T. Kochu Thommen, J.
1. A common question arises in these cases. The assessees are registered firms. They challenge the levy of interest under Section 139(8)(a) of the I.T. Act, 1961 (the 'Act'). They contend that Explanation 2 to Section 139(8)(a) is ultra vires and void, and pray for a declaration to that effect. In O.P. No. 6499 of 1981, interest has been charged :by Ex. P-2 for the assessment year 1976-77. In O.P. No. 3783 of 1982 interest has been charged for the assessment years 1976-77 and 1978-79 by Exts. P-1 and P-2 respectively. In O.P. No. 3805 of 1982, interest has been charged by Exts. P-1, P-2 and P-3 for the assessment years 1976-77, 1977-78 and, 1979-80 respectively. These orders are impugned by the petitioners.
2. The petitioners contend that the interest charged under Sub-section (8) of Section 139 amounts to a penalty for the reason that a registered firm is treated, by virtue of Explanation (2) to that sub-section, as if it was an unregistered firm for the purpose of computing the interest. The registered firm is thus singled out for discriminatory treatment among the various categories of taxpayers and is required to pay interest on amounts to which it is not liable to be assessed. The interest levied on a registered (inn with reference to the tax payable by an unregistered firm, the petitioners contend, has resulted in an unreasonable classification having no rational nexus with the object sought to be achieved, and is arbitrary, unfair and violative of Article 14 of the Constitution.
3. Section 139 casts an obligation on every person liable to be assessed under the Act, to furnish the return of his income on or before a specified date mentioned under Sub-section (1). In the case of a person who, in the opinion of the ITO, is assessable under the Act, notices may be served on him under Sub-section (2) requiring him to furnish within 30 days the return of his income. It is up to the officer, under Sub-section (1) or (2), to extend the date for furnishing the return. Notwithstanding such extension, interest is chargeable in accordance with the provisions of Sub-section (8). However, as stated in the proviso to Sub-section (8)(a), the ITO may, in certain cases and certain circumstances which may be prescribed by rules, reduce or waive the interest. Rule 117A of the I.T. Rules, 1962 (the ' Rules '), has prescribed these cases and circumstances. Sub-section (4) provides that a person who has not furnished the return within the time allowed under Sub-section (1) or (2) may, before the assessment is made, furnish the return at any time before the end of the period specified under Clause (b) thereof, and subject to the provisions of Sub-section (8). If the return under Sub-section (1) or (2) or (4) has been furnished after the specified date, or if it is not furnished at all, the assessee is, subject to the power of the ITO under the proviso to Sub-section (8)(a) to reduce or waive the interest, liable to pay simple interest at 12% per annum, whether or not extension of time for furnishing the return has been granted. The interest has to be reckoned from the day immediately following the specified date to the date on which the return has been furnished, or, where no return has been furnished, to the date of completion of the best judgment assessment under Section 144. Interest is payable on the amount of the tax payable on the total income as determined on regular assessment, but reduced by the advance tax paid and any tax deducted at source. The impugned Explanation 2 to Sub-section (8)(a), which is applicable only to a registered firm or an unregistered firm which has been assessed as a registered firm under Clause (b) of Section 183, provides that, for the purpose of computing interest under Sub-section (8) of Section 139, the tax payable on the total income shall be the amount of tax which would have been payable had the firm been assessed as an unregistered firm. In other words, the interest payable by the registered firm has to be calculated with reference to the tax payable by an unregistered firm as if the assessee was an unregistered firm. This shows that the privilege which has been extended to a registered firm in the matter of assessment has been, in respect of interest payable by such firm under Section 139(8), withheld or modified so as to compel it to pay interest with reference to the higher rate of tax applicable to an unregistered firm.
