TMI Blog1972 (12) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... cause why a penalty should not be imposed. The petitioner filed a written reply on October 28, 1969, stating that his funds were locked up in the business and that, therefore, the tax could not be paid in accordance with that section. But the Income-tax Officer rejected his explanation on the ground that the petitioner was showing large cash balance in his wealth-tax returns and that therefore there was no proper explanation for non-payment of tax under section 140A. By his order dated October 31, 1969, the Income-tax Officer levied a penalty of Rs. 5,000 under section 140A(3) of the Act. It may be mentioned that the regular assessment is stated to have been completed on September 30, 1969, and the tax payable on the regular assessment was determined at Rs. 17,501. In the second case also the facts are almost identical except that there is slight difference in the total income returned and the amount of tax payable. The total income returned for the year 1968-69 was Rs. 51,310 and the tax payable under section 140A was Rs. 15,482. A sum of Rs. 5,000 was levied as penalty in this case also. In both these cases it appears that the penalty was reduced to Rs. 2,500 on appeal by each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Act exceeds five hundred rupees, the assessee shall pay the tax so payable within thirty days of furnishing the return......... (3) If any assessee fails to pay the tax or any part thereof in accordance with the provisions of sub-section (1), he shall, unless a regular assessment under section 143 or section 144 has been made before the expiry of the thirty days referred to in that sub-section, be liable, by way of penalty, to pay such amount as the Income-tax Officer may direct, and in the case of a continuing failure, such further amount or amounts as the Income-tax Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed fifty per cent. of the amount of such tax or part, as the case may be: Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard." This is a new section which was introduced by section 34 of the Finance Act of 1964, with effect from April 1, 1964. As per sub-section (1), the moment a return is furnished the tax due, on the basis of the return as reduced by the tax already paid, becomes payable. With reference to the legal position prior to the introduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not voluntarily paid, is recoverable as any other debt due to the Government. The Government have certain special rights in the matter of recovery of the amounts due to them. Keeping in view that if a claim for recovery of tax becomes barred by limitation, the loss falls on the public, the Supreme Court upheld the constitutional validity of article 149 of the Limitation Act, 1908, providing for a special period of limitation of sixty years for recovery of amounts due to the Government in the decision in Nav Rattanmal v. State of Rajasthan. It is on this principle, the Supreme Court has also upheld the special provisions like the Revenue Recovery Acts for summary recovery of the amounts due to the Government without resorting to suit, in Mannalal v. Collector of Jhalawar. Even arrest and detention of the defaulter under the said Revenue Recovery Acts in cases where the defaulter is guilty of fraudulent conduct in order to evade payment were upheld as provisions for enforcing payment in the decisions of the Supreme Court in Purshottam Govindji Halai v. B. M. Desai, Addl. Collector of Bombay, and Collector of Malabar v. E. Ebrahim. In Collector of Malabar v. E. Ebrahim, the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of the amount of tax payable. It is also the ordinary rule in actions for recovery of money only, that the creditor recovers beyond the amount of the debt the interest on the money withheld or the value of the use of the money while he is kept out of it provided the agreement, express or implied, between the parties provided for it or there exists an express statutory provision to the effect that the interest may be allowed. The Income-tax Act itself has in various provisions imposed liability to pay interest on delayed payment of taxes. In this connection it is useful to refer to the following passage in American Jurisprudence, volume 51, page 850: " It is, however, undoubtedly within the power of the legislature to provide that taxes remaining unpaid shall bear interest from the time when they are due and payable and it is equally constitutional to provide that taxes which have already become delinquent shall bear interest from the time the delinquency commences." Thus, Parliament could validly provide for payment of interest on taxes remaining unpaid from the time when they are due and payable. In fact, the Act itself provides for payment of such interest under various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in order to attract the liability for penalty. The learned counsel for the revenue contended that, though a discretion is vested in the Income-tax Officer to levy a penalty for failure to pay tax, having regard to the nature of the provisions, he is expected to exercise a judicial discretion and impose a penalty only in those cases where the failure to pay was wilful by a person who had enough resources to pay but deliberately and fraudulently fails to pay. He also relied on the proviso to sub-section (3) requiring the issue of notice and giving opportunity to the assessee of being heard. This will enable the assessee to bring to the notice of the assessing authority the mitigating circumstances which would have to be taken into account by the assessing authority. In this connection he also relied on a Circular No. 20(LXXVI)D of 1964 dated July 7, 1964, issued by the Central Board of Direct Taxes, New Delhi, which contained an extract of the observation of the Minister of Finance in the Lok Sabha in his reply to the debate on clause-by-clause consideration of the Finance Bill, 1964, which reads as follows: "The amount of penalty is only the maximum that has been mentioned. