Rama Jois, J.:— 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, since reported in M. Nagappa v. Income Tax Officer, Central Circle-I, Bangalore(1) declaring that sub-section (4) of Section 139 of the Income Tax 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 filing 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 427 to 429 of 1974, are 1965–1966, 1966–1967 and 1967–1968, in the case of respondent in W.A No. 426 of 1974 the assessment year is 1969–1970 and in the case of respondent in W.As 424 and 425 of 1974 the assessment years are 1969–1970 and 1970–1971. 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 assessees—firms been unregistered firms, in view of clause (iii)(a) of the proviso to sub-section (1) of Section 139 of the Act (hereinafter referred to as the impugned provision). The respondents contended in the Writ Petitions that as the interest was required to be levied on all tax payers 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 Article 14 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(2), in which the validity of sub-section (2) of Section 271 of the 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.

3. After considering the rival contentions, Venkataramiah, J. (as he then was) held as fallows: The object of Section 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 Section 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 section 271 which is penal in character and the nature of levy under section 139 which is compensatory in character, the ratio of the decision of the Supreme Court in Jain Brothers cannot be extended to uphold the constitutional validity of section 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 Article 14 of the Constitution. Aggrieved by the said Judgment the Department has presented these appeals.

4. (1) Sri S.R Rajasekhara Murthy, learned counsel appearing for the Department, submitted that in the case of Jain Brothers, the Supreme Court has clearly held that the classification of tax payers into two classes, i.e, (i) registered firms, who enjoy the benefit of reduced tax under the Act, and (ii) other tax payers, is a reasonable classification and consequently, the differential treatment in the matter of imposition of penalty was not discriminatory and the same reasoning holds good for the differential levy of interest under Section 139 of the Act. In support of his submission, he also relied on the following decisions:

(i) Chhotulal v. Income Tax Officer(3)

(ii) Ganesh Das Sreeram v. Income Tax Officer(4)

(iii) Mahendrakumar Iswarilal & Co. v. Union of India(5)

(iv) Mahendrakumar Iswarilal & Co. v. Union of India(6) and

(v) Jiwan Hospital v. Income Tax Officer(7)

(vi) Hindustan Steel Forgings v. Commissioner of Income Tax(8).

in which the several High Courts have applied the ratio in the case of Jain Brothers for upholding the validity of the impugned provision. In particular he relied on the judgment of the Punjab High Court in Hindustan Steel Forgings in which the Punjab High Court has expressed disagreement with the judgment under appeal. He submitted that the learned Single Judge was not right in distinguishing the decision of the Supreme Court in Jain Brothers and holding that the impugned provision was violative of Article 14 of the Constitution.

(2) Sri K. Srinivasan and Sri G. Sarangan, learned counsel appearing for the respondents, per contra submitted that there was absolutely no justification to levy interest on registered firms on a notional amount and not on the basis of the actual amount withheld particularly having regard to the fact that the levy and collection of interest under section 139 of the Act was compensatory in character and there was absolutely no nexus between the provisions which imposed a heavy burden on registered firms by way of levying interest on a notional amount and the object sought to be achieved and further even the classification of registered firms for the purpose of levy of interest on the basis of an amount not due was itself unreasonable. They submitted that the learned single Judge has distinguished the decision of the Supreme Court in Jain Brothers on valid ground and, therefore, it does not call for interference in appeal.

5. The impugned provision, which was in force during the relevant years, and until it was substituted, by the Taxation Laws (Amendment) Act, 1970 with effect from 1st April, 1971 reads as follows:

“139. (1) Every person, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income tax, shall furnish a return of his income or the income of such other person during the previous year in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed—

(a) in the case of every person whose total income or the total income of any other person in respect of which he is assessable under this Act, includes any income from business or profession, before the expiry of four months from the end of the previous year or where there is more than one previous year, from the end of the previous year which expired last before the commencement of the assessment 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 any person whose total income includes any income from business or profession the previous year in respect of which expired on or before the 31st day of December of the year immediately preceding the assessment year, and in the case of any person referred to in clause (b) upto 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, upto the 31st day of December of the assessment year without charging any interest; and

(iii) upto any period falling beyond the dates mentioned in clauses (i) and (ii), in which case, interest at nine pec 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”.

(underlined by us to indicate the impugned provision)

The effect of the above provision to the extent necessary for this case may be summarised as follows:

(1) Every income-tax payer, whose income includes income from business or profession should file his return before the expiry of four months after his accounting year or before 30th June of that assessment year, whichever is later.

