1997 (5) TMI 5 - SC - Income Tax

Damages u/s14B EPF Act deductible u/s37(1) Income-tax Act only if compensatory, not penal

SC held that damages levied under s.14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, for delayed remittance of contributions, ... Liability incurred by the assessee for the payment of damages u/s 14B of the Employee's Provident Funds Act, 1952 - claim for deduction u/s 37 - HELD THAT:- In Prakash Cotton Mills Pvt. Ltd.'s case [1993 (4) TMI 3 - SUPREME COURT], this court has considered the question whether the interest paid for delayed payment of sales tax under the Bombay Sales Tax Act, 1959, and damages paid for delayed payment of contribution under the Employees' State Insurance Act were permissible deduction under section 37(1) of the Income-tax Act, 1961 ('the Act'). This court has held that whenever any statutory impost paid by an assessee by way of damages or penalty or interest, is claimed as an allowable expenditure under section 37(1) of the Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, i.e., partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature. In that case, this court has approved the judgment of the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd.[1987 (11) TMI 32 - ANDHRA PRADESH HIGH COURT], where the court was dealing with the deduction of the amount paid by way of damages under section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. It was held that the said amount comprises both the elements of penal levy as well as compensatory payment and that it will be for the authority under the Act to decide with reference to the provisions of the Employees' Provident Funds Act, 1952 and the reasons given in the order imposing and quantifying the damages to determine what proportion should be treated as penal and what proportion as compensatory and that the entire sum can neither be considered as mere penalty nor as mere interest. Appeal is, therefore, partly allowed to the extent that the matter is remitted to the High Court to consider question referred by the Tribunal in accordance with the principles laid down by this court in Prakash Cotton Mills Pvt. Ltd.'s case [1993 (4) TMI 3 - SUPREME COURT] and if for the purpose of such consideration the High Court considers it necessary it may ask the Tribunal to submit a supplementary statement of case. The appeal is disposed of accordingly Issues:1. Deduction of liability incurred under the Employees' Provident Funds Act.2. Allowance of penalty under the Central Sales Tax Act as a deduction.Analysis:1. The appeal involved questions regarding the deduction of liability incurred by the assessee under the Employees' Provident Funds Act and the allowance of penalty under the Central Sales Tax Act. The High Court had ruled against the assessee on these issues, citing previous decisions that supported the Revenue's stance. The appellant's counsel argued for a reconsideration based on a Supreme Court decision in Prakash Cotton Mills Pvt. Ltd.'s case [1993] 201 ITR 684.2. The Supreme Court noted that the previous decision established a framework for determining the deductibility of statutory imposts based on whether they were compensatory or penal in nature. The Court emphasized the need to analyze the nature of the impost to decide on deductibility. In this context, the Court referred to the judgment of the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113, which dealt with a similar issue under the Employees' Provident Funds Act, 1952.3. Regarding the first question on the deduction of liability under the Employees' Provident Funds Act, the Supreme Court found that the High Court had not examined the issue in light of the principles laid down in the Prakash Cotton Mills case. Therefore, the Court remitted the question back to the High Court for reconsideration based on the established principles, allowing for a supplementary statement of the case if necessary.4. On the second question concerning the penalty under the Central Sales Tax Act, the Supreme Court determined that the penalty imposed was not related to delayed payment but was for contravention of the Act. The Court found no compensatory element in the penalty and upheld the High Court's decision on this issue.5. In conclusion, the Supreme Court partly allowed the appeal, remitting the first question to the High Court for reconsideration in line with the established principles. The Court disposed of the appeal without costs, providing clarity on the deductibility of statutory imposts based on their nature as compensatory or penal.