Calcutta High Court
Hasimara Industries Ltd. vs Commissioner Of Income-Tax on 7 September, 1990
Equivalent citations: [1993]200ITR659(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, the following question of law has been referred to this, court :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the interest of Rs. 24,500 paid to the Provident Fund Commissioner on account of the delayed payment of provident fund was not allowable as business expenditure?"
2. At the outset, it must be stated that the question is not happily worded. The assessee did not pay interest but only damages under Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, and the assessee claimed Rs. 24,500 stated to have been paid as and by way of interest to the Provident Fund Commissioner on account of delayed payment of the provident fund contribution, the Income-tax Officer disallowed it on the ground that it was in the nature of penal interest and was not a business expenditure. This conclusion was upheld by the Commissioner of Income-tax (Appeals). On second appeal before the Tribunal, the Tribunal firstly recorded that "it was conceded on behalf of the assessee that this amount really was not by way of interest but as damages for the default in the payment of contribution to the provident fund." Before the Tribunal, the contention was that the payment was not by way of penalty but by way of interest. The Tribunal proceeded on the admission of the assessee that the assessee paid the aforesaid amount by way of damages under Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. According to the Tribunal, the payment was by way of penalty and, accordingly, it was not allowed. Out of the aforesaid facts, the question as mentioned above has been referred to this court.
3. Mr. Dey, learned counsel for the assessee led by Mr. N.K. Poddar, has submitted that the payment made in this case was in fact by way of interest and, accordingly, allowable. He has relied on several decisions in support of his contentions.
4. On the other hand, Mr. Moitra, on behalf of the Revenue, has drawn our attention to the decision of the Supreme Court in Organic Chemical Industries v. Union of India [1979] 55 FJR 283 ; AIR 1979 SC 1803, where the Supreme Court considered the nature of the damages payable under Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. He has also relied on several other decisions in support of his contention that the damages being penal in nature cannot be allowed as business expenditure.
5. We have considered the rival contentions. In Mahalakshmi Sugar Mills Co. v. CIT , the question was whether the interest payable on the arrears of sugarcane cess was allowable as business expenditure under the U.P. Sugarcane Cess Act, 1956. The Supreme Court held that the interest was not a penalty paid for an infringement of the law. There, the Supreme Court observed as follows (at page 433) :
"Now the interest payable on an arrear of cess under Section 3(3) is in reality part and parcel of the liability to pay cess. It is an accretion to the cess. The arrear of cess 'carries' interest ; if the cess is not paid within the prescribed period a larger sum will become payable as cess. The enlargement of the cess liability is automatic under Section 3(3). No specific order is necessary in order that the obligation to pay interest should accrue. The liability to pay interest is as certain as the liability to pay cess. As soon as the prescribed date is crossed without payment of the cess, interest begins to accrue. It is not a penalty, for which provision has been separately made by Section 3(5). Nor is it a penalty within the meaning of Section 4, which provides for a criminal liability and a criminal prosecution. The penalty payable under Section 3(5) lies in the discretion of the collecting officer or authority. In the case of the penalty under Section 4, no prosecution can be instituted unless, under Section 5(1), a complaint is made by or under the authority of the Cane Commissioner or the District Magistrate. There is another consideration distinguishing the interest payable under Section 3(3) from the penalty imposed under Section 3(5). Section 3(6) provides that the officer or authority empowered to collect the cess may forward to the Collector a certificate under his signature specifying the amount of arrears including interest due from any person, and on receipt of such certificate, the Collector is required to proceed to recover the amount specified from such person as if it were an arrear of land revenue. The words used in Section 3(6) are 'specifying the amount of arrears including interest', that is to say that the interest is part of the arrear of cess. In the case of a penalty imposed under Section 3(5), a separate provision for recovery has been made under Section 3(7). Although the manner of recovery of a penalty provided by Section 3(7) is the same as the manner for recovery provided by Section 3(6) of the arrears of cess, the Legislature dealt with it as something distinct from the recovery of the arrears of cess including interest. In truth, the interest provided for under Section 3(3) is in the nature of compensation paid to the Government for delay in the payment of cess. It is not by way of penalty. The provision for penalty as a civil liability has been made under Section 3(5) and for penalty as a criminal offence under Section 4. The Delhi High Court proceeded entirely on the basis that the interest bore the character of a penalty. It was, according to the learned judges 'penal interest'. The learned judges failed to notice Section 3(5) and Section 4 and the other provisions of the Cess Act."