(2) The Income-tax Officer, however, could extend the time till 30th September of the assessment year without charging any interest in the case of assessees whose accounting year ended before 31st December of the previous year and in other cases up to 31st December of assessment year.

(3) The Income-tax Officer could also extend the time to any period beyond 30th September or 31st December, as the case might be, but subject to payment of interest at 9 per cent per annum on the amount of tax reduced by the advance tax already paid.

(4) If the assessee to whom such extension is granted is a registered firm, the interest is payable on the amount of tax which would have been payable if the firm had been an unregistered firm.

6. Part XVI of the Act (sections 182 to 189) makes special provision applicable to partnership firms. The following position in law regulating the liability of partnership firms to pay tax under the Act is not in dispute:

(1) A registered firm is liable to pay tax, when the income of the firm exceeds the specified limit and at specified rates as fixed from time to time in the relevant Finance Acts. In addition, the share income of every individual partner is also liable to tax at his hands as individual income, if the individual income of the partner including his share income attracts the tax liability under the Act.

(2) In the case of an unregistered firm, the firm is treated as an unit.

(3) The tax payable by a registered firm, together with the tax payable by its partners individually, would be lesser, compared to the tax payable by the same firm if it was unregistered.

(4) The Act does not make any difference in the amount of tax payable by a registered firm, whether the return is filed within the due date or after the due date.

(5) When there has been delay on the part of a registered firm to file the returns whether extension of time is granted to file the returns beyond the maximum period, during which no interest is chargeable or not, in view of the impugned provision, the interest payable is calculated on the notional amount of tax which would have been payable had it been an unregistered firm, irrespective of the fact, that advance tax paid covered or exceeded the actual tax payable, or even if no tax was payable.

7. It appears that in some of the cases, time had been extended by the competent authority to file the return after the period during which no interest was chargeable and in other cases time had not been extended, but it makes no difference for the levy of interest as in all cases there has been delay in filing the return. Hence interest at the rate of 9 per cent was levied on the notional amount of tax, which would have been payable by the assessees had they been unregistered firms. In order to appreciate the contention for the assessees it is sufficient to set out the facts relating to the case of the respondent in W.A 425 of 1974. For the assessment year 1969–1970, the respondent had paid the advance tax. The respondent was required to file the return before 30th September, 1969. The respondent applied for extension of time more than once explaining the circumstances in which it was not possible to file the return and ultimately filed the return on 2nd September, 1970. Assessment order was made on 20th March, 1972. The income was assessed at Rs. 1,92,370. The other parts of the order which are relevant reads:

By my separate order of even number dated 20th March, 1972 I have granted registration to the firm for the assessment year 1969–1970.

Sri Bhaskara Reddy, Chartered Accountant appeared with books of account. As in previous years the assessee firm carried on transport business owing a fleet of lorries. Receipts and payment account together with the balance sheet has been filed. Information called for from time to time has also been furnished.

After examining the books of account and after discussion with the auditor, the total income is computed as under:

******

(omitted as unnecessary)

1,92,372 or

1,92,370

Action to levy penalty under Section 27(i)(a) is initiated separately. Advance tax paid Rs. 37,628.

(Sd.) S.L.N Sastry,

Income-tax Officer,

(Asst. 7).

Tax thereon Income tax SC SSC Total 25,974 5,195 3,117 34,286 Less: Adv. tax paid .. 28,507 5,701 3,420 37,628 Excess paid .. 2,533 506 303 3,342 Add: Int. under Sec. 214 .. .. .. 900 Total refund due .. .. .. .. 4,242 Less: 139(1)(iii) Int. .. .. .. 7,462 Balance tax due .. .. .. .. 3,220

The assessment order discloses that while the tax payable was assessed at Rs. 34,286 the respondent had paid advance tax of Rs. 37,628 and was entitled to a refund of a sum of Rs. 3,342 together with an interest of Rs. 900 payable by the Department to the respondent which in all amounted to Rs. 4,242. But instead of granting refund, an interest of Rs. 7,462 was charged applying the impugned provision calculating the same on the notional amount of tax which would have been payable by the respondent had it been assessed as an unregistered firm. The respondent was required to pay a balance of Rs. 3,220 after setting off the amount payable by the Department to the respondent.

