the interest payable under proviso (iii).

6. Before we deal with the first submission, we may set out the relevant provision of section 139 as was in force at the relevant time.

“139. (1) Every person, if his total income … during the previous year exceeded the maximum amount which is not chargeable to income-tax, shall furnish a return of his income….

(a) in the case of every person…. before the expiry of six months from the end of the previous year…..or before the 30th day of June of the assessment year, whichever is later;

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

Provided that, on an application made in the prescribed manner, the Income-tax Officer may, in his discretion, extend the date for furnishing the return—

(i) in the case of any person whose total income includes any income ….. the previous year in respect of which expired on or before the 31st day of December…. and in the case of any person referred to in clause (b), up to a period not extending beyond the 30th day of September of the assessment year without charging any interest;

(ii) in the case of any person whose total income includes any income from business or profession the previous year in respect of which expired after the 31st day of December of the year immediately preceding the assessment year, up to the 31st day of December of the assessment year without charging any interest; and

(iii) up to any period falling beyond the dates mentioned in clauses (i) and (ii), in which case, interest at six per cent per annum shall be payable from the 1st day of October or the 1st day of January, as the case may be, of the assessment year to the date of the furnishing of the return—

(a) in the case of a registered firm or an 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 may be ….

(4) Any person who has not furnished a return within the time allowed to him under sub-section (1) or sub-section (2) may before the assessment is made furnish the return for any previous year at any time before the end of four assessment years from the end of the assessment year to which the return relates, and the provisions of sub-clause (iii) of the proviso to sub-section (1) shall apply in every such case….

(8) Notwithstanding anything contained in clause (iii) of the proviso to sub-section (1), the Income-tax Officer may, in such cases and under such circumstances as may be prescribed, reduce or waive the interest payable by any person under any provision of this section.” (Inserted by the Finance Act, 1963).

7. Mr. Baruah submits that the petitioner in this case had not made any application for extension of time to furnish its return and there was, therefore, no occasion for the Income-tax Officer to extend time. He submits that an application by the assessee and a consequent order extending time for furnishing the return are conditions precedent for authorising the Income-tax Officer to charge interest under clause (iii) of the proviso to section 139(1) which is invoked in this case by the department. Under section 139(1), every person who has a taxable income in the previous year is under an obligation to furnish a return of his income. Different time-limits for submission of return are mentioned in clauses (a) and (b). These time-limits are allowed under the Act and there is no need for any application when the return is submitted within the time allowed under section 139(1)(a) and (b). There is also no question of payment of any interest when returns are submitted in compliance with section 139(1). Secondly, a further relaxation in the matter of charging of interest is made when an assessee makes an application in the prescribed manner praying for extension of time for furnishing the return under the proviso to section 139(1). Here again certain time-limits are specified within which returns may be filed without liability to pay interest, provided an application is made for time and the Income-tax Officer has granted the time up to the periods mentioned in clauses (i) and (ii) of the proviso. There is, however, a third case which comes under clause (iii) of the proviso, where up to any period falling beyond the periods mentioned in clauses (i) and (ii) of the proviso, interest at six per cent per annum shall be payable from the 1st day of October or the 1st day of January, as the case may be, of the assessment year to the date of the furnishing of the return.

8. Mr. Baruah submits that since the petitioner filed its return on 11th April, 1966, beyond the dates mentioned in clauses (i) and (ii) of the proviso and it made no application under the proviso in the prescribed form and consequently there was no order of the Income-tax Officer extending the date for furnishing the return, no interest could be charged under clause (iii) of the proviso. This submission, however, fails to take count of subsection (4) of section 139, which we have set out above. The assessee in this case has submitted its return under section 139(4) and it may be described as a person who has not furnished a return within the time allowed to him under sub-section (1) or sub-section (2). It is clear that it did not submit its return voluntarily under section 139(1) and it also made no application for extension of time in order to submit its return. The assessee, therefore, in this case did not furnish a return within the time allowed to it under sub-section (1). It also did not submit its return notwithstanding the service of notice under section 139(2) on 28th May, 1965, calling upon it to submit the return within thirty days of the service of the notice. The petitioner is, therefore, clearly an assessee who has not furnished a return within the time allowed to it under sub-section (1) or sub-section (2) and it has taken the benefit of sub-section (4) to furnish the return for the previous year on 11th April, 1966, before the assessment has been made in this case and before the expiry of the period mentioned in the sub-section. That immediately attracts clause (iii) of the proviso to sub-section (1) which empowers the Income-tax Officer to charge interest for late submission of the return. Sub-section (4) of section 139 is, therefore, a complete answer to the first submission of Mr. Baruah. There is, therefore, no substance in this contention.

