TaxTMI 
TaxTMI 
2010 (11) TMI 95
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...." 2. We now narrate the facts under which these questions have arisen for consideration. The respondent-assessee filed its return of income for the Assessment Year 2001-02 declaring a loss of Rs. 6,75,38,576/-. During the assessment proceedings, the Assessing Officer (AO) found that there was delay in making payment of provident fund (in short 'PF') dues by the assessee. For this reason, the assessee had to pay interest on late payments as well. Interest in the sum of Rs. 18,29,287/- was paid along with the PF dues belatedly and not in the year in question. Section 43B of the Income Tax Act (hereinafter referred to as 'the Act') provides that certain payments have not actually made, would not qualify for deduction as business expenditure. Payment of PF dues is one such item. Therefore indubitably, the assessee was not entitled to seek deduction of the dues towards PF, as this amount was not actually deposited with the PF Authorities. However, on the ground that because of late payment interest thereon had also become due, the assessee had claimed as deduction though not actually paid. The AO was of the view that since this amount was not paid, no deduction was allowable under Se....
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....id by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return 694a : Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36 and where such payment has been made otherwise than in cash, the sum has been realised within fifteen days from the due date. Explanation [1] : For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause (a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983 or any earlier assessment year) in which the liability to pay such sum was incurre....
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....f 1956), engaged in the business of providing long-term finance for industrial projects and approved by the Central Government under clause (viii) of sub-section (1) of section 36." 4. In a mercantile system of accounting, the income which arises or is due becomes taxable even when actually received or not. Conversely, if some liability becomes due, the assessee would be entitled to get the same deducted in his income tax return even if nor actually incurred, provided it is permissible deduction under various provisions of the Act. Certain exceptions would qualify for deduction under various other provisions of the Act whether actually incurred or not, if the liability in respect thereof has accrued. The Act so provides, keeping in view the „matching concept‟, so as to arrive at realistic figure of net profits/income on which tax is to be paid. The concept of „matching concept‟ is defined by the Supreme Court in the case of Commissioner of Income Tax Vs. Woodward Governor India (P) Ltd. [312 ITR 214]. The principle laid down would be relevant even for our purpose and therefore, we extract the same: "14. In the case of M.P. Financial Corporation v. CIT reported....
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.... at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading Section 37(1) with Section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of pra....
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....nd interest thereon becomes due for the period which falls within the assessment year, that would qualify for deduction even if it is not actually incurred. Realizing the aforesaid, the endeavour on the part of the Revenue is to bring the element of „interest‟ payable on late payment of PF as part of the PF itself i.e. it would partake the character of the PF itself to attract the mischief of Section 43B of the Act. 7. It is, therefore, clear that the answer to the questions posed would depend on this aspect, viz., whether the interest, which is payable on late payment of PF dues would assume the character of the PF. 8. Before answering this, we may, however, clarify one aspect. It was sought to be argued by the learned counsel for the Revenue that the interest is in the nature of punitive and therefore, not allowable as deduction. Though this issue never cropped up in this perspective, still we are of the opinion that this contention of the Revenue is not legally sustainable. As per the provisions of Employees Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred to as „the PF Act‟), the employer is supposed to deduct certain percentage ....
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....Reconstruction established under section 4 of the Sick Industrial Companies (Special Provisions) Act 1985 (1 of 1986) subject to such terms and conditions as may be specified in the Scheme." 9. The Supreme Court in the case of Organo Chemicals Industries and Anr. Vs. Union of India (UOI) and Ors. [(1979) 4 SCC 573] held that the damages payable under Section 14B of the PF Act are penal in nature. However, this principle cannot be extended to the payment of interest payable under Section 7Q of the PF Act. Obviously, the payment of this interest is automatic if the PF contribution by the employer is delayed. It is, therefore, clearly compensatory and cannot be treated as penal in nature. 10. In the case of Mahalakshmi Sugar Mills Co. Vs. Commissioner of Income Tax, Delhi [(1980) 123 ITR 429 (SC)] where the question of interest payable on arrears of cess which was to be paid on entry of sugarcane into the premises of a factory for use, consumption or sale therein would be in the nature of penalty. The Court answered the question in the negative holding that it would be compensatory in nature. In the case of Prakash Cotton Mills Pvt. Ltd. Vs. Commissioner of Income Tax [(1993) 20....