Allahabad High Court
Standard Chemical Co. Pvt. Ltd. vs Commissioner Of Income-Tax on 14 May, 1997
Equivalent citations: (1997)143CTR(ALL)398, [1998]229ITR193(ALL)
Author: P.K. Jain
Bench: P.K. Jain
JUDGMENT
1. The Income-tax Appellate Tribunal has referred the following question under Section 256(1) of the Income-tax Act, 1961, for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 19,081 levied as damages due to default in payment of provident fund contribution was an allowable deduction under Section 28(i) and/or Section 37(1) of the Income-tax Act, 1961 ?"
2. Section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (briefly "the Act"), as it stood in the assessment year 1974-75 relevant for the purpose of the case, provides that where an employer makes default in the payment of any contribution to the fund, the Central Provident Fund Commissioner or such other officer as may be authorised by the Central Government by notification in the Official Gazette in this behalf may recover from the employer by way of penalty such damages, not exceeding the amount of arrears as it may deem fit to impose.
3. The Appellate Tribunal found that the Income-tax Officer disallowed a sum of Rs. 19,081 with the remarks :
"Penalty of Rs. 19,081 relevant to previous year and not related to this year under consideration, as the liability has arisen due to negligence or fault on the part of the assessee."
4. The Appellate Tribunal has further held that on appeal the Appellate Assistant Commissioner affirmed the view of the Assessing Officer in the following manner :
"However, it is an admitted fact that, the total amount relates to penalty or damages paid by the appellant for various defaults in payment of provident fund contributions. Since the payment is apparently of the nature of penalty or fine, it is not an allowable expenditure. Therefore, the Income-tax Officer was justified in disallowing the assessee's claim."
5. The Appellate Tribunal relying on the decision of this court in the case of CIT v. Swadeshi Cotton Mills Co. Ltd., [1980] 121 ITR 747 (I.T. Reference No. 543 of 1977, dated September 14, 1979), held as follows :
"We are of the view that the income-tax authorities have rightly disallowed the assessee's claim for deduction of Rs. 19,081."
6. From the order of the Appellate Tribunal it is clear that the claim for deduction made by the assessee was disallowed holding that the amount of Rs. 19,081 was in the nature of penalty.
7. In Organo Chemical Industries v. Union of India [1979] 55 FJR 283 ; AIR 1979 SC 1803, 1816, the Supreme Court on the expression "damages" occurring in Section 14B of the Central Act of 1952 opined 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. ..."
8. "The question whether any such impost is in essence compensatory or is by way of penalty will have to be decided having regard to the relevant provisions of the law under which it is imposed and the circumstances under which it has been imposed. The mere nomenclature as interest, penalty or damages in the Act may not be conclusive for the purpose of allowing it as a deduction under the Income-tax Act. Similarly, the circumstance that a fixed rate of interest has to be paid also may not be conclusive. Section 14B of the Act provides for levy of damages for delayed payment as a percentage of the amount due up to a prescribed maximum. Such a determination is to be done by the appropriate authority after giving an opportunity to the employer." (See CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113, 119 (AP)).
9. Relying on the case of Organo Chemical Industries [1979] 55 FJR 283, the Supreme Court in Prakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR 684, confronted with a similar position, chose to remit the case to the Appellate Tribunal, since there was no categorical finding in the order of the Appellate Tribunal as to how much of the amount in respect of which deduction was claimed by the assessee, was compensatory in nature and how much amount was penal in nature.
10. Similar is the fact situation in the case at hand. The Appellate Tribunal simply disallowed the deduction claimed by the assessee on the ground that the damages paid by the assessee were for non-payment of the amount in time and hence were in the nature of penalty. The Supreme Court clearly held in Organo Chemical Industries [1979] 55 FJR 283 that such damages bear a twin character, inasmuch as they are made to provide compensation and also at the same time to penalise the defaulters. Therefore, it was the duty of the Appellate Tribunal to record a clear finding as to how much amount of the claim made by the assessee can be apportioned towards compensation and towards penalty. This has not been done by the Appellate Tribunal and, therefore, we have no option but to remand the matter to the Appellate Tribunal to record a clear finding as to how much amount of the claim of Rs. 19,081 is in the nature of compensation and how much amount is attributable to penalty.
11. In the result, we remit the aforementioned question to the Appellate Tribunal without recording a clear finding as to the allowability of deduction sought by the assessee with the direction that the Appellate Tribunal after giving an opportunity of being heard to the parties, will apportion the amount towards the compensation and penalty. Deduction will then be allowed only in respect of the amount apportioned towards the compensation in the light of the decision in the case, Organo Chemical Industries [1979] 55 FJR 283.