9. Mr. Baruah has drawn our attention to a decision of the Andhra Pradesh High Court in Kishanlal Haricharan v. Income-tax Officer [1971] 82 I.T.R 660 A.P. and he strenously urges us to take the same view as expressed in the following passage relied upon by him:

“A perusal of the proviso (proviso to section 139(1)) makes it clear that it is only when an assessee requests for time under the third clause, 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.”

10. 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 no escape from the conclusion that clause (iii) 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. With regard to the second submission of Mr. Baruah on the score of article 14 of the Constitution, it is sufficient to point out that section 139(1)(iii)(a) deals with registered firms which have committed certain defaults under the law. 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. The object indeed is not to let registered firms, with the benefits conferred upon them by the Act, slip in one of their essential duties to submit a return in time.

12. Mr. Baruah submits that interest payable under clause (iii) of the proviso to section 139(1) of the Act is of a compensatory nature and not penal as such. There is, therefore, according to him no rational basis for charging penal interest. We are unable to agree that the interest charged under section 139 does not partake of a penal character. It is indeed more penal than compensatory and may even be said to partake of a twin character of being penal as well as compensatory. It is penal as it entails (sic) on account of a breach of the mandate of section 139 and hence has relevance only to default in submission of a return and not to wrongful detention of money due. We are not required to consider in this case whether the position would be the same in cases of interest payable under several other provisions of the Act, such as, sections 215, 217,220(2) and 243 of the Act wherein withholding of money due to a party appears to be the relevant consideration. Mr. Baruah strenuously submitted that we should hold charging of interest as a compensatory measure instead of it being penal in order to steer clear of the decision of the Supreme Court in Jain Brothers v. Union of India. In that case, a challenge was made to section 271(2) of the Act of 1961, on the ground of contravention of article 14. The Supreme Court held in that case as follows:

“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. We fully share the view of the High Court that there was nothing to prevent the legislature from giving the benefit of a 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.”

13. Mr. Baruah frankly submits that if we hold that charging of interest is penal, the case will be governed by the ratio decidendi of the above decision of the Supreme Court. We have already held that the interest charged partakes also of a penal character. That being the position, the principle laid down in the above decision of the Supreme Court is clearly attracted. The submission of Mr. Baruah, therefore, fails.

14. With regard to the third submission, we feel that the same has good deal of force. Mr. Baruah submits that the assessee's case is governed by clause (iii)(a) of the proviso to section 139(1) and the interest when charged has to be reduced by crediting the advance tax paid by the assessee. Mr. Bhattacharjee submits that the clause “reduced by the advance tax, if any, paid” has relation only to sub-clause (b) of clause (iii) of the proviso to section 139(1). A perusal of clause (iii) of the proviso would clearly show that the words “reduced by the advance tax, if any, paid or by any tax deducted at source, as the case may be” have relation to both sub-clauses (a) and (b) of clause (iii) of the proviso. We do not find any ambiguity in the sub-clauses calling for a different interpretation. Under clause (iii) of the proviso interest shall be payable in the two given cases under sub-clauses (a) and (b) which is clear from the conjunctive “and” used in sub-clause (a) and in both cases, therefore, the tax to be taken into account for charging interest will be tax payable by the assessee reduced by the advance tax paid. There is, therefore, no force in the submission that the advance tax will be taken into account only in a case covered by sub-clause (b) of clause (iii) of the proviso. The submission of Mr. Bhattacharjee is of no avail. The Income-tax Officer was, therefore, not justified in not making allowance for the advance tax paid when determining the interest to be charged in the instant case.

15. In the result, the application is partly allowed. While the order of the Income-tax Officer charging interest holds good, he is directed to determine the actual interest payable by the, assessee by making appropriate allowance of the advance tax paid by the assessee. As both sides have shared success in this civil rule, we leave the parties to bear their own costs.

B.N Sarma, J.:— I agree.