1972 (12) TMI 7 - HC - Income Tax

Penalty for non-payment of self-assessment tax: provision found confiscatory and invalid under freedom to practise, competence upheld

Constitutionality of a statutory penalty for non-payment of self-assessment tax was examined: the provision was found confiscatory because it deprives the ... Power to levy a penalty for non-payment of tax - Constitutional validity of section 140A(3) of the Income-tax Act, 1961 - legislative competency of Parliament - Whether the provisions of Income-tax Act provided for levy of penalty for non-payment of self assessment tax violate provisions of article 19(1)(f) of the Constitution - HELD THAT:- Looking at the substance of section 140A(3) of the Act, there could be no doubt that it deprives or takes away the owner of his retained income and thus it is confiscatory in nature. That the penalty levied under section 140A(3) is not compensatory or interest for delayed payment of the tax or retention, is clear from the fact that it has no relation to the duration of the delay or the wilful of other nature of the violation to pay or the inability to pay the tax. There is not even a power to extend the time for payment. The moment thirty days given under sub-section (1) of section 140A is over, the liability for penalty is attracted. It is also not related to the quantum of the tax payable except that the penalty is attracted if the tax payable exceeds Rs. 500. Thus this section is not hedged in or circumscribed or limited by any condition other than the lapse of 30 days from the date of furnishing of the return and non-payment of the tax payable within those 30 days in order to attract the liability for penalty. It is well known that governmental machinery does not move as quickly as non-governmental bodies or individuals. Government being an impersonal body, there have to be departmental correspondence, consultations, obtaining sanction, etc., and these necessarily take some time. The Government have to depend on the efficiency and promptness of a team of officials. Loss or damage to the Government is a loss or damage to the public, that is, the community in general. In Nav Rattanmal v. State of Rajasthan [1961 (4) TMI 117 - SUPREME COURT], the Supreme Court held that article 149 of the Limitation Act, 1908, prescribing a period of 60 years, did not violate article 14 on the ground that the loss by reason of the claim becoming barred fell on the public and 'that itself would appear to indicate a sufficient ground for differentiating between the claims of an individual and the claim of the community at large'. We are, therefore, unable to discover any hostile discrimination in section 140A(3) against the petitioners. The provision is intended to be a deterrent against failure to pay tax under section 140A(1) of the Act. The Income-tax Officer is bound to issue a notice to the assessee before passing any order under that provision. This gives an opportunity to the assessee to bring to the notice of the Income-tax Officer any grounds in his favour for not levying the penalty or the mitigating circumstances which have to be taken into account in determining the amount of penalty payable by him. Under section 246(o) there is an appeal provided to the Appellate Assistant Commissioner against the order of the Income-tax Officer under section 140A(3). There is a further appeal to the Tribunal under section 253. If the case involves any question of law, the assessee could ask for a reference to the High Court with a further right of appeal to the Supreme Court. Thus the nature of the authority exercised by the Income-tax Officer and his duty to levy and effectively enforce payment of tax are, in our judgment, adequate enunciations of the principles and policy for guidance of the Income-tax Officer. Abuse of power is not to be readily assumed. Normally, 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. If a piece of legislation does not fall in any of the three Lists, then it must be regarded as a matter not enumerated in any of the three Lists and in such a case it belongs exclusively to Parliament under entry 97 of the Union List as a topic of legislation. The test, as laid down in Union of India v. Harbhajan Singh Dhillon [1971 (10) TMI 31 - SUPREME COURT], is to find out whether the impugned taxing provision is with respect to any of the entries in List II. If a taxing provision is not a law with respect to any of the entries in List II, it must necessarily fall within the legislative competence of Parliament under entry 97 of List I read with article 248 of the Constitution. The Supreme Court also held that there is no principle which debars Parliament from relying on its powers under specified entries 1 to 96 of List I and supplementing them with the powers under entry 97 and article 248. It is also well settled that a power to legislate could be found in more than one entry-vide K.L. Johar & Co. v. Deputy Commercial Tax Officer [1964 (11) TMI 58 - SUPREME COURT] and Commissioner of Commercial Taxes v. Ramkishan Shrikishan Jhaver [1967 (8) TMI 37 - SUPREME COURT]. It is not the contention of the learned counsel for the petitioners that the matter sought by Parliament to legislate is included in any of the entries in List II. Clearly, therefore, the power to legislate on penalty for failure to pay the tax is comprehended in entry 97 of List I and article 248 of the Constitution. Section 140A(3) of the Act is, therefore, not beyond the legislative competence of Parliament. In the result, we hold that section 140A(3) of the Income-tax Act, 1961, is not beyond the legislative competence of Parliament and it does not also infringe article 14 of the Constitution. But, it offends article 19(1)(f) and is not saved by article 19(5) of the Constitution. The writ petitions are, therefore, allowed. The order levying the penalty is quashed and the rule in each case is made absolute. Issues: (i) Whether section 140A(3) of the Income-tax Act, 1961, authorising levy of penalty up to 50% for non-payment of self-assessed tax within 30 days is confiscatory and violative of Article 19(1)(f); (ii) Whether section 140A(3) offends Article 14 as discriminatory or by conferring arbitrary unguided power; (iii) Whether section 140A(3) is beyond the legislative competence of Parliament.Issue (i): Whether section 140A(3) is confiscatory and violates Article 19(1)(f).Analysis: The Court examined the substance of section 140A(3) and compared it with recognised modes of enforcing recovery of Government dues, including compensatory interest provisions in other tax regimes and various recovery mechanisms. It considered that tax under section 140A(1) is a present civil debt and that recoveries normally permit compensatory interest or coercive recovery of the debt but do not impose additional punitive burdens unrelated to delay or culpability. The provision allows penalty without relation to duration of delay, wilfulness, or ability to pay and lacks a compensatory nexus to the debt; it therefore authorises taking retained income rather than merely enforcing payment of the debt.Conclusion: Section 140A(3) is confiscatory in substance and violates Article 19(1)(f); it is not saved by Article 19(5).Issue (ii): Whether section 140A(3) infringes Article 14 by creating an arbitrary power or invidious discrimination.Analysis: The Court considered whether the provision vests unguided discretion in the Income-tax Officer and whether the classification effected is arbitrary or discriminatorily hostile. It noted procedural safeguards in the statute (notice, hearing and appeal remedies) and that Parliament may legitimately treat the Government and its refund obligations as a separate class. The Court applied precedent on guidance for administrative discretion and on reasonable classification.Conclusion: Section 140A(3) does not infringe Article 14; it does not constitute arbitrary unguided power nor an invidious discrimination against the assessee.Issue (iii): Whether section 140A(3) is beyond legislative competence of Parliament.Analysis: The Court analysed entries in the Seventh Schedule and precedents addressing the scope of parliamentary powers, concluding that the impugned provision falls within Parliament's legislative competence under entry 97 of List I and article 248 when read with the income-tax entries.Conclusion: Section 140A(3) is within the legislative competence of Parliament.Final Conclusion: The Court allowed the writ petitions on the ground that section 140A(3) is confiscatory and unconstitutional under Article 19(1)(f), while holding it neither violative of Article 14 nor beyond Parliament's competence; orders imposing penalty under section 140A(3) were quashed and the writs were allowed.Ratio Decidendi: A statutory provision that levies a non-compensatory penalty for non-payment of a tax already constituted as a civil debt and that bears no relation to delay, culpability or the debt itself is confiscatory and unreasonable under Article 19(1)(f); such a penalty cannot be sustained as incidental to enforcement of tax recovery.