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Judgment
V. V. KAMAT, J. :
But for the fact that in these references two asst. yrs. 1982-83 and 1983-84, are concerned, there is no dispute that the question that is required to be considered is one and the same, nay identical. It is as regards deduction under s. 37 of the IT Act, 1961 and as to whether the assessee is entitled in regard thereto.
Although the Revenue has framed three questions, hearing the learned counsel for the parties and also in our judgment, the other questions (Question Nos. 2 and 3) are only facets of Question No. 1. Even the learned senior tax counsel made it clear that we need answer only Question No. 1, in the circumstances. Therefore, we reproduce only Question No. 1 hereinafter :
"Whether, on the facts and in the circumstances as the case, -
(i) the Tribunal is right in law and fact in holding that 40% of the damages of Rs. 92,025 + Rs. 65,518 + Rs. 10,005 has to be allowed as compensation and deductible under s. 37(1) of the IT Act ?
(ii) the assessee is entitled to any deduction out of the damages ?"
We make it clear that although for the asst. yr. 1983-84 the question is slightly differently worded, there is no difference in substance. In fact, it is not disputed before us that our answer to the question reproduced hereinbefore would effectively provide answer to the question in IT Ref. No. 144 of 1992 simultaneously.
The assessee is a company engaged in the manufacture and sale of plywood and other timber products. With regard to the asst. yrs. 1982-83 and 1983-84, the previous year ends on 30th June of each of the said years. The question is with regard to the claim of deduction in regard to the amount of Rs. 4,33,581. This claim arises out of orders of the authorities both under the Employees State Insurance Act and the Employees Provident Fund Act (under ss. 85B and 14B thereof respectively). The particulars are as follows :
Rs.
"Order dt. 4th Feb., 1981 under s. 85B of the Employees State Insurance Act
92,025.00
Order dt. 8th Sept., 1981 under s. 14B of the Employees Provident Fund Act
1,94,435.35
Demand regarding damages under E. P. F. for the year 1962-63 to 1972-73
71,496.78
Order dt. 4th Feb., 1981 under s. 85B of the Act
65,518.20
Order dt. 4th Feb., 1981 under s. 85B of the Act
10,005.00
4,33,480.33
It is quite elementary that these statutes - Employees State Insurance Act and the Employees Provident Fund Act - are social welfare legislations creating employers liability in regard to contributions as specified thereunder. The statutory provisions of the said enactments provide for consequences in the event of infraction of the concerned statutory provisions. It is also required to be emphasised that for the purpose of the present taxation proceedings, these orders have received finality, with regard to the aspect of infraction of the law. In fact, it is also elementary that the order imposing penalty could not be understood in the absence of infraction of law on the part of the employer to comply with the liabilities under the legislations.
With regard to both the years, by the orders dt. 25th Jan., 1985 and 11th March, 1986 respectively, the ITO proceeded on the situation of finality that the expenses claimed by the assessee included a sum of Rs. 4,33,581 being damages paid for delayed payments of Employees State Insurance and Provident Fund Contributions and further that the damages payable are for infraction of the statutory provisions. As a necessary consequent sequester, the ITO ruled that the same cannot be allowed as the expenditure incurred is not for the purpose of business.
Further travel of the proceedings before the first appellate authority - the CIT(A), Calicut - proceeds on a more detailed discussion of this accepted factual basis having received finality in regard thereto.
The first appellate authority has referred to in detail the written submissions on behalf of the assessee. We feel that our judgment would be complete if the said portion, referring to the written submissions, is reproduced to form part of this judgment. It is as follows :
"We give below briefly the circumstances which lead to the delay in payment of the contributions though there were deductions wherever applicable, from the employees, and the employers contribution was also provided for in the respective years. The appellant company had been having financial problems and due to this the contributions to provident fund and employees state insurance were not being remitted in time. Further, from 1977, the appellant-company was facing acute financial problems since the company was incurring loss year after year and all the sources of finance were also freezed. The company could not pay creditors and in the result the creditors filed petitions for winding up of the company in the High Court of Kerala. A list is attached of some of the instances which the company had to face. The company had also other problems like strike, etc. As the appellant company was attending to all these matters particularly relating to winding up petitions, there has been delay in remittance of contributions to provident fund and employees state insurance. We submit that the damages paid are in the nature of compensation to the Government for having withheld the money to be remitted to the Government. Therefore, the amount paid by way of damages by the appellant was not on account of infraction of any law and hence should be allowed as a deduction. This view is supported by the decision of the Supreme Court in the case of Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, ".
It would be seen that the contributions to the provident fund and the employees state insurance were not remitted in time assumes an admitted position as a result. The written submissions refer to the financial problems leading to the admission of delay in the remittance of the concerned contributions to the provident fund and the employees state insurance.
