Commissioner of Income Tax vs General Fibre Dealers Ltd.

Bhagabati Prasad Banerjee, J.—The following question of law has been referred to this court by the Tribunal u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the extra payment of Rs. 7,249 made by the company to the Provident Fund authorities for not making the payment of provident fund dues in time was not in the nature of penalty and that was in the nature of compensation paid to the Government ?"

The assessment year involved in this reference is the assessment year 1975-76, for which the relevant period of account is the financial year ending on December 31, 1974.

The Tribunal, following the decision of this court in the case of Balrampur Sugar Co. Ltd. v. CIT [1982] 155 ITR 227, held that damages levied and payable u/s 14B of the Employees'' Provident Funds and Miscellaneous Provisions Act, 1952, were not in the nature of penalty but in the nature of compensation paid to the Government. In the case of Balrampur Sugar Co. Ltd. Vs. Commissioner of Income Tax, , this court held that the liability to pay interest u/s 3(3) of the U. P. Sugarcane (Purchase Tax) Act, 1961, which arose for the delayed payment of cess was compensation for the delayed payment and not in the nature of a penalty imposed for an infraction of law and, therefore, the interest was an allowable deduction in computing the business income of an assessee, who carried on the business of manufacture and sale of sugar. In that case, reliance was placed on a decision of the Supreme Court in the case of Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, . There, the Supreme Court analysed the provisions of the U. V. Sugarcane (Purchase Tax) Act, and was of the view that the interest paid by the assessee-company engaged in manufacture and sale of goods u/s 3(3) of the U. P. Sugarcane Cess Act, 1956, on arrears of cess payable on the entry of cane into the premises of a factory for use either for consumption or sale thereof was in reality a part and parcel of the liability to pay tax and it was an accretion to the cess. The arrears of cess carried interest if it was not paid within the prescribed period and a larger amount became payable as cess. The Supreme Court further held that the enlargement of cess liability was automatic u/s 3(3).

In the instant case, the liability to pay provident fund was within a certain time and at certain rates as provided u/s 6 of the Employees'' Provident Funds and Miscellaneous Provisions Act. There is no specific provision for interest for delayed payment: Section 14B of the said Act provides that, where an employer makes default in the payment of any contribution to the fund or charges payable under any other provision of the said Act or any scheme or insurance scheme or under any of the conditions specified u/s 17, the 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. Section 14 provides for imposition of penalty for avoiding payment of. the provident fund by the employer in the form of imprisonment or fine.

On behalf of the Revenue, reliance was placed on the decision of the Supreme Court in the case of Organo Chemical Industries v. Union of India [1979] 55 FJR 283 ; AIR 1979 SC 1803. The question for consideration in that case was whether the damages paid u/s 14B are in the nature of penalty or an allowable deduction being an expenditure incidental to 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 provident fund accounts or in transfer of accumulations required to be transferred by him u/s 14B ? This question came up for consideration in the case of Organo Chemical Industries [1979] 55 FJR 283 : AIR 1979 SC 1803. In that case, the constitutional validity of the provisions of Section 14B was under consideration. In that case, the Supreme Court also considered the meaning of the word "damages" in Section 14B. There is a conflict of opinion between different High Courts as to the meaning of the word "damages" in Section 14B. According to some of the High Courts, the word "damages" means actual loss to the beneficiaries. This view is that Section 14B clearly indicates that an employer is liable to pay damages, if he has made default in payment of the contribution. Any delay in paying the amount u/s 6 of the said Act causes loss to the beneficiaries of the 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 u/s 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 that section. It is, therefore, held by some of the High Courts that the damages to be imposed u/s 14B should have correlation with the loss suffered and that damages u/s 14B are intended to compensate the loss to the beneficiaries of the scheme. The Supreme Court held that (55 FJR 304 and AIR 1979 SC 1816) :

"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 u/s 14B is not merely ''to provide compensation for the employees''. We are clearly of the opinion that the imposition of damages u/s 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. There is nothing in the section to show that the damages must bear relationship to the loss which is caused to the beneficiaries under the scheme. The word ''damages'' in Section 14B is related to the word ''default''. The words used in Section 14B are ''default'' in the payment of ''contribution'' and, therefore, the word ''default'' must be construed in the light of paragraph 38 of the Scheme which provides that the payment of contribution has got to be made by the 15th of the following month and, therefore, the word ''default'' in Section 14B must mean ''failure in performance'' or ''failure to act''. At the same time, the imposition of damages u/s 14B is to provide reparation for the amount of loss suffered by the employees."

In the instant ease, the question is whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the extra payment of Rs. 7,249 made by the company to the provident fund authorities for not making the payment of provident fund dues in time was not in the nature of penalty and that was in the nature of compensation paid to the Government. The Tribunal had no occasion to consider the judgment of the Supreme Court in the case of Organo Chemical Industries [1979] 55 FJH 283, and the Tribunal had not considered in what circumstances the damages have been imposed and there is no finding by the Tribunal on the basis of which it could be concluded that the entire sum was imposed by way of penalty or was imposed for serving two purposes, namely, whether the entire sum was imposed merely for default and penalty in nature and the imposition of damages u/s 14B to what extent was to provide reparation for the amount of loss suffered by the employees.

Accordingly, the matter is remanded to the Tribunal for fresh consideration of the matter in the light of the observations made by the Supreme Court in the case of Organo Chemical Industries [1979] 55 FJR 285.

Suhas Chandra Sen, J.

I agree.