8. The liability to pay interest, though the assessee had paid advance tax, which was in excess of the tax assessed was on account of the impugned provision. An analysis of section 139(1) shows that while all category of tax payers, who file returns after the due date, are liable to pay interest only on the actual amount of tax with-held by them, the registered firms alone are subjected to a differential treatment. The illustration of the case of the respondent in W.A 425 of 1974 is glaring. The question for consideration is whether this differential treatment of registered firms is discriminatory and, therefore, violates the right of equality guaranteed under Article 14 of the Constitution. The principles on the basis of which the answer to such a question should be found out, are well settled. (See: Ram Krishna Dalmia v. Mr. Justice S.R Tendolkar*(9). The injunction addressed to the State not to deny equal treatment to any person means that persons similarly situated should not be subjected to discriminatory laws, i.e, the law shall not favour one and discriminate against another, both of whom are similarly situated, in relation to the particular object or purpose sought to be achieved by the legislation. Two categories of persons may be similarly situated for one purpose, and may not be so situated for another purpose. It is for the Legislature to make the necessary classification for purposes of legislation and to make the laws, in regulating the rights and liabilities or conferring benefits, as between different classes of persons. There would be no discrimination, if the differentiation is reasonable and has rational nexus with the object of the legislation. There is also an initial presumption that the differentiation or classification made by the legislature is reasonable. In order to find out whether any legislation has or has not violated the right to equality guaranteed under Article 14 of the Constitution, the following two tests have to be applied:

(i) Classification must be reasonable.

(ii) Even if the classification is reasonable, the particular provision of law which subjects an individual or class of persons to discriminatory treatment, in comparison with other individuals on class of persons, must have a rational nexus to the subject sought to be achieved.

To the above general principles, a taxing statute is no exception. However, in view of the intrinsic complexity of fiscal adjustments compared to other legislation, a wider, but not unlimited, discretion is conceded to the legislature. Therefore, a taxing provision could be declared violative of Article 14, only when the court is convinced that it is arbitrary, or capricious, fanciful or clearly unjust (vide Khandige Sham Bhat v. Agricultural Income Tax Officer(10), Income Tax Officer, Assam v. Lawrence Singh(11), Income Tax Officer v. N.T.R Rymbai(12) and Anandji Haridas v. S.P Kasture(13) Applying the above principle and declaring the provisions of section 11(4)(a) of the C.P and Berar Sales-tax Act which discriminated against dealers registered under that Act and unregistered dealers in the matter of proceedings for escaped assessment, the Supreme Court observed:

“To be a valid classification, the same must not only be founded on an intelligible differentia which distinguishes persons and things that are grouped together from others left out of the group but that differentia must have a reasonable relation to the objects ought to be achieved.

(16) Section 11(4)(a) is separable from the rest of the sub-section. Its separation from that sub-section does not affect the implementation of the other provisions of the Act.”

Having due regard to these principles we proceed to examine the validity of the impugned provisions.

9. The Act, for purposes of levy of tax, has classified partnership firms into two categories registered and unregistered. Registered firms are conferred certain benefits in the matter of tax payable under the Act. There is no dispute that there had been higher exemption limit and also lower rate of tax prescribed, which was applicable to registered firms. The share income of each partner is taxable at the hands of the partner consequently not only the individual partners come under lower slab, but it is quite possible that in a given case they may fall within the exempted limit also. Even taking the tax payable by the firm and tax payable by the individual partners, the total tax payable is lesser compared to the tax payable by the same firm if it was an unregistered firm. Unregistered firm is treated as an unit for purposes of tax and, therefore, subject to higher incidence of taxation. Therefore there can be no doubt that the legislature has, in its wisdom, classified partnership firms into two categories for purposes of levy of tax under the Act and its validity for purposes of taxation is not questioned.

10. The above classification made, holds good, according to the provisions of the Act itself for the assessment of tax payable, whether the registered firm filed the returns within the due date or not. The tax liability of a registered firm fixed on the basis of its being a registered firm, is the same both before and after the due date. In other words, for purposes of tax liability the legislature itself has treated registered firms filing the returns within the due date and those filing the returns after the due date similarly. Further this is so in respect of all category of tax payers. There is no difference in the rate or amount of tax payable by all categories of assessees, including registered firms whether the returns are filed within the due date or after the due date. The scheme of the Act discloses that the legislature has classified tax payers, into various categories such as individuals, Hindu undivided families, registered firms, unregistered firms, companies etc., for purposes of taxation, and has prescribed different exemption limits and different rates of tax, but it has not made any difference in the amount of tax payable, whether the return is filed before the due date of after the due date. However, in the matter of liability to pay interest for filing the returns after the due date, while all categories of tax payers are required to pay interest on the actual amount of tax with-held by them, in view of the impugned provisions, the registered firms alone are singled out for differential treatment. It is as follows:

(1) In the case of filing returns after the due date, while every category of tax payer is not required to pay any interest, if he is not liable to tax, or no tax is due, a registered firm is liable to pay interest even if no tax is payable, its income being within the exempted limits, if its income treating it as an unregistered firm, is liable to tax, on such tax, even though such tax itself is not payable.

