Commissioner of Income Tax vs S. Zoraster and Co. (Supplies) (P.) Ltd.

M.B. Sharma, J.—The revenue has filed this application u/s 256(2) of the income tax Act, 1961 (''the Act'') directing the Tribunal, Jaipur Bench, to refer the following question of law for the opinion of this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the penalty amounting to Rs. 71,232 on late payment of provident fund contribution was deductible as a business expenditure under the income tax Act, 1961?

There is no dispute that the non-petitioner S. Zoraster & Co. (Supplies) (P.) Ltd., Golecha Garden, Jaipur (the company) is covered under the provisions of the Employees'' Provident Funds & Miscellaneous Provisions Act, 1952 (''the Act''). Presently, there also appears to be no dispute that the contribution, i.e., employer''s contribution as well as the employees'' contribution, both in respect of provident fund, was not paid in time. Therefore, after notice to the company u/s 14B of the Employees'' Provident Funds & Miscellaneous Provisions Act, damages amounting to Rs. 71,232 were levied against the company for late payment of the contribution. In doing assessment for the year 1976-77, the company claimed the aforesaid amount of Rs. 71,232 as business expenditure u/s 37 of the income tax Act. The assessing authority under the assessment order dated 9-8-1983 held that the company was not entitled to claim the said amount and the aforesaid amount u/s 14B, being in the nature of penalty, could not be allowed as business expenses. The company preferred an appeal and, the Commissioner (Appeals) under his order dated 10-2-1984 in agreement with the assessing authority, did not allow the aforesaid amount as business expenditure. The company then filed an appeal before the Tribunal, Jaipur Bench, and the Tribunal under its order dated 29-9-1987, allowed the appeal in part and took a view that the provisions of the Act are different from the provisions claiming damages under the same Act and placed reliance on its earlier decision for the assessment year 1974-75 in the case of Udaipur Mineral Development Syndicate (P.) Ltd. [IT Appeal No. 452 (Jp.) of 1981 dated 22-7-1983] and further placed reliance on the Special Bench decision in the case of Second ITO v. Bisleri (I)(P.) Ltd. [1985] 12ITD 116 (Bom.), wherein the Tribunal had said that the damages under the Provident Funds Act are allowable as business expenditure. An application for reference u/s 256(1) was filed before the Tribunal and the Tribunal under its order dated 26-7-1988 refused to state a case and refer question of law for the opinion of this Court. The Tribunal said that its finding was that the amount paid to the Provident Fund Commissioner was in the nature of payment of interest for late payment.

It is contended by the learned counsel for the revenue in support of his application u/s 256(2), that the view taken by the Tribunal is not in accordance with law and the Tribunal has taken a wrong view that the amount paid to the Provident Fund Commissioner was in the nature of payment of interest for late payment. In support of his contention that it is by way of penalty and, as such, cannot be allowed as business expenditure u/s 37, the learned counsel for the revenue has placed reliance on the case of Commissioner of Income Tax Vs. Kamlapat Motilal, wherein a Division Bench of the Allahabad High Court has taken the view that the damages paid for late payment of provident fund deductions u/s 14B of the Employees'' Provident Funds & Miscellaneous Provisions Act are penal in nature and are not allowable as business expenditure u/s 37 of the income tax Act. In the aforesaid case, the Allahabad High Court considered the cases of Triueni Engg. Works Ltd. v. CIT [1983] 144 ITR 7322 (FB) and Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, on which reliance has been placed by the learned counsel for the revenue and said that the Supreme Court had said in the aforesaid case of Mahalakshmi Sugar Mills Co. (supra) that interest paid on arrears of cases u/s 3(3) of the U.P. Sugarcane Cess Act, 1956 as an allowable deduction as revenue expenditure. In the aforesaid case of Kamlapat Motilal (supra). The Allahabad High Court considered the case of Organo Chemical Industries v. Union of India AIR 1979 SC 1803. In the aforesaid case the Supreme Court disapproved the view and said that ''damages'' paid u/s 14B are simply to recompense the beneficiaries of the Scheme from the loss they suffered, and remarked:

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. (p. 1816)

We are of the opinion that the view taken by the Tribunal that they were not in the nature of interest for late payment does not appear to be in accordance with law. At any rate, question of law does arise for opinion of this Court.

There is no dispute that this Court has power to reframe the question which is required to be answered by this Court.

Consequently, we allow this application u/s 256(2) and direct the Tribunal requiring to state the case and refer the following questions of law for the opinion of this Court:

1.Whether the damages u/s 14B of the Employees'' Provident Funds & Miscellaneous Provisions Act, 1952, paid by the company for delayed payment of contribution is in the nature of interest or in the nature of penalty? 2. Whether the damages paid by the company for delayed payment u/s 14B of the Act are business expenditure and allowable u/s 37 of the IT Act?

We direct the Tribunal to state the case and refer the aforesaid question of law for the opinion of this Court within a period of three months.