4. A lower rate of tax is an advantage conferred on a registered firm by the provisions of the Act. That position remains undisturbed, notwithstanding the default, for the purpose of assessment, so long as the registration continues in force; but is withheld only for the purpose of computation of the interest. To that limited extent, the lower rate of tax will not avail in the event of default to file the return on the due date. The question is whether Explanation 2 to Section 139(8)(a) which so provides is violative of Article 14 of the Constitution
5. I shall now read Sub-section (8)(a) of Section 139 and Explanation 2 to that subsection.
' 139(8)(a). Where the return under Sub-section (1) or Sub-section (2) or Sub-section (4) for an assessment year is furnished after the specified date, or is not furnished, then whether or not the Income-tax Officer has extended the date for furnishing the return under Sub-section (1) or Sub-section (2), the assessee shall be liable to pay simple interest at twelve per cent. per annum, reckoned from the day immediately following the specified date to the date of the furnishing of the return or, where no return has been furnished, the date of completion of the assessment under Section 144, on the amount of the tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source :
Provided that the Income-tax Officer may, in such cases and under such circumstances as may be prescribed, reduce or waive the interest payable by any assessee under this sub-section......Explanation 2.--For the purposes of this sub-section,, where the assessee is a registered firm or an unregistered firm which has been assessed under Clause (b) of Section 183, the tax payable on the total income shall be the amount of tax which would have been payable if the firm had been assessed as an unregistered firm. '
6. It is not only for the purpose of interest payable under Sub-section (8) of Section 139 that a registered firm is treated as if it was an unregistered firm, but also for the purpose of penalty under Section 271 in circumstances warranting the levy of interest under Section 139. Penalty is levied in such cases provided the competent officer is satisfied that the assessee's failure to furnish the return or comply with any of the notices or direction referred to in Section 271 was without reasonable cause or that he has concealed the particulars of the income or furnished inaccurate particulars of such income. Sub-section (2) of Section 271 singles out an unregistered firm in the manner in which it is singled out in Section 139. It says :
'271. (2) When the person liable to penalty is a registered firm or an unregistered firm which has been assessed under Clause (b) of Section 183, then, notwithstanding anything contained in the other provisions of this Act, the penalty imposable under Sub-section (i) shall be the same amount as would be imposable on that firm if that firm were an unregistered firm. '
7. Referring to Section 271(2), the Supreme Court in Jain brothers v. Union of India : [1970]77ITR107(SC) , rejected the contention that that provision contravened Article 14 of the Constitution. The court stated (p. 118):
'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 default and became liable to imposition of penalty. ' (emphasis *supplied)
8. If the word 'penalty ' in the above passage were to be substituted by 'interest', then the principle stated by the Supreme Court would be as much applicable to interest as to penalty. If this were the position, the challenge against Explanation 2 to Sub-section (8)(a) of Section 139 would be totally unsustainable. It has been so held by several High Courts : Mahendra-kumar Ishwarlal & Co, v. Union of India : [1973]91ITR101(Mad) ; Mabendrakumar Iswarlal & Co. v. Union of India : [1974]94ITR65(Mad) ; Ganesh Das Sreeram v. ITO ; Chhotalal & Co. v. ITO : [1976]105ITR230(Guj) ; Jiwanmal Hospital v. ITO : [1979]119ITR439(MP) ; Hindustan Steel Forgings v. CIT ; Mohanlal Soni v. Union of India : [1983]143ITR436(Cal) .
9. However, counsel for the petitioners, Shri. P.C. Chacko, argues ably to the contrary. He says that the principle applicable to penalty is not applicable to interest, for penalty is a punishment in the nature of a deterrent while interest is a compensation commensurate with the loss. Interest is levied under the Act to compensate the loss suffered by the Revenue on account of the delayed furnishing of the return and payment of the tax. Interest does not, therefore, partake of the character of penalty which is punitive. The classification of the registered firms as a separate class, for the purpose of calculating interest in the event of default to file the return, by treating them as if they were unregistered, amounts to a penalty, thereby making Explanation 2 to Sub-section (8)(a) of Section 139 arbitrary, unfair and discriminatory. In support of this argument, counsel relies upon the decision of the Karnataka High Court in M. Nagappa v. ITO : [1975]99ITR32(KAR) , which was affirmed by a Division Bench of that court in Addl. CIT v. Mahadeshwara Lorry Service : [1981]129ITR516(KAR) .