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Post Officer v. K. P. Abdulla and Bros., the Supreme Court held that section 42(3) of the Tamil Nadu General Sales Tax Act, 1959, which empowers the Check Post Officers to confiscate goods and levy penalty in lieu of confiscation without inspection of the goods found in a vehicle when the driver of the vehicle was not carrying with him the documents specified in the section, is not a provision which is ancillary or incidental to the power to tax sale of goods under entry 54 of List II of the Seventh Schedule to the Constitution, approving the decision of this court in K. P. Abdulla Bros. v. Check Post Officer. Though the Supreme Court was concerned with the legislative competency of a State legislature under entry 54 of List II of the Seventh Schedule to the Constitution, the ratio of that judgment, in our opinion, is that a provision for confiscation or levy of penalty is not a provision for enforcement of payment of tax. Thus, the provision for confisaction of property for non-payment of tax arrears could not be sustained as a provision ancilliary or incidental for enforcement of payment and, therefore, a reasonable restriction under clause (5) of article 19 of the Constitutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l burden. The learned counsel for the revenue, in this connection, relied on a number of decisions where the Supreme Court has upheld some of the provisions designed to prevent evasion of tax. In Balaji v. Income-tax Officer, the Supreme Court upheld sections 16(3)(a)(i) and (ii) of the Indian Income-tax Act, 1922, on the ground that it was designed to prevent evasion of tax by carrying on business nominally in the name of a wife or minor child. For the same reasons sections 2(6A) and 12(1B) of the Indian Income-tax Act, 1922, were upheld in Navnit Lal C. Javeri v. Appellate Assistant Commissioner of Income-tax. In Sivagaminatha Moopanar Sons v. Income-tax Officer, this court had to consider the scope of section 28 of the Indian Income-tax Act, 1922, which provided for a levy of penalty for failure to furnish a return without reasonable cause and for concealment of the particulars of his income or deliberate furnishing of inaccurate particulars. It was held that section 28 was enacted for the purpose of rendering evasion unprofitable and of securing to the State compensation for damages caused by attempted evasion. It was also held that the expression "taxes on income" is of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced strong reliance on the decision of the Supreme Court in M. A. Rahman v. State of A.P. The facts in that case were these. The petitioners therein, who were dealers in motor spirit in Hyderabad, did not submit their returns under the Madras Sales of Motor Spirit Taxation Act (Act 6 of 1939), which was extended to Andhra Pradesh. Thereupon, best judgment assessments were made against the petitioners and they were required to pay the tax, though liberty to pay in instalments was granted to them for that purpose. As the petitioners failed to pay the instalments, the registration certificate of one of the petitioners was cancelled and the other petitioners were threatened with cancellation of the registration certificate. Thereafter, petitions were filed challenging the provisions of the Act relating to cancellation of registration certificates on the ground that such cancellation was not a reasonable restriction on the fundamental rights of the petitioners to carry on business under article 19(1)(g) of the Constitution. Section 4(1) of the Act provided that no person shall, after the commencement of the Act, carry on business in motor spirit at any place in the State unless he has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may even follow from the application of other coercive processes for realisation of dues from a trader, for his assets may be sold off to pay the arrears of tax and he may thereafter be not in a position to carry on the business at all. Therefore, the provision for cancellation of registration for failure to pay the tax or for fraudulently evading the payment of it is an additional coercive process which is expected to be immediately effective and enables the State to realise its revenues which are necessary for carrying on the administration in the interest of the general public. The fact that in some cases restrictions may result in the extinction of the business of a dealer would not by itself make the provision as to cancellation of registration an unreasonable restriction on the fundamental right guaranteed by article 19(1)(g). We may in this connection refer to Narendra Kumar v. Union of India, where it was held that: 'the word "restriction" in articles 19(5) and 19(6) of the Constitution includes cases of "prohibition" also; that where a restriction reaches the stage of total restraint of rights special care has to be taken by the court to see that the test of reasonablen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6) and that the impugned provision did not impose any additional burden or liability in respect of the tax payable. It is also very important to note that there is no provision in the Madras Sales of Motor Spirit Taxation Act as extended to Andhra Pradesh or the Rules framed thereunder, prohibiting or debarring a person whose licence has been cancelled, from applying for a fresh licence. This case is, in our opinion, similar to those cases where the arrest and detention for recovery of arrears of tax under the Revenue Recovery Act were upheld. A law with respect to the recovery of debts is also not one with respect to carrying on of any trade or business, though the debtor might be a trader as held in Lachhman Das on behalf of the firm Tilak Ram Ram Bux v. State of Punjab. Confiscation of property is also not allowed under articles 19(1)(f) and 19(5). The learned counsel for the revenue also referred to the decision in Western Union Telegraph Co. v. State of Indiana. In that case a penalty of 50 per cent. for non-payment of taxes by a telegraph company which was imposed by an Indiana Act of 1893, was held not unconstitutional as a denial to such company of the equal protection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as whether this rule entitling the State to have priority in respect of its dues over the claim of a usufructuary mortgagee, infringed article 19(1)(f). The Supreme Court held that that rule created an unreasonable restriction on the mortgagee' sright under article 19(1)(f) and, therefore, was void under article 13. Though the Supreme Court itself has held in a number of cases that the State is entitled to priority of payment of its dues over private unsecured debts that right was held not available to the State and could not be given even by statute so as to affect the prior mortgagee's right, which was held to be property. Even for a public demand, the recovery of which will be in the public interest, the Supreme Court refused to uphold the confiscation of property and held it to be an unreasonable restriction on the right to property. In K. T. Moopil Nair v. State