Allahabad High Court
Commissioner Of Income-Tax vs Kamlapat Motilal on 17 March, 1988
Equivalent citations: [1988]172ITR438(ALL), [1988]39TAXMAN95(ALL)
JUDGMENT Om Prakash, J.
1. At the instance of the Commissioner of Income-tax, Kanpur, the Income-tax Appellate Tribunal, Allahabad Bench, referred to us the following three questions under Section 256(2) of the Income-tax Act, 1961 (briefly " the Act, 1961"), for our opinion :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 31,572 by way of damages for late payment of provident fund deductions was made by the assessee in the course of its business and was deductible in computing the assessee's total income ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 32,259 being interest under Section 5(3) of the Sugarcane Cess Act was deductible in computing the assessee's total income ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 86,263 being interest on purchase tax was deductible in computing the assessee's total income ?"
2. First, we take up question No. (1). The assessee claimed deduction of Rs. 31,572 representing damages for the late payment of provident fund deductions under Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (briefly "the Act, 1952"), which in so far as relevant says that where an employer makes default in the payment of any contribution to the fund or in the transfer of accumulations required to be transferred by him under Sub-section (2) of Section 15 or Sub-section (5) of Section 17, the Central Provident Fund Commissioner or such other officer, as may be authorised by the Central Government, may recover from the employer such damages not exceeding the amount of arrears, as it may think fit to impose. The Income-tax Officer was of the view that damages paid under Section 14B were penal in nature and, therefore, were not incidental to the business. He, therefore, disallowed the assessee's claim. The assessee appealed to the Appellate Assistant Commissioner, but failed. Then, the assessee filed an appeal before the Appellate Tribunal which reversed the order of the Appellate Assistant Commissioner on this point. The Appellate Tribunal held:
"The payment of damages cannot be equated with the payment of penalty. The former is related to the business of the assessee whereas the latter arose due to the contravention of the Provident Fund Rules."
3. The question for consideration is whether damages paid under Section 14B of the Act, 1952, are in the nature of penalty or an allowable deduction being an expenditure incidental to the business. What is the true nature and character of "damages" paid by an employer who makes default in the payment of any contribution to the fund or in the transfer of accumulations required to be transferred by him under Section 14B? This question came up for consideration before the Supreme Court in Organo Chemical Industries v. Union of India, AIR 1979 SC 1803. The question as formulated by the Supreme Court for consideration in paragraph 2 on page 1804 was : "Whether Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, is unconstitutional and, if not, what is the semantic-juristic sweep of the expression 'damages' used therein?" Before this question was decided by the Supreme Court in Organo Chemical's case, AIR 1979 SC 1803, there was a conflict of opinion between different High Courts as to the meaning of the word "damages" in Section 14B of the Act. According to some of the High Courts, the word "damages" in Section 14B meant actual loss to the beneficiaries. The view is that Section 14B clearly indicates that an employer is liable to pay damages if he has made default in the payment of contributions. Any delay in paying the amount under Section 6 of the Act, 1952, causes loss to the beneficiaries of the Provident Fund Scheme, such as loss of interest and the like. This is the loss that is sought to be recovered from the defaulting employer for the purpose of indemnifying the beneficiaries of the Scheme, namely, the employees, to the extent of the loss suffered by them. The defaulter under Section 14B is, therefore, liable to pay damages which represent the loss but not anything more, as such recovery would amount to penalty and that is not permitted under the section. It is, therefore, held by these High Courts that the damages to be imposed under Section 14B should have correlation to the loss suffered and that damages under section 14B are intended to compensate the loss to the beneficiaries of the Scheme. This approach of some of the High Courts was not approved by the Supreme Court. But, at the same time, some other High Courts took the contrary view that damages paid under Section 14B are penal in nature. In para 46, on page 1816, the Supreme Court, disapproving the view that "damages" paid under Section 14B are simply to recompense the beneficiaries of the Scheme from the loss they suffered, remarked (p. 1816, para 46) :
"The traditional view of damages as meaning actual loss, does not take into account the social content of a provision like Section 14B contained in a socio-economic measure like the Act in question. The word 'damages' has different shades of meaning. It must take its colour and content from its context, and it cannot be read in isolation, nor can Section 14B be read out of context. The very object of the legislation would be frustrated if the word 'damages' appearing in Section 14B of the Act was not construed to mean penal damages. The imposition of damages under Section 14B serves a two-fold purpose. It results in damnification and also serves as a deterrent. The predominant object is to penalise, so that an employer may be thwarted or deterred from making any further defaults."