(2) While every category of tax payers, who had paid advance tax equal to or more than the tax assessed, is not liable to pay any interest, a registered firm, though it had paid the full tax in advance or had paid even more, it is liable to pay interest calculated on the basis of notional tax payable as if it were an unregistered firm, though no tax is payable.

(3) Though every category of tax payer has to pay interest only on the actual amount of difference between the tax payable and the advance tax paid, a registered firm has to pay interest on the notional amount of tax due, deeming it as an unregistered firm, through no such amount is due.

11. Thus it will be seen that in the matter of levy of interest, a heavy burden without reference to the actual amount of tax due is imposed by the impugned provisions on the registered firm. To put it differently, while all the category of tax payers are liable to pay only the interest on the principal amount due to the revenue, the registered firms are liable to pay interest, in view of the impugned provision, on principal amount not due to the revenue.

12. The nature of levy of interest under section 139 is compensatory in character. This is the view taken in Chhotulal v. Income-tax Officer(14), N.V.N Nagappa Chettiar v. Income tax Officer(15) and in Express-Newspapers (P) Limited v. Income Tax Officer(16). The very concept of interest is that it is an amount payable or paid by one person to another, in respect of a principal amount due to the latter from the former. Relevant part of the meaning of the expression ‘interest’ in Jowitts Dictionary (Vol. I) Second Edition, at page 997, reads:

“Interest also signifies a sum payable in respect of the use of another sum of money, called the principal. Interest is calculated at a rate proportionate to the amount of the principal and to the time during which the non-payment continues.

Interest is of two kinds, namely, that which is agreed to be paid on a loan, and that payable as damages for the non-payment of a debt or other sum of money on the proper day. Formerly the common law only allowed interest by way of damages where the debt was Secured by a bill of exchange, or where a promise to pay interest was implied from a usage of trade or the like, In equity, interest seems to have been allowed as damages in all cases where there was a wrongful detention of money which ought to have been paid (Hyde v. Price, (1837) P. Coop. 193): and in any such case the remedy was to obtain an order for an account with rests.”

(Underlining by us)

The object of section 139 of the Act is to compensate the exchequer, in respect of the tax due to it, under the Act from a tax payer within the prescribed date, but with-held by him beyond that date. This concept is clearly discernible from the provision which provides that in the case of delay in filing the returns, interest is payable on the tax assessed reduced by the advance-tax paid, if any, in the case of all categories of tax payers, as also from the position that interest is payable even if time was extended to file the returns for good reasons, as distinct from the provisions of section 271 of the Act under which no penalty is leviable, if extension of time was granted by the competent authority to file the returns. However, in view of the impugned provision, even though a registered firm has paid the entire tax assessed or even more, by way of advance tax, it is made liable to pay interest on an amount not at all with-held.

As far as liability to pay the tax payable under the Act, there is an inbuilt similarity in the provisions of the Act itself, as between registered firms and all other tax payers, in that the amount of tax payable by every assessee is the same, whether return is filed within the due date or after the due date. When that is so, we fail to see any rational basis or nexus, as between the impugned provision which subjects the registered firms for differential treatment and the purpose of the levy. For the purpose of levy of interest, in case of delay in filing the return and the delay in paying the tax, no rational basis is discernible from the provisions of the Act and no such surrounding circumstances are brought to our notice as to why the registered firms have been subjected to discriminatory treatment. Except trying to justify the impugned provision on the ground that registered firms are a separate class, learned counsel for the department was unable to indicate any nexus between the object of the levy and the impugned provision. Therefore, in our view, the impugned provision is patently arbitrary and unjust and therefore violative of Article 14 of the Constitution and the view taken by the learned single Judge has to be affirmed.

13. Learned counsel for the department however strenuously contended that the ratio of the decision of the Supreme Court in Jain Brothers upholding the constitutional validity of section 271(2) of the Act, which provides for the levy of penalty on registered firms for filing belated returns, on the basis of tax payable as if it were an unregistered firm, equally applied to this case. He also relied on the decisions of the several High Courts (3-8) taking such a view.