of Kerala the Supreme Court struck down a taxing provision on the ground that it is confiscatory. Again in Assistant Commissioner of Urban Land Tax v. Buckingham Carnatic Co. Ltd. the Supreme Court held that where the taxing statute is plainly discriminatory or provides no procedural machinery for assessment and levy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c revenue is essential to the continued existence of the state; it cannot tolerate delay in the payment of taxes, and to induce prompt payment of taxes when due, the legislatures of the several states have very generally imposed penalties upon taxpayers who fail to pay their taxes within a specified period. Such an imposition is doubtless within the constitutional power of the legislature. The state may provide a penalty for failure promptly to pay a corporate franchise tax .... The power to exact interest on delinquent taxes is an incident of the power to tax, and many jurisdictional statutes impose liability for interest on delinquent taxes in the nature of a penalty for non-payment of taxes when due. However, the imposition of liability for interest for non-payment of taxes when due is not necessarily equivalent to a penalty thereon. This depends upon the wording and context of the statute. In many instances the legislature in imposing liability for interest uses that term in its ordinary sense of a charge imposed for the use of money; this may be indicated by the fact that the amount of interest imposed is fixed at the legal rate of interest and chargeable on other obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of anything more than the debt with compensatory interest and costs. Any law relating to the recovery of tax due, contrary to this basic principle, unless substantial grounds are made out for a departure, is, in our opinion, unreasonable. We are not satisfied that there are any such substantial grounds for varying this provision of levying interest for delayed payment into one of penalty. To sum up: Tax due and payable under section 140A(1) of the Act is a civil debt. Any provision in the Act for enforcing payment of that debt would be valid. This provision for enforcing payment and recovery of the tax payable may include or impose anything compensatory for delayed payment or retention of the tax. It is not the nomenclature, which the legislature has used in the provision, that decides the issue as to whether the provision is compensatory or penal, but the substance of the provision. A power to levy penalty which is not compensatory is neither incidental nor ancillary to the power of recovery, and it is not inherent in the power to recover the tax payable. The levy of penalty could be sustained only in cases of concealment or evasion of taxes. Penalty for concealment or evasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer does not grant the refund within a period of six months from the date of such order, the Government shall pay the assessee simple interest at 9 per cent. per annum on the amount of refund due from the date immediately following the expiry of the period of six months aforesaid to the date on which the refund is granted. Thus, while these provisions make the Government liable for interest only, for failure to refund within time the excess amount of tax collected, section 140A(3) makes the assessee liable for penalty. This, according to the learned counsel for the petitioners, is an invidious and hostile discrimination against the assessees like the petitioners and therefore section 140A(3) is violative of article 14. We are unable to accept this argument. Section 140A(3) treats all these persons who fail to pay the tax as provided under section 140A(1) as a class by itself and makes them liable to pay the penalty. In our opinion, there can be no comparison between that class of persons and the Government. Government can be legitimately treated as a class by itself. It is well known that governmental machinery does not move as quickly as non-governmental bodies or individuals. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or line of action which should guide the authority, article 14 is not violated, unless the rules of the policy indicated lay down different criteria to be applied to persons or things similarly situate. It is not however essential for the legislature to comply with the guarantee of equal protection that the rules for the guidance should be laid down in express terms. Such guidance may be obtained from or afforded by, (a) the preamble read in the light of the surrounding circumstances which necessitated the legislation, taken in conjunction with well-known facts of which the court might take judicial notice or of which it is apprised by evidence before it in the form of affidavits, (b) or even from the policy and purpose of the enactment which may be gathered from other operative provisions applicable to analogous or comparable situations or generally from the object sought to be achieved by the enactment. " The Supreme Court further held that the guidance may be gathered from the provisions of the Act, its scheme, policy and purpose and the surrounding circumstances which necessitated the legislation. The question for consideration in that case was whether section 3 of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, it is presumed that public officials will discharge their duties honestly and in accordance with law. The discretion vested in the Income-tax Officer has also to be exercised in a judicial manner. It must be governed by rule and not by whim. Whether in a given case the power has been properly exercised or not is open to question in appeals and further appeals. Thus, there is an effective check on the exercise of the power by the Income-tax Officer. We are, therefore, of opinion that section 140A(3) does not infringe article 14 of the Constitution on this ground. Regarding the legislative competency of Parliament, the submission of the learned counsel for the petitioners was that a power to levy penalty or confiscation of property for non-payment or failure to pay in time of the tax payable is not a power incidental or ancillary to the power to legislate on "taxes on income" under entry 82 of List I to the Seventh Schedule to the Constitution. Regarding article 248 and entry 97 of List I to the Seventh Schedule, his submission was that if there is a specific entry and the particular power is not comprehended within that entry no resort to residuary power is permitted. Entry 82, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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