4. In para. 47, on the same page (p. 1816), their Lordships reiterated :
"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 penalises 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."
5. To support the view that "damages" are penal in nature, their Lordships extensively quoted from "Statement of Objects and Reasons" of the Amending Act 40 of 1973, clearly indicating that a tendency had been growing amongst the employers not to contribute to the funds and not to transfer the accumulated funds and with a view to curbing this tendency, which was injurious to the welfare of the employees, it was proposed to amend the Act so as to render the penal provisions more stringent and to make defaults cognizable offences.
6. From this authority which finally resolved the conflict of opinion between the two sets of High Courts, one taking the view that "damages" paid under Section 14B are nothing but compensation awarded to the employees for the loss they suffered and the other holding the view that "damages" are penal in nature, it is manifest that damages have a deterrent effect on the erring employers and are penal in character. It is trite law that an amount of penalty is not incidental to the business and hence is not deductible or allowable as business expenditure. We do not consider it necessary to unnecessarily burden this order by citing endless authorities on this point.
7. Sri Swarup, learned counsel for the assessee, strenuously argued before us :
(1) that the word "damages" has not been used in Section 14B as synonymous with "penalty " and, if it were so, there was no need for the Legislature to make provisions for penalty twice over--once in Section 14 and again in Section 14B of the Act, 1952 ;
(2) that "damages" under Section 14B partly augment the provident fund and are partly transferred to the general revenues of the appropriate Government and to the extent "damages" are paid to the employees to compensate their loss, that should be allowed, since expenditure incurred as interest or compensation paid in any other form has always been held as allowable deduction ;
(3) that though the Supreme Court held that the word "damages" in Section 14B is in the nature of penalty, nevertheless it is not penalty in the sense in which it is used in Section 14 ; and (4) that the Supreme Court in Organo Chemical Industries' case, AIR 1979 SC 1803, has not interpreted the word "damages" under the Income-tax Act, but only under the Act, 1952, it having nothing to do with the former,
8. We are not at all impressed by these submissions of Sri Swarup. Under the Income-tax Act, what is relevant is the point of deduction. So far as the true character, nature, content or shade of the word "damages" is concerned, that will be seen only in the context of the scheme of the Act, 1952, and, therefore, it will not be a distinctive feature that the Supreme Court interpreted the word "damages" under the Act, 1952, only, without adverting to the Income-tax Act. We fail to understand how when the Supreme Court clearly held that "damages" under Section 14B are penal in nature, the damage paid to compensate the employees from the loss can be appropriated or segregated from that part of the damages which are transferred to the general revenues of the Government. There is no bar to making two separate provisions relating to penalties covering two different situations, though it may be a drafting expediency. The Supreme Court having clearly held that damages are penal in nature, the argument that the word "damages" in Section 14B is not penalty in the true sense of the term as it is used in Section 14, cannot be accepted.
9. Following Organo Chemical Industries' case, AIR 1979 SC 1803, it must be held that the Appellate Tribunal was in error in holding that the payment of damages cannot be equated with the payment of penalty and that damages paid under Section 14B are allowable as business expenditure.
10. Question No. (1) is, therefore, decided in favour of the Revenue and against the assessee.
11. Then we take up questions Nos. (2) and (3) together. In question No. (2), the point involved is whether the payment of interest under Section 5(3) of the Sugarcane Cess Act is deductible in computing the assessee's total income. In Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (SC), the Supreme Court held that interest paid on arrears of cess under Section 3(3) of the U.P. Sugarcane Cess Act, 1956, is an allowable deduction as revenue expenditure. Therefore, the view of the Appellate Tribunal in this regard has to be accepted.
12. Question No. (3) raises a question whether payment of Rs. 86,263 being interest on purchase tax was deductible in computing the assessee's total income. This question is not res Integra so far as this court is concerned. In Triveni Engineering Works Ltd. v. CIT [1983] 144 ITR 732 (All) [FB], a Full Bench of this court held that interest paid on delayed payment of sugarcane purchase tax under the U.P. Sugarcane Purchase Tax Act, 1961, is an allowable deduction. Therefore, the view taken by the Appellate Tribunal in this regard deserves to be upheld.
13. We, therefore, decide questions Nos. (2) and (3) against the Revenue and in favour of the assessee.
14. In the result, the reference of the Revenue is partly allowed. There will, however, be no order as to costs. Let a copy of the judgment be sent to the concerned Bench of the Appellate Tribunal which shall pass an order to dispose of the case conformably to our judgment.