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Jiwanmal Hospital v. Income Tax Officer, (Assessment Ii), Raipur (M.P) .
Factual and Procedural Background
The petitioner is a partnership firm registered under the Partnership Act. By a petition under Article 226 of the Constitution, the petitioner challenged assessment orders passed by the Income-tax Officer for the assessment years 1968-1969 to 1971-1972, insofar as the petitioner was made liable to pay interest under clause (iii)(a) of the proviso to section 139(1) of the Income-tax Act, 1961.
The petition proceeded on the sole contention that sub-clause (a) of clause (iii) of the proviso to section 139(1) requires a registered firm to pay interest computed on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm, and that this requirement is discriminatory and violates Article 14 of the Constitution.
Legal Issues Presented
- Whether sub-clause (a) of clause (iii) of the proviso to section 139(1) of the Income-tax Act, 1961 (which prescribes interest for registered firms on the tax amount as if they were unregistered firms) is discriminatory and therefore violative of Article 14 of the Constitution.
- Whether the distinction drawn by that provision between registered and unregistered firms (for the purpose of calculating interest when an extension is granted beyond certain dates) is constitutionally permissible as a legislative policy choice.
- Whether authorities (notably the Supreme Court's decision in Jain Brothers v. Union of India) that upheld a similar statutory distinction in the context of penalties apply to the present provision, particularly in light of arguments that the interest in question is compensatory rather than penal.
Arguments of the Parties
Petitioner's Arguments
- The petitioner contended that a registered firm is effectively a separate legal entity for assessment purposes and should be treated like any other assessee.
- The petitioner argued there was no justification for subjecting a registered firm, when interest is payable under clause (iii)(a), to interest computed on the tax that would be payable if it were assessed as an unregistered firm, while other assessees pay interest on the tax payable by them; this, the petitioner said, is discriminatory and offends Article 14.
- The petitioner relied on the decision in M. Nagappa v. I.T.O. (99 ITR 32 Karnataka) in support of the contention that the impugned provision is invalid.
The opinion does not contain a detailed account of any specific arguments advanced by the respondent beyond the court's consideration of statutory text and precedent.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| M. Nagappa v. I.T.O., 99 ITR 32 (Karnataka) | Supported the petitioner's contention that the impugned provision is invalid (proceeded on distinction that the interest is compensatory and therefore Jain Brothers' reasoning inapplicable). | The court acknowledged that M. Nagappa supported the petitioner's contention but explicitly rejected the view taken in that decision and distinguished its reasoning as inapplicable to the present case. |
| Jain Brothers v. Union of India, 77 ITR 107 (Supreme Court) | Upheld section 271(2) of the Income-tax Act by reasoning that a registered firm may be granted privileges but the Legislature may withhold those privileges in certain circumstances (i.e., treating a registered firm as if unregistered for penalty purposes) without violating Article 14. | The court relied on the reasoning of Jain Brothers to support the validity of sub-clause (a) of clause (iii) of the proviso to section 139(1), applying the principle that withholding certain privileges for registered firms in specific circumstances is a legitimate legislative choice and not discriminatory under Article 14. |
| Ganesh Das Sreeram v. I.T.O., 93 ITR 19 (Gauhati High Court) | Upheld the validity of the impugned provision (proceeded on view interest under clause (iii) was quasi-penal). | The court noted that this decision upheld validity; the present court observed that such cases were relied upon and had been distinguished by the Karnataka High Court in M. Nagappa, but the present court found those distinctions immaterial to the applicability of Jain Brothers' reasoning. |
| Mahendra Kumar Ishwarlal & Co. v. Union of India, 94 ITR 65 (Madras High Court) | Upheld the validity of the impugned provision (treating interest as quasi-penal in those decisions). | The present court recorded that the Madras High Court upheld validity; it treated that authority as supportive of upholding the impugned provision. |
| Chhotaial (Chhotalal) & Co. v. I.T.O., 105 ITR 230 (Gujarat High Court) | Held the impugned provision valid and observed that clause (iii)(a) merely withholds privileges otherwise extended to a registered firm; in that case the interest was held to be compensatory in nature (not penal). | The court expressly agreed with the Gujarat High Court's reasoning, adopting its view that the provision validly withholds statutory privileges and that the compensatory character of the interest does not affect the applicability of Jain Brothers' principle. |
Court's Reasoning and Analysis
The court began with the text of section 139(1) and its proviso, setting out the filing deadlines and the Income-tax Officer's discretionary power to extend dates under clauses (i) and (ii) of the proviso without charging interest. It then explained that if an extension is granted beyond the dates in clauses (i) and (ii), clause (iii) requires interest to be paid.
