Law:

Section:

Section 139(8)(a) of the income-tax act, 1961-Return of income-Interest for late filing of-Whether 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 tax withheld by registered firm, but with reference to tax which assessee, a registered firm, 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-held, no Facts The petitioners, being registered firms, challenged the constitutional validity of Explanation 2 to section 139(8)(a). They contended that the interest charged under section 139(8)(a) amounted to a penalty for the reasons that a registered firm was treated, by virtue of Explanation 2 to that section, as if it was an unregistered firm for the purpose of computing interest. The registered firm was, thus, singled out for discriminatory treatment among the various categories of taxpayers and was required to pay interest on amounts to which it was not liable to be assessed. The interest levied on the registered firm with reference to the tax payable by an unregistered firm, the petitioners contended, had resulted in an unreasonable classification having no rational nexus with the object sought to be achieved and was arbitrary, unfair and violative of article 14 of the Constitution. It was further contended that the principle applicable to penalty, as enunciated in Jain Bros. v. Union of India [1970] 77 ITR 107 (SC) was not applicable in regard to interest, for penalty was a punishment in the matter of a deterrent while interest was a compensation commensurate with the loss. In other words, it was contended that the interest was levied to compensate the loss suffered by the revenue on account of the delayed furnishing of the returns and payment of the tax. Interest did not, therefore, partake of the character of penalty, which was punitive. On writ: Held There is a divergence among the decisions of various High Courts as to the nature of interest levied under section 139(8)(a). While in the majority of cases, it has been held that interest under section 139 is compensatory, it has…

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