It is then submitted that the payments are in the nature of damages that are paid as compensation to the Government for having withheld the money to be remitted to the Government. Even at a first blush, the situation proceeds on a wrong assumption that contributions to public provident fund and employees insurance are payments to the Government. They are the payments for statutory purposes in favour of employees. Again it would be elementary to state that the employers under the statutory provisions of the above two enactments are under a statutory liability to make the payments in accordance thereto which are undoubtedly for the statutory considerations of welfare of the employees and not in any case payments to the Government, as sought to be understood in the written submissions. Reliance is placed in regard thereto on the decision of the apex Court in Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, . It would be seen that the first appellate authority has emphasised this obvious aspect in its reasoning that in the case of provident fund contributions, the amounts are already deducted by the assessee from the payments of the employees. It is thereafter held that the money which has to be remitted to the provident fund authorities was already in the seisin of the assessee. The first appellate authority referred to the decision of the apex Court dealing with the question of cess levied by the UP Government authorities, which was undisputedly the payment to the Government. The decision was considered to be non-applicable to the factual matrix in the proceedings. The first appellate authority considered the merits of the situation and has emphasised the factual peculiarity that the amounts concerned are liabilities of the employer-assessee under the Employees State Insurance Act and the Employees Provident Fund Act. It is emphasised that these amounts are debited by the assessee and yet they were not remitted by the assessee to the authorities concerned in accordance with the statutory provisions and it was only in infringement of law by the orders under the statutory provisions of the said legislations the amounts totalling Rs. 4,33,480 have been demanded as penalty for infraction of law.
In spite of this position, the Tribunal proceeded to consider the situation on merits as if it was acting as a superior authority in regard to the orders passed by the statutory authorities and not dealing with the situation with regard to the question of levy of and imposition of tax on the basis of situations having received finality in the process. The Tribunal considered the decision of the apex Court in Organo Chemical Industries & Anr. vs. Union of India & Ors. AIR 1979 SC 1803, which was dealing with the provisions of s. 14B of the Employees Provident Funds and Miscellaneous Provisions Act, 1952. In a proceeding on merits arising out of the order of the Regional Provident Fund Commissioner, Chandigarh imposing a penalty of Rs. 94,996.80 on the petitioners as damages under s. 14B of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 for delayed remittance of the employees provident fund contributions of their employees including their own contributions and the administrative charges thereon. We have carefully gone through the reasoning of the apex Court, under the above circumstances. The apex Court was essentially concerned with the question as to whether the power under s. 14B to impose damages is a guided power or not. Even in this connection, the apex Court has observed that the action under s. 14B of the Act and the amount awarded thereunder would have to be understood as belonging to the employees provident fund and not general revenue of the State.
In our judgment, the Organo Chemical Industries case (supra) would not be of any help because the orders referred to above have assumed a situation of finality and a basis for the limited requirement of the taxation proceedings that it is as a result of infraction of law. There is no dispute that if the amount covered by the payment is as a result of infraction of law, deduction cannot be justified in regard thereto. In fact, having read the three judgments of the authorities and hearing the learned counsel for the assessee in regard thereto, there cannot be any difficulty to see the situations that these are the demands as a result of infraction of the legal provisions of the two enactments. The limited question in these proceedings is as to whether a claim for deduction can be sustained. It cannot be sustained if there is infraction of law which requires payment under the demand orders.
Even the decision of the Supreme Court in Mahalakshmi Sugar Mills case (supra) would not govern the situation in the proceeding before us. The apex Court was concerned with the UP Sugarcane Cess Act, 1956 with regard to the payment of cess which was undisputedly the payment to the UP Government payable on the entry of sugarcane into the premises of a factory for use, consumption or sale therein. The statutory provisions of the Act as to be found from the judgment are more than clear that any delay with regard to the payment, payment of cess to the State Government incurred liability to pay interest. On consideration of the statutory provisions of the said Act, the situation was clear enough to the apex Court that the payment of interest did not have any kind of connection with the penal aspect of the situation leaving to the Court to reach conclusion that it was an allowable deduction.
In our judgment, apart from the situation that all orders have received finality there being no dispute that the orders proceeded on the basis of the infraction of law, the situation would neither be governed by Mahalakshmi Sugar Mills case (supra) nor by the Organo Chemical Industries case (supra). The amount of Rs. 4,33,480.33 arises out of undisputable liability as a result of infraction of law in the nature of resort to the penal provisions of both the Employees State Insurance Act and the Employees Provident Fund Act. In such a situation of the factual matrix, it is not possible to sustain the reasoning of the Tribunal.
It is needless to state that the factors that are placed by the assessee relating to the feature of the financial stringency cannot travel in the process of determination of the tax liability, much less in regard to the consideration of tax deduction on that basis. Again, it is elementary that the considerations regarding tax liability vis-a-vis deductions from liability are entirely different and considerations dealing with deductions are on a more stringent pedestal in the process.
For all the above reasons, the question is answered in the negative - in favour of the Revenue and against the assessee - to the effect that the amounts are not deductible under s. 37(1) of the Income Tax Act.