Venkataramiah, J.:— The petitioners in the above petitions are all registered firms who are assessed to income-tax under the provisions of the Income Tax Act, 1961, hereinafter referred to as the Act. Because a common question of law arises for consideration in all these petitions, they are disposed of by this common judgment.

2. W.P Nos. 926, 927 and 928 of 1972 are filed by M. Nagappa and the relevant assessment years are 1965–1966, 1966–1967 and 1968–1969. W.P 3401/73 is filed by Southern Express Transport Co., and the relevant year of assessment is 1969–1970. W.P Nos. 3402 and 3403 of 1973 are filed by Mahadeswara Lorry Service against the orders of assessment passed in respect of assessment years 1969–1970 and 1970–1971. Being aggrieved by the amount of interest claimed under Section 139 of the Act and included in the relevant orders of assessment, the petitioners have filed these petitions. The concerned Income Tax Officer, the Union of India and the Commissioner of Income Tax have been impleaded as respondents. In all the cases, interest under Section 139 is calculated at the prevailing rate on the amount of tax which would have been payable if the concerned firm had been assessed as an unregistered firm. The contention of the petitioners is that Section 139(1) read with Section 139(4) (as they stood prior to 1st April, 1971) which authorised collection of interest from a registered firm at the prescribed rate on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm is discriminatory and violative of Article 14 of the Constitution. They claim that they are liable to pay interest on the actual tax payable by them like all other assessees and that there is no justification to levy interest on the tax which they are not in law liable to pay under the Act.

3. In order to sustain an attack based on Article 14 of the Constitution of India, the classification made by the legislature should satisfy two tests: (1) that there is an intelligible differentia between persons and things which are grouped together and those which are excluded from the group; and (2) that there is a reasonable nexus between the classification and the object intended to be achieved by the classification. The contention of the petitioners is that a registered firm which is an assessee under the Act which has not filed its return within the prescribed time and which files the return either within the time extended by the Income Tax Officer or after the prescribed time when no extension of time is granted by the Income Tax Officer cannot be treated differently from the other assessees under the Act in the matter of calculation of interest levied on account of delay in filing the return. If a return is not filed by an assessee within the prescribed time and the time is not extended for furnishing the return by the Income Tax Officer, under Section 139 the assessee has to pay interest at the prescribed rate and also will be liable to pay penalty levied under Section 271(1) subject, of course, to any waiver or reduction of interest and penalty by the appropriate authority. Sub-section (2) of Section 271 of the Act prescribes that when the person liable to penalty is a registered firm, then notwithstanding anything contained in the other provisions of the Act the penalty imposable under sub-section (1) of Section 271 shall be the same amount as would be imposable on that firm if that firm were an un-registered firm. In Jain Brothers v. Union of India(1) the Supreme Court has upheld the constitutionality of the above provision after negativing the contention that it was violative of Article 14 of the Constitution. In that connection, the Supreme Court observed as follows:—

“Lastly, the challenge to Section 271(2) of the Act of 1961 on the ground of contravention of Article 14 may be considered. 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 aggregate 50 per cent of the tax payable by the assessee; whereas in the case of a registered firm the maximum penalty is 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 per cent 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. 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.”

It is seen from the foregoing that the Supreme Court was of the view that since the provision in question was one which levied a penalty on a firm which was a defaulter, it was open to the legislature to treat a registered firm as an unregistered firm The essential factors which arise for consideration under Section 271(1) are: (1) default on the part of the assessee; and (2) the quantum of penalty that has to be levied. The object of the said provision is to levy penalty on an erring assessee to ensure due observance of law. The question for consideration is whether the view expressed by the Supreme Court on the validity of Section 271(2) can be extended to Section 139(1) also.

4. Section 139(1) authorises the levy of interest on the amount of tax withheld by the assessee when the assessee has not filed his return in time. What is the character of the interest that is levied under Section 139(1)? Is it compensatory or penal in character? The answer to the above questions according to me, would determine the issue that arises for consideration in these cases.

