Commissioner of Income Tax vs A. Albuquerque and Sons

K. Shivashankar Bhat, J.—The question referred under the provisions of section 256(2) of the Income Tax Act, 1961, reads as follows :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that amount paid u/s 14B of the Employees'' Provident Funds Act as damages for default in making payment of provident fund contributions cannot be construed to be penal in nature and the same is an admissible expenditure ?"

The nature of the amount levied and collected u/s 14B of the Employees''s Provident Funds and Miscellaneous Provisions Act, has been considered by the Supreme Court in Organo Chemical Industries v. Union of India [1979] 55 FJR 283, 293; AIR 1979 SC 1803. At page 1809, Mr. Justice Krishna Iyer observed thus :

"18. I am clearly of the view that ''damages'', as imposed by section 14B, includes a punitive sum quantified according to the circumstances of the case. In ''exemplary damages'' this aggravating element is prominent. Constitutionally speaking, such a penal levy included in damages is perfectly within the area of implied powers and the Legislature may, while enforcing collections, legitimately and reasonably provide for recovery of additional sums in the shape of penalty so as to see that avoidance is obviated. Such a penal levy can take the form of damages because the reparation for the injury suffered by the default is more than the narrow computation of interest on the contribution."

Again, Mr. Justice Sen conveyed the same idea at page 1816 (55 FJR 304), thus :

"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 u/s 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."

Further, at page 1817, he observes (55 FJR 305) :

"The object and purpose of the section is to authorize the Regional Provident Fund Commissioner to impose exemplary or punitive damages and thereby prevent employers from making defaults. The provision for imposition of damages at twenty-five per cent. of the amount of arrear, however, did not prove to be effective. Accordingly, by Act 40 of 1973, the words ''not exceeding the amount of arrear'' were substituted for the words ''twenty-five per cent.''"

Thus, there can be no doubt that the levy u/s 14B is predominantly a penal levy imposed by the Commissioner depending upon the circumstances of each case. There is no compulsion that, in each and every case of default, there should be a levy u/s 14B and a judicial discretion has been conferred on the statutory authorities.

If the levy is a penal levy, there can be no doubt that the same cannot be claimed as a deduction for the purpose of computing the taxable income u/s 37 of the Income Tax Act.

In Income Tax Referred Case No. 146 of 1986 Commissioner of Income Tax Vs. Bharat Printers, decided on September 6, 1991, we have considered the principles applicable in detail. The decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. Vs. The Commissioner of Income Tax, Bombay City II, was referred to and relied upon for the conclusion arrived at by us therein. That was a case of penal levy under the provisions of the Central Sales Tax Act which was held as a non-deductible expenditure.

Mr. Raghavendra Rao, learned counsel for the Revenue, brought to our notice that a Full Bench of the Allahabad High Court has taken a similar view in respect of the levy u/s 14B of the Provident Funds Act; the same is reported in Saraya Sugar Mills (P.) Ltd., Gorakhpur Vs. The Commissioner of Income Tax,

Consequently, the question referred is answered in the negative and against the assessee. Reference answered accordingly.