10. In M. Nagappav. ITO : [1975]99ITR32(KAR) , E. S. Venkataramiah J. of the Karnataka High Court, as he then was, held that the interest chargeable under Section 139(1) (now Section 139(8)) was compensatory and not penal in character. Unlike the penalty levied on an erring assessee to ensure due observance of law, the object of the interest is to reimburse the Revenue's loss caused by the delayed payment of the tax. The interest calculated with reference to the tax payable by an unregistered firm, as stipulated by Explanation 2, as if the assessee was an unregistered firm, was a levy more in the nature of a penalty than mere compensation. The learned Judge held that the decision of the Supreme Court in Jain Brothers : [1970]77ITR107(SC) , was not applicable in regard to interest. This reasoning was upheld by a Division Bench of that High Court in Addl. CIT v. Maha-deshwara Lorry Service : [1981]129ITR516(KAR) .
11. There is divergence among the decisions of various High Courts as to the nature of an interest. While in the majority of cases it has been held that interest under Section 139 is compensatory, it has been regarded as penal or quasi-penal in certain other cases. See the decision catalogued in Nagappa (M.) v. ITO [1974] 99 ITR 32. In Associated Cement Co. Ltd. v. CTO : [1982]1SCR563 , which is a case that arose under the Rajasthan Sales Tax Act (29 of 1954), E. S. Venkataramiah J. of the Supreme Court, speaking for the majority, said (p. 475 of STC) :
' Tax, interest and penalty are three different concepts. Tax becomes payable by an assessee by virtue of the charging provision in a taxing statute. Penalty ordinarily becomes payable when it is found that an assessee has wilfully violated any of the provisions of the taxing statute. Interest is ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not be wrong to say that such interest is compensatory in character and not penal.' (emphasis* supplied)
12. It would seem from the above observation that the object of a provision in a taxing statute charging interest is to compensate the Revenue for the tax withheld by the assessee. Interest is normally calculated at the prescribed rate on the basis of the actual amount of the tax withheld and the extent of delay in paying it. The question, however, is whether the legislature in specifically providing, as it does under Explanation 2 to Section 139(8)(a), that interest has to be calculated, not with reference to the tax withheld by the registered firm, but with reference to the tax which the assessees would have been liable to pay had it been an unregistered firm, imposes a penalty, and, if so, whether such a provision is ultra vires ?
13. In M. Nagappa v. ITO : [1975]99ITR32(KAR) , K. S. Venkataramiah J. of the Karnataka High Court, as he then was, stated that the interest leviable under Section 139 being compensatory in character (pp. 37 and 38):
'......its incidence on all the assessees dealt with by that provision should be the same.......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.......'
14. So stating the learned Judge found that the classification adopted under Section 139 for the purpose of levying interest on a registered firm, as if it were an unregistered firm, was invalid as it had no rational relation to the object sought to be achieved, namely, compensation for the loss of revenue owing to the delay in furnishing the return and paying the tax.
15. In Anandji Haridas & Co. P. Ltd. v. S. P. Kasture, : [1968]1SCR661 , the Supreme Court stated (p. 338 of STC) :
' 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 object sought to be achieved.......It is true the State can by classification determine who should be regarded as a class for the purpose of legislation and in relation to a law enacted on a particular subject, but the classification must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be attained and cannot be made arbitrarily and without any substantial basis.......'