5. In Additional Commissioner of Income Tax v. Santosh Industries(2), the Gujarat High Court held that the interest levied under Section 139(1) was not penal in character but was only compensatory in nature. Dealing with the above question, Bhagwati, C.J, (as he then was) observed at page 577 as follows:

“The learned Advocate-General, appearing on behalf of the assessee, objected to this construction of the second clause of Section 271(1)(a) on the ground that it would result in double penalty. If a person files his return of income after the time allowed under sub-section (1) or sub-section (2) of Section 139 but before the expiration of four years from the end of the assessment year, he would be liable to pay ‘penal interest’ under clause (iii) of the proviso to sub-section (1) and he would also be liable to pay penalty under the second clause of Section 271(1)(a). The legislature could not have intended to impose such double penalty for the same default. We do not think this objection is well founded. It suffers from several defects. In the first place, it is not correct to say that interest chargeable to a person who files his return of income under Section 139, sub-section (4), is ‘penal interest’, though that is an expression which is commonly in use in income-tax parlance. It is not by way of penalty that interest is chargeable from a person who does not file his return within the time allowed to him under sub-section (1) of Section 139. If we look at clause (iii) of the proviso to sub-section (1) of Section 139, it is clear that even where the Income Tax Officer grants extension of time to a person to file his return of income, the person to whom extension of time is granted is liable to pay interest, if the extended date falls beyond a particular date. There is no question in such a case of levying any penalty on the person concerned, because extension of time having been granted to him, he is not in default. Interest is not charged to him by way of penalty but he is required to pay it, because by reason of extension of time, the filing of the return would be delayed and that would in its turn delay the assessment and consequent realisation of tax from the assessee. It is, therefore, by way of compensation for delay in realisation of tax that interest is required to be paid by the assessee. Now, obviously, if a person who obtains extension of time beyond a certain date is required to pay interest, a person who does not seek extension of time but files the return of income under sub-section (4) of Section 139 after the time specified in sub-section (1) of Section 139 cannot be allowed to escape payment of interest. The latter cannot be placed in a better position than the former and, therefore, with a view to putting the latter on par with the former in this respect, the legislature made the provision in clause (iii) of the proviso to sub-section (1) applicable in a case where a person files his return of income under Section 139, sub-section (4). This interest which a person filing his return under Section 139, sub-section (4), is required to pay is thus 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 the penalty for default in furnishing return of income within the time allowed under sub-section (1) or sub-section (2) of Section 139. There is, therefore, no question of imposition of double penalty on the interpretation contended for on behalf of the revenue.”

While taking the above view, the Gujarat High Court relied upon the decision of the Andhra Pradesh High Court in Poorna Biscuit Factory v. Commissioner Of Income-Tax, A.P(3) and the decision of the Madras High Court in K.C Vedadri v. Commissioner Of Income-Tax, Madras-I.(4).

6. In a later decision of the Andhra Pradesh High Court, T. Venkata Krishnaiah & Co. v. Commissioner of Income Tax(5) it was again held that the interest levied under Section 139 was only compensatory and not a penalty.

7. Following the decision in the case of Venkata Krishnaiah & Co., a Division Bench of this Court in D.B D.B Navalgundkar & Co. v. Commissioner Of Income-Tax, Mysore.(6), upheld the levy of penalty under Section 271(1)(a) of the Act when interest under Section 139 had also been charged and rejected the case of the assessee that the interest levied under Section 139 was also in the nature of penalty.

8. In Express Newspapers (P) Ltd. v. Income Tax Officer(7), the High Court of Madras upheld the levy of interest under Section 139 and the levy of penalty under Section 271(1) (a) on an assessee who had not filed the return within the specified time on the ground that the interest levied under Section 139(1) was purely compensatory in character.

9. I respectfully agree with the above decisions and hold that the interest levied under Section 139(1) is compensatory in character and not in the nature of penalty.

10. When once it is held that the interest that is levied under Section 139(1) is compensatory in character, its incidence on all the assessees dealt with by that provision should be the same. Having regard to the loss which the Government would suffer by the assessee withholding the payment of arrears of tax the legislature has specified the interest payable by the assessee. While construing Section 139(1) the Court should place emphasis on the loss, which the Government suffers by the delayed tiling of return resulting in delayed payment of arrears of tax and not on the kind of assessee who has committed default. The loss suffered by the Government which is sought to be compensated by the legislative measure should be the same in all cases, irrespective of the fact that the assessee who is responsible for it is a registered firm or any other kind of assessee. If that is the case, then the amount claimed by way of interest should be directly correlated to the amount of tax withheld by the assessee without reference to the kind of assessee concerned in a given case. The object of levy of interest being just reimbursement of what the Government would lose by delayed payment of tax resulting from the delayed filing of the return, it is clear that the levy of interest in the case of a registered firm on the tax which would have been payable if the firm had been assessed as an unregistered firm is outside the said object. From the memo of calculation filed in these cases it is seen that the interest claimed from the petitioners ranges between four times to six times the interest which can be claimed from the other assessees. The levy is more in the nature of penalty than mere compensation. It follows that the classification of registered firms which have not filed the return within the specified time as a separate class for purposes of payment of interest under Section 139(1) does not bear any relationship to the object to be achieved by that section.