14. In the judgment under appeal, the learned single Judge considered this submission, but he held that the ratio in Jain Brothers has no application to the validity of section 139 of the Act as the penalty leviable under section 271 is penal in character and the interest leviable under section 139 is compensatory in character. In our opinion, the view taken by the learned single Judge holding that the ratio in Jain Brothers is inapplicable to uphold the validity of the impugned provision is correct for reason assigned by him and also for the following reasons which distinguish section 271 from the impugned provision:

(1) If the income of a registered firm does not exceed Rs. 1,500 over and above the exempted limit, it is exempted from penalty in view of non abstante clause contained in section 271(3)(a) of the Act, but even in such cases, the liability to pay interest under the impugned provision on the notional tax payable, though not payable exists.

(2) If a registered firm fail to comply with the notice issued under section 139(2) or section 148 of the Act, even then the penalty payable is only Rs. 25 if it proves that it had no income liable to tax, in view of section 271(3)(b) of the Act, but in such a case, the liability to pay interest, on the notional tax payable as if it were an unregistered firm, though no such tax is payable, exists in view of the impugned provision.

(3) If an assessee including a registered firm shows reasonable cause, such as circumstances beyond his or its control for not filing return, no penalty can be levied under section 271 of the Act whereas interest is payable under section 139 of the Act whether there was justification for the delay or not.

(4) If time had been granted to file return beyond the due date, no penalty is leviable under section 271(1) of the Act whereas under section 139 of the Act interest is payable even if, on being satisfied about the reason for the inability to file the returns in time, the competent authority had granted extension of time to an assessee to file the return.

15. In view of the above distinguishing features, which differentiate the levy of penalty under section 271 of the Act and interest under section 139 of the Act, we are unable to agree that the ratio in Jain Brothers is sufficient to hold that the impugned provision is not violative of Article 14 of the Constitution and for the same reasons, we are unable to agree with the view taken in the cases of Chotulal by the Gujarat High Court, Ganesh Das Sreeram by the Gauhati High Court, Mahendrakumar Iswarilal and Company( and ), by the Madras High Court, Jiwan Hospital by the Madhya Pradesh High Court and Hindustan Steel Forgings by the Punjab High Court.

16. In all the above decisions, the various distinguishing features, to which we have adverted to, have not been considered. In particular, the position, that a registered firm is liable to pay interest, even if advance tax paid covered or was even in excess of the tax assessed as in the case of the respondent in W.A No. 425 of 1974 or even in cases in which it has no taxable income, has not been examined. Division Bench of the Punjab and Haryana High Court, which distinguished the judgment under appeal observed as follows:

“It is open to the legislature to say that once a registered firm committed a default attracting the payment of interest it should be deemed or considered to be an unregistered firm for the purposes of imposition of interest. There is nothing to prevent the legislature from giving the benefit of reduced rate to the registered firm for the purpose of tax but withholding the same when it committed a default and became liable to the payment of interest on the amount, which amount had fallen due but was not actually paid. No question of discrimination under Article 14 of the Constitution, in the said case, can arise.”

(underlining by us)

The above observation indicates that the Court proceeded on the basis that under the impugned provision, the interest was leviable on a registered firm only on the amount of tax actually due but not paid; which is not the correct position; and on that basis held that the impugned provision was not violative of Article 14 of the Constitution.

17. In the light of the above discussion, we hold that the impugned provision is violative of Article 14 of the Constitution. In the judgment under appeal the learned single Judge declared as follows:

“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 on unregistered firm, whenever the registered firm did not fife the return within the specified time, was violative of Article 14 of the Constitution of India and was therefore void.”

In our view, the order of the Court declaring any provision of a statute must be specific and the section or offending portion of a section when it is severable from the rest, should be struck down. (See: Anandji Haridas, relevant portion of which is extracted earlier and Railway Board v. A. Pitchumani(17). In the present case, the discriminatory portion of the impugned provision is severable from the rest of the provision and its striking down does not affect the implementation of the clauses in other respects and the object of section 139 of the Act. Accordingly, we make the following order:

(i) The appeals are dismissed.

(ii) The words ‘a registered firm or’ in sub-clause (a) of clause (iii) of the proviso to sub-section (1) of section 139 of the Income-tax Act, 1961, as it stood before it was amended by the Taxation Laws (Amendment) Act, 1970 with effect from I April 1971, are struck down.

(iii) The consequential orders made in the writ Petitions are affirmed.

(iv) No costs.