Compensatory interest on notional tax for registered firms was struck down as discriminatory under Article 14.

A compensatory interest levy for delayed return filing was held unconstitutional insofar as it required a registered firm to pay interest on notional tax not actually payable by it. The classification between registered and unregistered firms was accepted for tax computation, but the provision failed Article 14 because no rational nexus was shown between that distinction and the special burden imposed, including where advance tax had already covered the liability or no actual tax default existed. The discriminatory portion was severable, and the writ relief was affirmed.

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Issues: Whether the provision requiring a registered firm to pay interest on notional tax as if it were an unregistered firm for delayed filing of return was discriminatory and violative of Article 14 of the Constitution of India.

Analysis: The levy of interest under the relevant return-filing provision was compensatory in character and, in the ordinary case, interest was chargeable only on the actual tax withheld. The impugned clause singled out registered firms by directing computation of interest on a notional tax basis even where the tax actually payable by the registered firm was nil or had already been covered by advance tax. The classification of registered and unregistered firms for tax computation was accepted, but no rational nexus was shown between that classification and the special burden imposed for delayed filing. The distinction from the penalty provision upheld in earlier authority was material, because the interest levy operated even where no actual tax default existed and even where extension of time had been granted.

Conclusion: The provision, to the extent it required a registered firm to pay interest on tax not actually payable by it, was held unconstitutional as violating Article 14 and the challenge succeeded.

Final Conclusion: The appeals failed, the discriminatory portion of the provision was struck down as severable, and the relief granted in the writ petitions stood affirmed.

Ratio Decidendi: A taxing provision imposing compensatory interest must bear a rational nexus to actual tax withheld and cannot, consistently with Article 14, single out one class of assessees for interest on a notional liability that is not in fact due.

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