11. It is, however, urged on behalf of the Revenue that in the matter of levy of taxes the legislature has greater freedom. It is no doubt so. But at the same time, it should be remembered that it should not be assumed that there are always some valid reasons which are undisclosed and unknown for subjecting certain persons or things to hostile or discriminatory legislation. Relying on the decision of the Supreme Court in Jain Brother's case, it was contended by the respondents that when the classification was valid for the purpose of levy of penalty under Section 271, the classification made under Section 139 also should be upheld. The above contention overlooks the object to be achieved by the two provisions. Whereas in one case the statute is dealing with the penalty to be levied on an erring assessee, in the other case it is dealing with the reimbursement of the loss sustained by the Government by the delayed payment of tax. I am of the view that the decision of the Supreme Court is distinguishable from the case on hand.

12. The learned counsel for the respondents next relied upon the decision of a single Judge of the High Court of Madras in Mahendra Kumar Ishwarlal & Co. v. Union of India(8) and the decision of a Division Bench of that High Court in W.P 954/69 decided on 6th December, 1972 in which it was held that Section 139(1) in so far as it permitted the levy of interest in the case of a registered firm as if it were an unregistered firm, was not violative of Article 14 of the Constitution of India. With great respect to the learned Judges who decided those cases, I have to express my disagreement with their view. Ramaprasada Rao, J., who decided the first case proceeded on the basis that the intention of the legislature in enacting the impugned provision was to levy a ‘quasi penalty’ on a defaulting registered firm and the Division Bench consisting of Ramanujam and Ramaswami, JJ. proceeded to decide the second case on the basis that the interest collected need not always be compensatory. The Division Bench decided the above case on December 6, 1972. It is seen from the certified copy of the said decision that the Division Bench did not fully share the view of the Andhra Pradesh High Court in the case of T. Venkata Krishnaiah & Co., that the interest levied under Section 139(1) was compensatory in character. But the very same Bench had on November 21, 1972 in the case of Express Newspapers (P) Ltd., accepted that the levy of interest under Section 139(1) was a compensatory measure. The ultimate view reached by the Madras High Court in the two decisions referred to above was largely influenced by the view that the interest levied either was in the nature of quasi-penalty or that it was not always compensatory. It is quite probable that the conclusion of the Madras High Court would have been different if the learned Judges had proceeded on the basis that the interest in question was compensatory in character.

13. Similarly the decision in Ganeshdas Sreeram v. Income Tax Officer(9) of the Gauhati High Court also has proceeded on the basis that the interest in question was compensatory in was in the nature of a penalty and not compensatory in character. Goswamy, C.J, as he then was, observed in the above case at page 25 as follows:—

“Mr. Baruah submitted 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.”

Having held that the interest levied was in the nature of penalty, the learned Judge felt that the case was covered by the decision of the Supreme Court in the case of Jain Brothers. I regret my inability to agree with the above view also.

14. It is urged on behalf of the revenue that a firm which, on account of registration, became entitled to several concessions and privileges can be deprived of the privilege in some respects by the legislature whenever it commits a default. This contention does not directly concern the question at issue. But before leaving the said contention, it has to be observed, that whatever may have been the position before 1956–1957 when the Parliament commenced to tax the income of the firm in the hands of the firm, I do not really think that after 1956–1957 an individual whose source of income is the profit made by a firm of which he is a partner is in a more advantageous position than an individual who has other sources of income. By treating a firm as an entity for purposes of assessment, the law first subjects its entire income to tax and then proceeds to state that if the firm is registered, the tax payable would be less. If the firm is not treated as an entity for purposes of assessment and the individual partners alone are taxed on the income which they derive from the business of the firm just like income derived from any other source is taxed, it would be clear that what appears to be a concession or privilege earned by the registration of the firm is really not there. It is unnecessary to dwell any longer on this question as I do not find that the said contention urged by the respondents has any relevance to the question to be decided in these cases.

15. I am therefore of the view that Section 139(1) as it stood prior to 1st April, 1971 read with Section 139(4) to the extent it required a registered firm to pay interest at the specified rate on the tax assessed as if it were an unregistered firm, whenever the registered firm did not file the return within the specified time, was violative of Article 14 of the Constitution of India and was therefore void.

16. In the result, the orders of assessment impugned in these petitions are quashed to the extent interest is levied under Section 139 as if the petitioners were unregistered firms. The concerned assessing authorities are directed to amend the orders of assessment by levying interest at the prevailing rate on the arrears of tax payable by the petitioners as registered firms and recover the same in accordance with law.

17. A writ shall issue accordingly in all these cases. There shall, however, be no order as to costs.