Rohtak Textiles Mills Ltd. vs Commissioner of Income Tax.

At the instance of the assessee, in respect of the assessment year 1977-78, the question referred for the opinion of this court is as follows :

"Whether, on the facts and in the circumstances of the case, the sum of Rs. 6,078 being damages paid u/s 14B of the Employees'' Provident Funds and Miscellaneous Provisions Act, 1952, is deductible under Chapter IV-D of the Income Tax Act, 1961 ?"

The real question to be determined would be whether damages paid u/s 14B of the Employees'' Provident Funds and Miscellaneous Provisions Act, 1952, are penal in nature or not. The answer to this question would determine whether the damages paid u/s 14B can be allowed as deduction u/s 37 of the Income Tax Act, 1961. In Haji Aziz and Abdul Shakoor Bros. Vs. The Commissioner of Income Tax, Bombay City II, , the Supreme Court has held that no expense which was paid by way of penalty for a breach of the law, even though it might involve no personal liability, could be said to be an amount wholly and exclusively laid out for the purpose of the business of the assessed within the meaning of section 10(2)(xv) of the Indian Income Tax Act and the fine paid by the assessed was not an allowable deduction under that section. Section 37 of the Income Tax Act, 1961, corresponds to section 10(2)(xv) of the Indian Income Tax Act, 1922.

The Supreme Court in Organo Chemical Industries v. Union of India [1979] 55 FJR 283; AIR 1979 SC 1803, while considering the constitutional validity of section 14B of the aforesaid Act, has observed that the predominant object of section 14B is to penalise the employer so that he may be deterred from making any further default. The court has also opined that damages as imposed by section 14B include a punitive sum quantified according to the circumstances of the case and the levy u/s 14B is penal in nature.

The Allahabad, Karnataka and Calcutta High Courts have also expressed the view that damages paid u/s 14B are penal in nature (see Saraya Sugar Mills (P.) Ltd., Gorakhpur Vs. The Commissioner of Income Tax, , Commissioner of Income Tax Vs. A. Albuquerque and Sons, and Hasimara Industries Ltd. Vs. Commissioner of Income Tax, ).

In view of the aforesaid it has to be held that damages paid u/s 14B of the Employees'' Provident Funds and Miscellaneous Provisions Act, 1952, are penal in nature and the same cannot be allowed as deduction u/s 37 of the Income Tax Act, 1961. Accordingly, the question is answered in the negative, in favor of the Revenue and against the assessee. No costs.