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7. The Supreme Court in its decision relied upon by the Tribunal, viz., Mahalakshmi Sugar Mills Co. v. CIT , was considering the controversy about the payment of interest under sub-section (3) of section 3 of the Uttar Pradesh Sugarcane Cess Act, 1956. It is useful to extract section 3 in its entirety (at p. 432 of 123 ITR) :

"3. Imposition of cess. - (1) The State Government may by notification in the Official Gazette impose a cess not exceeding four annas per maund on the entry of the cane into the premises of a factory for use, consumption or sale therein...
(7) Any sum imposed by way of penalty under sub-section (5) shall be recoverable in the manner provided in sub-section (6) for the recovery of the arrear of cess."

8. The Supreme Court held that the payment required by sub-section (3) of section 3 for interest at 6 per cent. per annum, could not be treated as penalty and it was, in essence, compensation paid to the Government for the delay in payment of cess. The nature of payment under section 14B of the Act was not considered in the said decision. The Tribunal has applied the same principle to the levy under section 14B of the Act. The nature of this impost was considered by the Supreme Court in the case of Orango Chemical Industries v. Union of India, AIR 1979 SC 1803; [1979] 55 FJR 283 (SC), where the two judges who constituted a Bench have given separate, but concurring judgments. It was not a case under the Income-tax Act, but the following passage from the judgment of A. P. Sen J., in paragraph 47, is relevant for ascertaining the nature of the levy (at p. 304 of 55 FJR) :

9. Earlier, in the same judgment, the learned judge has noticed the conflict of views in the various High Courts on the question whether the damages awarded under this section was penal in character or compensatory. In view of this decision of the Supreme Court, it cannot be said that the amount payable under section 14B is wholly compensatory and, therefore, it cannot be equated to the interest payable under section 3(3) of the U. P. Sugarcane cess Act. It is not disputed that any penal levy (i.e., other than compensatory levy) cannot be claimed as a deduction for ascertaining the income from business under the Income-tax Act. The aforesaid decision of the Supreme Court does not appear to have been considered in the decisions cited by the Revenue or the assessee. In fact, the conflict of decisions in the various High Courts is referred to by the Supreme Court. The Tribunal, therefore, was not right in treating the payment as purely compensatory. 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. Thus, the levy will be by a speaking order of the authority fixing quantum of damages. As held by the Supreme Court, the said amount comprises both an element of penal levy as well as compensatory payment. It will be for the authority under the Income-tax Act to decide with reference to the provisions of the Employees' Provident Funds Act 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. The entire sum can neither be considered as mere penalty nor as mere interest. In view of what has been stated above, our answer to question No. (1) is that only a portion (which is held to be compensation) out of the amount paid as damages under section 14B of the Employees' Provident Funds Act is an allowable deduction under the Income-tax Act. We direct the Tribunal to determine the appropriate portion after hearing the parties and then pass consequential orders.