M. Nagappa vs Income Tax Officer

M. Rama Jois, J.—These twenty two writ appeals have been presented by the appellants against the common judgment in Writ Petition No. 992 of 1972 and connected writ petitions, made by a single judge dismissing the writ petitions rejecting their prayer for striking down section 217 of the income tax Act, 1961 (hereinafter referred to as "the Act") on the ground that it is violative of article 14 of the Constitution. The brief facts which gave rise to the writ petitions out of which these appeals arise are these: The appellants, who are partners in the firm of contractors called M. Nagappa, were not assessed to income tax under the Act prior to 1965-66. They became assessees for the assessment years 1965-66, 1966-67 and 1968-69. While passing the assessment orders the ITO found that the appellants were liable to pay advance tax in accordance with the provisions of the Act. Hence, he levied interest on the amount of advance tax withheld, as prescribed in section 217 of the Act. Their petitions claiming exemption from interest made to the Commissioner were rejected. Aggrieved by the levy of interest, the appellants presented writ petitions challenging the constitutional validity of section 217 of the Act on the ground that it is discriminatory and, therefore, void as it offends article 14 of the Constitution. Their plea was that persons, who are similarly situated and to whom notices calling upon them to pay advance tax u/s 210 of the Act are issued are not liable to pay any interest, even if they do not pay advance tax in terms of the notice, whereas persons like the appellants, who are new assessees, are made liable to pay interest at 12 percent on the advance tax withheld and, therefore, section 217 of the Act is violative of article 14 of the Constitution.

The respondents resisted the case of the appellants on the following grounds: Persons who are already assessees and to whom notices for payment of advance tax u/s 210 of the Act are issued and the persons like the appellants who became assessees for the first time, belong to two separate and distinct classes. The appellants, therefore, cannot claim similar treatment. Moreover, defaulters in payment of advance tax, in spite of sending notices u/s 210 of the Act, are liable to the imposition of penalty u/s 221 of the Act, though not liable to pay interest, and the new assessees, who are liable to pay interest u/s 217, are not liable to penalty u/s 221, as they do not answer the discription of defaulters in terms of section 218 of the Act. Therefore, section 217 is not violative of article 14 of the Constitution.

Learned single judge repelled the contention of the appellants holding that the appellants belong to a separate class, vis-a-vis, assessees to whom notices are issued u/s 210 of the Act and the classification is reasonable and differential treatment is not discriminatory. Sri K. Srinivasan, learned counsel for the appellants and Sri S.R. Rajasekhara Murthy, learned counsel for the respondents, addressed arguments in support of their respective cases,

We shall in the first instance briefly set out the scheme of the Act insofar as it relates to the collection of advance tax. Section 207 makes the payment of advance tax, in accordance with the provisions of sections 208 to 219 obligatory. Section 208 provides that every person having an income more than the income specified in that section is liable to pay advance tax during the financial year. Section 209 prescribed the procedure for computation of advance tax payable. Provisions relating to the requirement of issue of notice and liability for non-payment in time, are as under:

Section 210 provides for issue of a notice to a person, who is already an assessee, to pay advance tax specifying the instalments of advance tax. There is no provision providing for payment of interest, on the amount of advance tax even if it is not paid within the time specified.

Section 212 enables an assessee to whom a notice u/s 210 has been issued to file a revised estimate of his income, if it were to be lower and pay advance tax if payable accordingly and also makes it obligatory for filing a revised estimate if income is going to be higher by 33 1/2 percent or more than the amount of advance tax demanded and to pay accordingly.

According to section 215, if advance tax payable by an assessee is not paid, or even if paid, if it is less than the 75 percent of the assessed tax, he is liable to pay 12 percent interest on the amount which the advance tax so paid falls short of assessed tax.

Under section 216, an assessee is made liable to pay interest on the advance tax withheld if he had made an under-estimate of his income.

Section 217 applies to new assessees. According to this section, a person who becomes an assessee for the first time and who though liable to pay advance tax under the Act and failed to pay the same, as required under the Act, is liable to pay interest at 12 percent per annum on the amount not paid.

Section 218 says that an assessee who fails to pay advance tax in accordance with the notice issued u/s 210 or according to his estimate filed u/s 212, shall be deemed to be a defaulter in respect of instalments not paid.

Section 221 provides for imposition of penalty, against a defaulter, in any amount, not exceeding the amount of tax in arrears.