Sub-clause (a) of clause (iii) prescribes that, for a registered firm (or an unregistered firm assessed as if it were registered under clause (b) of section 183), interest shall be payable on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm. Sub-clause (b) prescribes that, in other cases, interest is payable on the tax payable on the total income reduced by advance tax or tax deducted at source, as applicable.
The petitioner argued that a registered firm is a separate legal entity for assessment purposes and should be treated like any other assessee; therefore, there was no justification for the impugned distinction. The court responded by describing the statutory scheme: where a firm is unregistered, tax is levied on the firm itself; where registered, each partner's share is taxed in the hands of the partners and the firm pays tax at a reduced rate (the "registered firm tax"). The court noted that the Act grants special privileges to registered firms and that it is within legislative competence to grant those privileges in some respects and withhold them in others.
The court relied principally on the Supreme Court's reasoning in Jain Brothers v. Union of India, which upheld section 271(2) (a provision that treated a registered firm as if it were unregistered for penalty imposition) on the basis that withholding privileges in particular circumstances is a permissible legislative policy and does not amount to discrimination under Article 14. The court held that the same reasoning applies to sub-clause (a) of clause (iii) of the proviso to section 139(1).
The petitioner argued that Jain Brothers concerned penalties and that the present interest is compensatory (not penal), so Jain Brothers was inapplicable. The court rejected that distinction, reasoning that whether the interest is compensatory or penal does not affect the legislative power to grant privileges selectively; withholding privileges in particular respects does not violate Article 14.
The court reviewed other High Court decisions: it noted that M. Nagappa proceeded on the compensatory distinction and was contrary to the court's view. The court observed that other High Courts (Gauhati, Madras, Gujarat) had upheld the impugned provision; although some were treated as relying on a quasi-penal characterization, the present court held that such a characterization did not alter the applicability of Jain Brothers. The court expressly agreed with the Gujarat High Court's statement that clause (iii)(a) merely withholds privileges otherwise extended to a registered firm.
Holding and Implications
Petition dismissed.
Direct consequences of the decision:
- The petition challenging the assessment orders to the extent that the petitioner was made liable to pay interest under clause (iii)(a) of the proviso to section 139(1) was dismissed.
- The dismissal was without any order as to costs.
- The security amount deposited by the petitioner was ordered to be refunded.
The court upheld the validity of the impugned provision (sub-clause (a) of clause (iii) of the proviso to section 139(1)), holding that the legislative choice to withhold certain privileges from a registered firm for the limited purpose set out in the provision does not amount to discrimination under Article 14. The opinion does not state that a new legal principle was created; it applies and relies upon existing precedent (notably Jain Brothers) to uphold the provision.
Petition dismissed.
G.P Singh, C.J:— The petitioner is a partnership firm registered under the Partnership Act. By this petition under Article 226 of the Constitution, the petitioner challenges assessment orders passed by the Income-tax Officer in respect of assessment years 1968-1969 to 1971-1972, in so far as the petitioner is made liable for payment of interest under clause (iii)(a) of the proviso to section 139(1) of the Income Tax Act, 1961.
2. The sole contention raised by the learned counsel for the petitioner before us is that the aforesaid provision in so far as it requires a registered firm to pay interest on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm, is discriminatory and offends Article 14 of the Constitution. Learned counsel, in support of this submission, relies upon the case of M. Nagappa v. I.T.O . 99 ITR 32 Karnataka.. This case no doubt supports the contention of the learned counsel for the petitioner; but with respect we are unable to accept the view taken in it.
3. Section 139 in so far as relevant reads as follows:
“139. Return of Income.—(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 six 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, 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 from business or profession the previous year in respect of which expired on or before the 31st day of December of the year immediately proceeding the assessment year, 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 alter 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) 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. The section fixes the time within which the returns are to be filed. The Income-tax Officer may extend the date for furnishing the return under clauses (i) and (ii) of the proviso without any liability on the assessees to pay interest. When time is extended beyond the period mentioned in clauses (i) and (ii), the assessee has to pay interest under clause (iii). The impugned provision i.e sub-clause (a) of clause (iii) of the proviso, enacts that in the case of a registered firm or an unregistered firm which has been assessed under clause (b) of section 183 as if it were a registered firm, interest shall be payable on the amount of tax which would have been payable if the firm had been assessed as a registered firm. In any other case, sub-clause (b) of clause (iii) directs that interest shall be paid 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.