16. Judged by this principle of classification, or by the rule of fairness or non-arbitrariness as adopted by the Supreme Court in its subsequent decisions such as Maneka Gandhi (Smt.) v. Union of India, : [1978]2SCR621 ; Ramana Dayarayi Shetty v. International Airport Authority of India, : (1979)IILLJ217SC and Ajay Hasia v. Khalid Mujib Sehravardi, : (1981)ILLJ103SC , can it be said that the impugned provision suffers from the vice of ultra vires
17. In C. A. Abraham v. ITO : [1961]41ITR425(SC) , the Supreme Court characterised the penalty payable under Section 28 of the Indian I.T. Act, 1922, as an additional tax. The court said (p. 430):
' By Section 28, the liability to pay additional tax which is designated penalty is imposed in view of the dishonest contumacious conduct of the assessee. It is true that the liability arises only if the Income-tax Officer is satisfied about the existence of the conditions which give him jurisdiction and the quantum thereof depends upon the circumstances of the case.' (emphasis* supplied)
18. This principle was restated by the Supreme Court in CIT v. Bhikaji Dadabhai & Co. : [1961]42ITR123(SC) . In CIT v. Anwar Ali : [1970]76ITR696(SC) , the Supreme Court referring to the observation in C. A. Abraham : [1961]41ITR425(SC) , held that one of the principal objects in enacting Section 28 (1922 Act) was to provide a deterrent against recurrence of default on the part of the assessee. In that sense the court pointed out that the section was penal. That aspect of Section 28 did not specifically arise for consideration in C. A. Abraham : [1961]41ITR425(SC) . Referring to Section 28(1)(c) of the 1922 Act, the court pointed out that the gist of the offence was that the assessee had concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and, therefore, the burden was upon the Department to establish that the receipt of the amount in question constituted income of the assessee. This aspect of the penalty--viz., the penal aspect and the burden of proof--under Section 28 did not, however, change its character as an additional tax, as held in C.A. Abraham : [1961]41ITR425(SC) . In Khemka & Co. v. State of Maharashtra, : [1975]3SCR753 , this question was considered again by a Bench of five judges of the Supreme Court. Affirming the principle stated in Bhikaji Dadabhai & Co. : [1961]42ITR123(SC) and C. A, Abraham : [1961]41ITR425(SC) , the court said (p. 581 of STC) :
' Penalty is not merely a sanction. It is not merely an adjunct to assessment. It is not merely consequential to assessment. It is not merely machinery. Penalty is in addition to tax and is a liability under the Act ......Penalty is in addition to the amount of income-tax......penalty partakes of the character of additional tax.'
19. It is clear from the above observation that, although penalty is a sanction and thus a deterrent, it partakes the character of an additional tax. The penal aspect of penalty does not make it any the less a part of the assessment proceedings. Penalty is at once a sanction, an adjunct to assessment, consequential to assessment, a part of the machinery for assessment, and a levy in addition to tax. These are the several attributes all rolled into one, but none of them is a sine qua non to the penalty being in the nature of an additional tax. It partakes the character of an additional tax because the word 'assessment' denotes the whole procedure for imposing liability on the taxpayer and penalty is a part of such liability. So is 'interest', which is an additional levy. But unlike penalty, interest is not punitive, but compensatory in its object and effect. Although 'tax', 'penalty' and 'interest' have distinct and different attributes and objectives, all the three elements denote the whole procedure for imposing liability under the Act. In that sense, like in the case of penalty, so in the case of interest, the levy is in the nature of an additional tax or at any rate an amount payable in addition to tax.
20. Section 271 does not authorise the imposition of penalty until the competent officer is satisfied that a person has without reasonable cause failed to furnish the returns or comply with the notice or direction or has concealed the particulars of his income or furnished inaccurate particulars of such income. The satisfaction of the officer is a condition precedent to the imposition of penalty. Section 139(8), on the other hand, provides for automatic accrual of interest in the event of default in furnishing the return. Interest accrues whether or not the period for furnishing the return has been extended, although the ITO has the power in certain cases to reduce or waive the interest. While the object of Section 271 is sanction or deterrence, even when it enriches the Revenue, the object of Section 139(8) is basically compensatory, although, as I shall presently show, it is neither fully compensatory nor is it totally without an element of deterrence or sanction.
21. The effect of registration under the provisions of Chapter XVI of the Act is to confer a substantial benefit upon a class of assessees, namely, the registered firms. They are singled out for conferment of a special benefit. The basis of their classification as a separate group and the objects sought to be achieved are not in question here. It may, however, be pointed out that Parliament in its wisdom decided that it would be in the best, interests of economy that a class of taxpayers constituted as firms and registered under the Act. enjoyed the benefit of a comparatively lower rate of tax with a view to enabling them to function more effectively and efficiently as contributors of national income. The legislative assumption is that with such encouragement and protection this class of assessees would, taking advantage of the benefits, function in a healthy, prudent and proper manner. A firm is not a legal person, although in income-tax law it is a unit of assessment. The object of conferment of the special benefit of a lower rate of tax upon these specially favoured registered firms is defeated if they do not discharge their obligations under the Act. Upon registration of a firm, the Department loses a part of the Revenue which it could have otherwise recovered on the basis of the rate applicable to an unregistered firm. As a sanction or deterrent, the Legislature has provided for penalty, by way of an additional tax, to be payable by the defaulters in certain circumstances. The Legislature has also provided for interest being charged on these defaulters as another item of levy. Although the interest charged is compensatory, it does not fully restore to the State the revenue lost, for Section 139(8) relates only to payment of interest and not tax. The statute contains no provision, so long as the registration remains intact, to impose tax upon the registered firm at the rate applicable to an unregistered firm. So long as the registration continues in force, the defaulting firm pays tax at the rate applicable to a registered firm. The State is thus compensated only to the extent that a higher interest is charged. The margin of tax reduced on account of registration is not restored to the State, notwithstanding the default. In this respect, the compensation is only partial and, therefore, not commensurate with the actual loss of revenue. At the same time, although Section 139(8) is not intended to be penal, as in the case of Section 271, the very fact that a registered firm would be compelled to pay higher interest computed with reference to the tax payable by an unregistered firm is a discouragement and in that sense a deterrence against default as well as its statutorily intended consequence [See Mahendrakumar Ishwarlal & Co. v. Union of India : [1973]91ITR101(Mad) ].