The contention urged for the appellants is that though every person, who fails to pay advance tax, is made liable to pay interest, on the amount withheld, an assessee to whom notice u/s 210 has been issued and who has not filed thereafter any revised estimate of his income and who fails to pay the advance tax, is not liable to pay any interest on the amount not paid and this is a clear discrimination in favour of persons falling within section 210 and against all other income tax payers.

In this case we shall, as was done by the learned single judge in the writ petition, confine the examination of the cases of the appellants with reference to the assessees falling u/s 210 of the Act. The appellants in these cases are all persons, who had filed their returns for the first time. Hence, they are all covered by section 217 of the Act. According to the said section, they are required to pay interest at the rate of 12 percent per annum from the 1st day of April next following the financial year, in which advance tax was payable up to the date of regular assessment. In respect of assessees to whom advance tax notices are issued u/s 210 and who had not filed estimates of their income u/s 212 of the Act, there was no provision, after the commencement of the Act till section 209A was introduced with effect from 1-06-1978, for payment of interest. Therefore, the question for consideration is whether the absence of provision requiring a defaulter in payment of advance tax falling in the afore said category, is sufficient to declare section 217 of the Act which requires new assessees like the appellants to pay interest at the prescribed rate as void as offending article 14 of the Constitution.

At this stage it is necessary to refer, briefly, the guidelines laid down by the Supreme Court for testing the validity of a law when called in question on the ground that it is violative of article 14 of the Constitution. The guidelines are -

I. (1) Article 14, forbids class legislation, but does not forbid reasonable classification of persons or things for purposes of legislation.

(2) In order to pass the test of permissible classification -

(a) classification must be reasonable in that it should be founded on intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group; and

(b) such a classification must have nexus to the object sought to be achieved.

See, Ram Krishna Dalmia Vs. Shri Justice S.R. Tendolkar and Others,

II.(1) Taxation Laws cannot claim immunity from the equality clause of the Constitution. Therefore, taxation statute cannot be arbitrary and oppressive.

(2) Court cannot, however, meticulously scrutinise the impact of the burden of a tax law on different persons or interests but can only strike down if the Court is convinced that the method adopted is arbitrary or capricious, fanciful or clearly unjust.

(3) If Legislature has adopted one method for imposition of tax burden, the Court cannot strike down the law on the ground that the Legislature should have adopted another method which, in the opinion of the Court, is more reasonable - KHANDIGE SHAM BHAT AND ANOTHER Vs. AGRICULTURAL Income Tax OFFICER, KASARAGOD, AND ANOTHER.,

III.(1) In view of the intrinsic complexity of fiscal adjustments of diverse elements, a considerably wide discretion is given in the matter of classification for taxation purposes.

(2) If the classification by a taxing statute is a reasonable one, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some income or objects and not others - Income Tax Officer, Shillong and Others Vs. R. Takin Roy Rymbai and Others,

The validity or otherwise of the impugned provision has to be decided by applying the aforesaid principles enunciated by the Supreme Court. This classification of persons liable to pay income tax under the Act into the following two categories, viz.,

(a) those who are already assessees and liable to pay advance tax and to whom advance tax notice is issuable and issued u/s 210 of the Act; and

(b) those who have not become assessees, but liable to pay advance tax, is clearly an intelligible classification. This is also clear from the fact that as against assessees not paying advance tax even after receiving notice u/s 210, recovery proceedings could be taken straight away as they are treated as defaulters, but no such action is possible in the case of persons, though liable to pay advance tax, but who are not yet assessed even once. In view of this classification, the Legislature was entitled to treat both these classes differently in the matter of imposing additional liability over and above the advance tax liable to be paid. It is well settled that every differentiation is no discrimination. So long a differentiation is founded on a rational classification having reasonable nexus to the object sought to be achieved by legislation, it does not infringe the right of equality guaranteed under article 14.

That the classification is reasonable is not also controverted by the learned counsel for the appellants. However, he contended as follows: Even if the classification is consider ed reasonable, in order to pass the test of article 14, there must be nexus to the object sought to be achieved. He argued that the object of levy of interest on the withheld advance tax, is only to compensate the State for delayed payment. Therefore, whether a person is already an assessee to whom notice of advance tax has been issued u/s 210 or a person is not an assessee, should make no difference, so long both are liable to pay advance tax in time. There is no justification to levy interest on the latter only and not to levy interest on the former.