5. The argument of the learned counsel for the petitioner is that a registered firm is a separate legal entity for assessment purposes, and that it should be treated like any other assessee. It is also argued that there was absolutely no justification for making the impugned provision for payment of interest in case of a registered firm on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm, and in case of other assessees on the amount of tax payable by them.
6. Under the Income Tax Act, if the firm is unregistered the tax payable by the firm itself is determined as in the case of any other distinct entity and the levy is made on the firm itself. But where the firm is registered, each partner's share in the firm's income is added in the partner's income and the tax is payable by each partner on the basis of his total income (including his share in the firm's income) and the levy is made on the partners individually. After the year 1956, a registered firm also pays tax on the total income at a reduced rate. The Act confers special privilege or a registered firm in that the total income of the firm is assessed in the hands of the partners and the firm only pays tax at the reduced rate or what is commonly known as ‘the registered firm tax’. While granting certain privileges to a registered firm it is open to the Legislature to say that the privileges would be granted in certain respects but not in others. It is this kind of provision which is made in sub-clause (a) of clause (iii) of the proviso. The Legislature here says that in case an extension of time is granted for filing the return after the dates mentioned in clauses (i) and (ii) of the proviso, a registered firm will have to pay interest on the amount of tax which would have been payable if the firm had been assessed as an unregistered firm. There is, in our opinion, no question of discrimination here. While repelling a challenge to section 271(2) of the Act, the Supreme Court in Jain Brothers v. Union of India . 77 ITR 107. observed as follows:
“According to that provision when a 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% of the tax payable by the assessee; whereas in the case of a registered firm the maximum penalty is not made to depend upon the tax assessed on 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% 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 without the same when it committed a default and became liable to imposition of penalty.”
7. The reasoning contained in the above passage of the Supreme Court judgment upholding the validity of section 271(2) of the Act, fully applies for supporting the validity of sub-clause (a) of clause (iii) of the proviso to section 139(1). It was submitted by the learned counsel for the petitioner that the Supreme Court in Jain Brothers' case was dealing with a provision for penalty; whereas the interest payable under clause (iii) of the proviso to section 139(1) is in the nature of compensation and, therefore, the decision of the Supreme Court is not applicable. We are unable to agree with this argument. As earlier stated by us, the reasoning of the Supreme Court is that a registered firm is granted certain privileges under the Act. To what extent those privileges would be granted is a matter of policy for the Legislature. If in certain matters the privileges are not allowed, no case of complaining violation of Article 14 arises. This reasoning applies also to the impugned provision before us. The case of M. Nagappa v. I.T.O (supra), which proceeds upon the distinction that the interest payable under sub-clause (a) of clause (iii) of the proviso to section 139(1) is compensatory in nature and, therefore, Jain Brothers' case is not applicable, does not appeal to us. The validity of the impugned provision was upheld by the Gauhati High Court in Ganesh Das Sreeram v. I.T.O . 93 ITR 19., Madras High Court in Mahendra Kumar Ishwarlal & Co. v. Union of India . 94 ITR 65. and Gujarat High Court in Chhotaial & Co. v. I.T.O . 105 ITR 230.. These cases, except the Gujarat case, were noticed and distinguished by the Karnataka High Court in M. Nagappa's case on the ground that they proceed on the basis that interest payable under clause (iii) of the proviso to section 139(1) was quasi-penal. As earlier pointed out by us above, this distinction does not make any difference in the applicability of the reasoning of the Supreme Court in Jain Brothers' case. As rightly pointed out by the Gujarat High Court in Chhotalal & Co.'s case “all that the Legislature has done in clause (iii)(a) of the proviso to section 139(1) is to withhold privileges which is otherwise extended to a registered firm.” The Gujarat High Court held the provision valid and, in our opinion, rightly, even though it held that the interest payable under the impugned provision is by way of compensation and not a penalty. We respectfully agree with the view taken by the Gujarat High Court. The impugned provision does not suffer from the vice of discrimination.
8. The petition fails and is dismissed, but without any order as to costs. The security amount be refunded to the petitioner.
Petition dismissed.
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