1993 (4) TMI 3 - SC - Income Tax

Appeal partly allowed; issues under s.37(1) remitted for fresh factual and legal consideration of deductibility of interest and ESI damages

SC partly allowed the appeal, remitting the assessee's claims under s.37(1) for interest paid on delayed sales tax and damages for delayed ESI ... Claim for deduction under section 37(1) - interest paid for delayed payment of sales tax and the damages paid for delayed payment of contribution under the Employees' State Insurance Act, 1948 ('the ESI Act') - Entitlement to claim the entire entertainment expenses as allowable expenditure under Section 37(2) - HELD THAT:- The facts of the case under our consideration disclose that the Income tax Officer and the appellate authorities have refused to allow the claims made by the assessee under section 37(1) of the Income-tax Act, without any examination of the Scheme of the provisions of the Bombay Sales Tax Act, to find whether impost of the interest paid by the assessee for delayed payment of sales tax was compensatory in nature as would entitle it for deduction under section 37(1) of the Income-tax Act. The same is the position as regards the impost of damages paid by the assessee under the Employees' State Insurance Act, 1948, for delayed payment of contribution thereunder. Hence, we consider it necessary to remit the question to the concerned Tribunal for deciding the assessee's claims for deduction of interest and damages under section 37(1) of the Income-tax Act. The first question is answered accordingly. As to what portion of the miscellaneous expenses claimed is a deductible entertainment expenses of the assessee being a matter to be decided by the fact-finding authorities while assessing the relevant materials placed before them, no question of law could arise in that regard, particularly, when the fact-finding authorities have recorded their concurrent finding on consideration of the relevant material. Hence, the question under consideration is devoid of merit and is answered against the assessee. In the result, we allow this appeal partly and remit the case relating to the appellant-assessee's claim for deduction under section 37(1) of the Income-tax Act, 1961, to the Income-tax Appellate Tribunal, Bombay, for being decided in the light of our answer to the first question and decide the appeal of the assessee accordingly. Appeal allowed. Issues Involved:1. Entitlement to claim interest and damages as allowable expenditure under Section 37(1) of the Income-tax Act, 1961.2. Entitlement to claim the entire entertainment expenses as allowable expenditure under Section 37(2) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:First Issue: Entitlement to Claim Interest and Damages as Allowable Expenditure under Section 37(1) of the Income-tax Act, 1961The appellant, a company engaged in textile manufacturing, claimed Rs. 19,635 as revenue expenditure for interest on delayed sales tax payments under the Bombay Sales Tax Act, 1959, and damages for delayed contributions under the Employees' State Insurance Act, 1948. The Income-tax Officer disallowed this claim, treating it as penal interest. Appeals to the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal were unsuccessful, as were applications under Sections 256(1) and 256(2) of the Income-tax Act to the Tribunal and the Bombay High Court, respectively.The court referred to the precedent set in Mahalakshmi Sugar Mills Co. v. CIT, where interest paid under the U.P. Sugarcane Cess Act was deemed compensatory and thus allowable under Section 10(2)(xv) of the Indian Income-tax Act, 1922. Similarly, in CIT v. Hyderabad Allwyn Metal Works Ltd., the Andhra Pradesh High Court distinguished between compensatory and penal imposts, ruling that statutory damages under Section 14B of the Employees' Provident Funds Act were partly compensatory and partly penal.The Supreme Court concluded that the nature of the statutory impost must be examined to determine whether it is compensatory or penal. If compensatory, it is deductible under Section 37(1) of the Income-tax Act. The court found that the authorities had failed to examine the relevant statutory provisions and remitted the matter to the Tribunal for reconsideration.Second Issue: Entitlement to Claim the Entire Entertainment Expenses as Allowable Expenditure under Section 37(2) of the Income-tax Act, 1961The appellant claimed Rs. 3,865 as entertainment expenses. The Income-tax Officer allowed Rs. 1,365 and disallowed Rs. 2,500, attributing it to personal expenses of the directors. The Appellate Assistant Commissioner and the Tribunal upheld this view, finding that the expenses were not wholly and exclusively for business purposes.The Supreme Court noted that the determination of deductible entertainment expenses is a factual matter for the assessing authorities. Given the concurrent findings of fact by the lower authorities, no question of law arose. Consequently, the court found no merit in the appellant's claim on this issue.Conclusion:The appeal was allowed in part. The case concerning the appellant's claim for deduction under Section 37(1) of the Income-tax Act was remitted to the Income-tax Appellate Tribunal for reconsideration. The claim under Section 37(2) was dismissed. No costs were awarded.