22. In V. Venugopala Ravi Varma Rajah v. Union of India : [1969]74ITR49(SC) , the Supreme Court stated (p. 54):
'Equal protection clause of the Constitution does not enjoin equal protection of the laws as abstract propositions......Again tax laws are aimed at dealing with complex problems of infinite variety necessitating adjustment of several disparate elements...... A taxing statute is not, therefore, exposed to attack on the ground of discrimination merely because different rates of taxation are prescribed for different categories of persons, transactions, occupations or objects. '
[See also Twyford Tea Co. Ltd. v. State of Kerala : [1970]3SCR383 ].
23. The legislature had an object in classifying the registered firms as a group apart and separate from unregistered firms and other assessees, and conferring a special benefit upon them. But the benefit conferred is not unconditional. It is subject to a condition subsequent in the sense, that is, in some degree defeasible upon the occurrence of an event. In the event of default, the benefit conferred is withheld in the calculation of the interest for the period relevant to the default. In other respects the assessee continues to enjoy the benefits of registration. In this respect all registered firms in default are treated alike. There is no discrimination between firms of the same group. Their classification as a single group for the conferment of benefits and for partial withdrawal of the same is based on an intelligible differentia which distinguishes persons and things from others left out of the group and which has a rational relation to the object sought to be achieved by the relevant provisions of the Act.
24. Whether this is seen solely as compensation or the statutorily intended consequence of the happening of an event or to some extent a sanction or deterrence, the interest payable is, as in the case of penalty, a sum in addition to tax and is relevant for the purpose of computing the total liability.
25. In this respect it is futile to overemphasise the conceptual distinction between compensation and sanction, for whether interest is seen exclusively as the former or to some extent partaking of the character of the latter, the amount payable is in addition to tax in terms of the statute. While in regard to the burden of proof the distinction between the two concepts is relevant and significant, for the purpose of computation of the total liability of the assessee, it is of little significance. Penalty being a sanction, and, therefore, a deterrent even when it enriches the Revenue, and interest being a compensation, even when it deters default, the two imposts forming part of the total liability of the assesses are directed towards distinct and separate ends, and there is no burden of double penalty in the imposition of both. The interest prescribed under Explanation 2 to Section 139(8)(a) is not any the less an interest by reason of its being calculated with reference to the rate applicable, not to a registered firm, but to an unregistered firm. In my judgment, the impugned Explanation 2 to Section 139(8)(a) is neither arbitrary nor unfair nor discriminatory, but like any other provision denoting the liability of the assessee, this provision also denotes the imposition of liability and thus forms part of the assessment. I am of the opinion that the principle laid down by the Supreme Court in Jain Brothers : [1970]77ITR107(SC) , in regard to penalty is applicable to interest with equal force, With the greatest respect, I do not agree with the Karnataka High Court in so far as it has been held to the contrary in M. Naggappa v. ITO : [1975]99ITR32(KAR) and in Addl. CIT v. Mahadeshwara Lorry Service : [1981]129ITR516(KAR) .
26. In the circumstances, I see no merit in the contention that Explanation 2 to Section 139(8)(a) is ultra vires Article 14 or any other provision of the Constitution. The Explanation is, in my view, perfectly valid. So are the orders challenged. The original petitions are accordingly dismissed. I make no order as to costs.