If the classification is a reasonable one, it follows that a claim for similar treatment is not tenable and it is open for the Legislature to treat them differently, though it was possible to treat them similarly, unless it is established that there is absolutely no justification to treat them differently having regard to the object sought to be achieved. Viewed from this light, it may be seen that an assessee to whom notice calling upon him to pay advance tax is issued u/s 210, but who fails to pay it within the stipulated time, is deemed to be a defaulter u/s 218 of the Act. Not only coercive action for recovery of advance tax could be taken immediately against him, but also he is liable to the imposition of penalty, which may go to the extent of the advance tax payable itself. The said section has no application to persons like the appellants, who are governed by section 217 of the Act which requires an additional payment of interest at 12 percent per annum on the amount of advance tax withheld. The Legislature has imposed additional burden on both the classes of persons in a different way. Whether the Legislature should have levied interest only on both or penalty only on both or interest on one category and penalty on the other is a matter for legislative wisdom and judgment and could not constitute a ground for striking down the provision so long additional burden is imposed on both in one way or the other.

Learned counsel for the appellants, however, strenuously contended that the levy of interest u/s 217 and levy of penalty u/s 221, on an assessee, who is a defaulter in payment of advance tax has nothing to do with each other and, therefore, the former cannot be taken as the basis to hold that article 14 is not violated. In this behalf, he submitted as follows:

u/s 18A of the 1922 Act, both classes of persons were liable to pay interest and a defaulter in payment of advance tax after notice was liable to penalty in addition to payment of interest.

2 Under the 1961 Act, while a defaulter in payment of advance tax falling u/s 210 is not at all liable to pay interest only persons like appellants, who are governed by section 217 are liable to pay interest.

Interest is compensatory in character and penalty is penal in character - M. Nagappa and Others Vs. Income Tax Officer, Central Circle I, Bangalore and Others, Therefore, penalty imposable u/s 221 cannot be taken into account to hold that there is no discrimination in levying interest on persons coming within the provision of section 217 and not levying interest on persons coming within the provision of section 210 of the Act.

It is no doubt true that interest is compensatory in character and penalty is penal in character. It is also true that assessees who were served with advance tax notices and who failed to pay advance tax were liable to pay interest in addition to penalty like fresh assessees, but under the 1961 Act the defaulters in payment of advance tax even after receiving notices u/s 210 were not made liable to pay interest till 1-06-1978 when section 209A was added. This circumstance, however, is insufficient to strike down section 217 on the ground of violation of article 14, as the two categories of persons fall into two separate classes and the classification is a reasonable one. Whether the law imposes interest or penalty for non-payment of advance tax, by doing so the law imposes an additional burden on the person concerned over and above the tax payable. As to what method or methods should have been adopted by the Legislature in imposing additional burden on these two separate and distinct classes of persons was well within the legislative judgment and just because interest and penalty was imposed on defaulter-assessees who were served with advance tax notices, and interest only on new assessees under the 1922 Act and that under the 1961 Act only penalty was imposed on the former and interest only on the latter could not, in our opinion, constitute sufficient basis to strike down section 217 of the Act on the ground that it is discriminatory.

In the circumstances, it appears to us that while the argument contended for the assessee that on the basis of omission to levy interest on the amount of advance tax omitted to be paid by an assessee falling u/s 210, and the levy of interest on the amount of advance tax omitted to be paid by the new assessees appears to be attractive at first sight, on a deeper scrutiny we are convinced that there is no violation of article 14 of the Constitution. Therefore, the view taken by the learned single judge is correct and the appeals are liable to be dismissed.

Before concluding it is necessary to refer to another argument contended on the basis of sub-rule (5) of rule 40 of the income tax Rules. We see absolutely no force in this contention. The said sub-rule only empowers the IAC to reduce the interest leviable under the Act, if, in his opinion, there are good grounds to do so in a genuine case. This is a provision favourable to the appellants and other assessees. But the argument was as there are no guidelines for the exercise of the power under that sub-rule, levy of 12 percent interest u/s 217 becomes violative of article 14. We fail to see that there is any vice in sub-rule (5) of rule 40. On the other hand it is favourable to the assessees, as they have the opportunity of getting the interest reduced. Further, no provision of an enactment could be struck down on the ground that a rule framed thereunder is violative of any constitutional provision. If any rule is found to be ultra vires, only, the rule can be struck down and not the provision of the Act under which it is framed. Hence, we reject this contention. For the reasons stated above, we make the following orders: The appeals are dismissed. No costs.