6. In our view, the aforesaid decision of the Supreme Court has no application to the facts of this case. As would be evident from the extract of the judgment of the Supreme Court, different provisions have been made in the Cess Act for imposition of penalty as well as interest which was payable on arrears of cess under Section 3(3) of the U. P. Sugarcane Cess Act. As held by the Supreme Court, interest is in reality part and parcel of the liability to pay cess. It is an accretion to the cess. The arrear of cess carries interest ; if the cess is not paid within the prescribed period, a larger sum will become payable as cess. But this is not the case here. Under Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, the authority is empowered to recover damages where an employer makes default in the payment of any contribution to the funds. The expression "default" is synonymous with failure to pay. The employer's liability for damages is attracted the moment he makes default. The Supreme Court in Organic Chemicals [1979] 55 FJR 283 ; AIR 1979 SC 1803, has considered this question. There, the Supreme Court held as follows (at page 304 of 55 FJR.) :
"The expression, 'damages' occurring in Section 14B is, in substance, a penalty imposed on the employer for the breach of the statutory obligation. The object of imposition of penalty under Section 14B is not merely 'to provide compensation for the employees'. We are clearly of the opinion that the imposition of damages under Section 14B serves both the purposes. It is meant to penalise defaulting employers as also to provide reparation for the amount of loss suffered by the employees. It is not only a warning to employers in general not to commit a breach of the statutory requirements of Section 6, but at the same time it is meant to provide compensation or redress to the beneficiaries, i.e., to recompense the employees for the loss sustained by them. There is nothing in the section to show that the damages must bear relationship to the loss which is caused to the beneficiaries under the Scheme. The word 'damages' in Section 14B is related to the word 'default'. The words used in Section 14B are 'default in the payment of contribution' and, therefore, the word 'default' must be construed in the light of para 38 of the Scheme which provides that the payment of contribution has got to be made by the 15th of the following month and, therefore, the word 'default' in Section 14B must mean ' failure in performance ' or ' failure to act'. At the same time, the imposition of damages under Section 14B is to provide reparation for the amount of loss suffered by the "employees."
7. It is, therefore, clear that the Supreme Court did not accept the contention that the award of damages under Section 14B must be, in essence, the pecuniary reparation for loss or injury sustained by one person through the fault or negligence of another.
8. The Supreme Court further observed as follows (at page 303 of 55 FJR) :
"With respect, these High Courts have obviously fallen into an error in reading the word 'damages' in Section 14B in isolation, by trying to construe the word in a purely legalistic sense. These High Courts have overlooked that we are not concerned in interpreting what damages means in the realm of contract or tort but the word had to be given its true meaning, in consonance with the objects and purpose of the legislation."
9. It is true that the damages contemplated under Section 14B cover compensation for actual losses and punitive element but one cannot be separated from the other in holding that a part of it relates to the compensation as and by way of interest and the other part being a deterrent for fulfilling the obligation under the Act. The amount levied under Section 14B must partake of the character of penalty and, accordingly, it could not be allowed as a deduction.
10. Our attention has been drawn to the decision of this court in the case of Balrampur Sugar Co. Ltd. v. CIT [1982] 135 ITR 227, where the question was with regard to the liability to pay interest under Section 3(3) of the U. P. Sugarcane (Purchase Tax) Act, 1961. There this court held that the provisions of the U. P. Sugarcane (Purchase Tax) Act, 1961, and those of the U. P. Sugarcane Cess Act, 1956, considered by the Supreme Court in Mahalakshmi Sugar Mills Co. were in pari materia. Accordingly, the interest was allowed as business expenditure.
11. Our attention has also been drawn to the decision of a Full Bench of the Allahabad High Court in Triveni Engineering Works Ltd. v. CIT , where the question was whether interest payable on sugarcane purchase tax arrears is allowable as business expenditure. There also the Allahabad High Court, following the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. , held that the provisions of the U. P. Sugarcane Cess Act, 1956, were in substance in para materia with the provisions of the U. P. Sugarcane Purchase Tax Act in so far as accrual of liability for payment of interest on the arrears of sugarcane purchase tax was concerned and, accordingly, such payment was allowable as business expenditure.
12. Our attention has also been drawn to the decision of this court in Union Drug Co. Ltd. v. CIT [1985] 156 ITR 197. There, a distinction was made by this court between interest payable under Section 16 of the Public Demands Recovery Act with the damages payable under Section 14B of the Employees' Provident Funds and Family Pension Fund Act, 1952. There this court held that the payment made by the assessee was not in respect of the damages under Section 14B of the Employees' Provident Funds Act. The assessee paid interest under the Bengal Public Demands Recovery Act, 1913. This decision has no application to the facts and circumstances of this case.
13. Our attention has been drawn to the decision of the Rajasthan High Court in Rajasthan Central Stores (P) Ltd. v. CIT [1985] 156 ITR 90. There the question was whether the payment of penal interest on sales tax collections withheld by the assessee and utilised for the purpose of his own business was an admissible deduction or not. There, the Rajasthan High Court, on a perusal of the provisions contained in Section 11B of the Rajasthan Sales Tax Act, held that the interest was payable automatically if the amount of tax payable under Sub-sections (2) and (2A) of Section 7 of the Act was not paid within the period allowed or, if the amount specified in any notice of demand, whether for tax, fee or penalty was not paid within the period specified in such notice, or in the absence of such specification within 30 days from the date of service of such notice. The Rajasthan High Court observed that the aforesaid provisions contained in Section 11B of the Rajasthan Sales Tax Act were not much different from the provisions contained in Section 3(3) of the U. P. Sugarcane Cess Act which came up for consideration before the Supreme Court in Mahalakshmi Sugar Mitts Co. , Balrampur Sugar Co. Ltd. and Triveni Engineering Works Ltd. [FB]. This case proceeded on the construction of the provisions contained in the Rajasthan Sales Tax Act and the court was of the view tht the imposition was not by way of penalty but it was compensatory in nature.
14. The same view was taken by the Rajasthan High Court in CIT v. Udaipur Distillery [1986] 160 ITR 444. There also, the question was whether liability to pay interest is allowable as a deduction on the failure of an assessee to pay tax, fee or penalty or on his failure to pay the amount of tax within the period allowed. There the court held that the liability to pay interest on delayed payment of sales tax is a statutory obligation of the dealer and is automatic and no specific order is required. Thus, it is a part of sales tax and, like sales tax, interest is paid by a dealer for the purpose of carrying on business.
15. Our attention has also been drawn to the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961. There, the Supreme Court held that the interest is levied under Section 139(8) and Section 215 of the Income-tax Act, 1961, because, by reason of the omission or default mentioned in the respective provision, the Revenue is deprived of the benefit of the tax for the period during which it remained unpaid. The levy of interest is a part of the process of assessment. This case does not advance the contention raised by the assessee before us. The question there was, whether an appeal would lie against an improper exercise of discretion to waive or reduce interest under Section 139(8) or Section 215 of the Income-tax Act.
16. Our attention has also been drawn to the decision of the Guwahati High Court in CIT v. Pheros and Co. (P) Ltd. [1989] 178 ITR 472, where the question was whether interest paid for delay in payment of sales tax was allowable as a business expenditure or not. There, the Guwahati High Court followed the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. , Central Provinces Manganese Ore Co. Ltd. and held that, where interest is levied on account of deprivation of the benefit of the tax for the period during which it has remained unpaid, the same is compensatory in nature, and is not imposed by way of penalty.
17. In our view, the decision of the Supreme Court in Organic's case [1979] 55 FJR 283 ; AIR 1979 SC 1803, has set at rest the question as to the nature of the damages payable under Section 14B. It cannot be con-tended that the damages levied under Section 14B are merely compensatory in nature.
18. The Gujarat High Court in CIT v. Mihir Textiles Ltd. [1976] 104 ITR 167, held that Section 14 of the Employees' Provident Funds and Family Pension Fund Act, 1952, lays down that damages can be recovered from an employer who makes a default in the payment of any contribution to the provident fund. The same Act also exposes the employer concerned to an action in a criminal court where he can be tried and punished. The fact that one and the same action exposes the offender to two different penalties does not mean that only one out of the two is a penalty and the other is not, In any event, this amount has to be paid for an infraction of law and, in that sense, it is a penalty. An amount paid as damages for delay in making provident fund contribution is not deductible as business expenditure.
19. The Allahabad High Court in CIT v. Kamlapat Motilal [1388] 172 ITR 438, following the decision of the Supreme Court in Organic Chemical Industries [1979] 55 FJR 283, AIR 1979 SC 1803, held that damages paid for late payment of provident fund deductions under Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, are penal in nature and are not allowable as business expenditure under Section 37 of the Income-tax Act, 1961.
20. In our view, the colour and content, nature and character and shades of the meaning of the word "damages" have to be understood in the context of the scheme of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. The meaning assigned to the said word by the Supreme Court in Organic's case, AIR 1971) SC 1803, must be taken to be the governing factor in determining the question whether the damages under Section 14B are penal or compensatory in nature. The expression "damages" occurring in Section 14M is, in substance, a penalty imposed on the employer for the period of infringement of a statutory obligation. The payment made by the assesses in this case, although termed as interest, in fact, represents damages under Section 14B of the Act and hence is not allowable as a deduction.
21. For the reasons aforesaid, we answer the question in this reference in the affirmative and in favour of the Revenue and against the assessee. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
22. I agree.