Madras H.C : Whether, on the facts and in the circumstances of the case, the damages paid by the assessee under s. 14B of the Employees Provident Fund Act, 1952 for belated payment of contribution to the provident fund is an admissible deduction in computing the income from the business of the assessee?

High Court Of Madras

CIT vs. Simco Meters Ltd.

Section 37(1)

Asst. Year 1978-79

Abdul Hadi & N.V. Balasubramanian, JJ.

Tax Case No. 149 of 1984

2nd January, 1997

Counsel AppearedS.V. Subramaniam, for the applicant : R. Meenakshisundaram; for the Respondent

N.V. BALASUBRAMANIAN, J.:

At the instance of the Department, the Tribunal has referred the following question of law for the opinion of this Court under s. 256(1) of the IT Act, 1961 :

“Whether, on the facts and in the circumstances of the case, the damages paid by the assessee under s. 14B of the Employees Provident Fund Act, 1952 for belated payment of contribution to the provident fund is an admissible deduction in computing the income from the business of the assessee?”

The assessee is a public limited company. It paid a sum of Rs. 16,061 as damages under s. 14B of the Employees’ Providence Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred to as ‘the Act’). The assessee claimed that this sum of Rs. 16,061 paid as damages should be allowed as business expenditure, on the ground that it was paid out for the purpose of business and the amount paid under s. 14B of the Act did not amount to penalty or fine. The ITO disallowed the claim on the ground that the amount paid represented the penalty paid for not complying with the statutory provisions of the Act and hence, the expenditure was not incurred for the purpose of the business.

The assessee preferred an appeal to the CIT(A), who, following an earlier order, held that the amount paid should be regarded as business expenditure, and allowed the assessee’s appeal.

Aggrieved by the order of the CIT(A), the Department preferred an appeal before the Tribunal. Before the Tribunal, the Department placed reliance on Saraya Sugar Mills (P) Ltd. vs. CIT 1978 CTR (All) (FB) 329 : (1979) 116 ITR 387 (All) (FB) : TC 17R.797 and CIT vs. Mihir Textiles Ltd. (1976) 104 ITR 167 (Guj) : TC 17R.861 and contended that the amount paid under s. 14B of Act is purely penal in nature, and it is not allowable as business expenditure. The Tribunal following the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. vs. CIT (1980) 16 CTR (SC) 198 : (1980) 123 ITR 429 (SC) : TC 17R.877, held that the amount paid represents interest for the belated payment of contribution, and even if there was an infraction of a statutory obligation, it was an infraction which arose from carrying on the business and incidental to the business and hence, the amount paid is allowable as business expenditure.

Aggrieved by the order of the Tribunal, the Department has come up by way of this reference. Mr. S. V. Subramanian, learned Senior Central Government Standing Counsel for the Department submitted that the amount paid under s. 14B of the Act is both penal as well as compensatory in nature and hence, to the extent to which irepresents penal nature, it is not allowable as business expenditure. He also submitted that the view of the Tribunal that the obligation of the assessee has arisen because of the carrying on of business is not correct, and the obligation to pay the amount under s. 14B of the Act arose because of the default in payment of the contribution and not in carrying on of the business of the assessee. He strongly placed reliance on the decision of the Supreme Court in Organo Chemical Industries vs. Union of India AIR 1979 SC 1803 and submitted that the nature of the payment made under s. 14B of the Act was considered by the Supreme Court, and the Supreme Court held that it is to be both penal as well as compensatory in nature. He also relies in the decision of the Supreme Court in Prakash Cotton Mills (P) Ltd. vs. CIT (1993) 111 CTR (SC) 389 : (1993) 201 ITR 684 (SC) : TC 17R.746, wherein the Supreme Court remitted the matter to the Tribunal to determine the question as to how much would be allowable in the case of payment of interest for the belated payment of sales tax under the Bombay Sales Tax Act. He referred to the passage found at page 688 of the above decision and submitted that the Supreme Court referred to the decision of Andhra Pradesh High Court in CIT vs. Hyderabad Allwyn Metal Works Ltd. (1988) 72 CTR (AP) 2 : (1988) 172 ITR 113 (AP) : TC 17R.752, wherein the Andhra Pradesh High Court considered the question whether the damages paid by the assessee-company under s. 14B of the Act is an allowable deduction under s. 37(1) of the IT Act. He submitted that the damages paid is both penal as well as compensatory in nature and the order of the Tribunal in allowing the entire amount as business expenditure is not sustainable in law. He fairly brought to our notice a decision of the Karnataka High Court in CIT vs. Mysore Electrical Industries Ltd. (1992) 196 ITR 884 (Kar) : TC 17R.754, wherein the Karnataka High Court has taken the view that the interest paid under s. 14B of the Act is compensatory in nature and not a penalty and hence, it is deductible as business expenditure.

Mr. R. Meenakshisundaram, learned counsel appearing for the assessee agrees that the matter may be remitted to the Tribunal to determine the question whether the entire amount paid would be business expenditure and he submitted that in so far as it relates to the portion, which is compensatory in nature, that can be allowed as business expenditure.

We have carefully considered, the submissions of learned Senior Standing Counsel for the Department as well as learned counsel for the assessee. The nature of the payment made under s. 14B of the Act was considered by the Supreme Court in AIR 1978 SC 1803 (supra), wherein, after considering the scheme of the Act, the Supreme Court held that the imposition of damages under s. 14B of the Act serves both the purposes, and that it is meant to penalise defaulting employer as also to provide reparation for the amount of loss suffered by the employees.

In the said decision, the Supreme Court further observed that it is not only a warning to employers in general not to commit a breach of the statutory requirements of s. 6, but it is also meant to provide compensation or redress to the beneficiaries viz., employees. The Supreme Court further held as follows :— “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 s. 14B is related to the word ‘default’. The words used in s. 14B are ‘default in the payment of contribution’ and therefore, the word, ‘default must be construed in the light of para 38 of the Scheme which provides that the payment of contribution was got to be made by the 15th of the following month, and, therefore, the word ‘default’ in s. 14B must mean ‘failure in performance’ or ‘failure to Act’. At the same time, the imposition of damages under s. 14B is to provide reparation for the amount of loss suffered by theemployees”. Thus the decision of the Supreme Court makes it clear that the imposition of damages under s. 14B of the Act has dual character in the sense that it is both penal as well as compensatory in nature. It is fairly conceded that on the basis of the decision of the Supreme Court in (1993) 201 ITR 684 (SC) (supra), wherein it was held that if the amount paid is penal in nature, it is not allowable as business expenditure, but only that portion which is compensatory in nature, is allowable as business expenditure. The Andhra Pradesh High Court in (1988) 172 ITR 113 (AP) (supra) considered this precise question whether the damages paid under s. 14B of the Act was allowable as business expenditure or not and held that the amount paid under s. 14B of the Act comprises with the elements of penal levy as well as compensatory payment, and only that portion of the amount paid as damages under s. 14B of the Act, which is compensatory in nature, is allowable deduction under the IT Act. The above decision of the Andhra Pradesh High Court was quoted by the Supreme Court without disapproval of the same. Therefore, we are of the view that the Tribunal is not correct in holding that the entire sum can be considered as business expenditure and it is not sustainable in law.

The Karnataka High Court in (1992) 196 ITR 884 (Kar) (supra) held that the interest paid under s. 14B of the Act is only compensatory in nature. However, the Karnataka High Court has not considered in detail the nature of the obligation under s. 14B of the Act. But, the Andhra Pradesh High Court in (1988) 72 CTR (AP) 2 : (1988) 172 ITR 113 (AP)(supra) considered the nature of the obligation under the said section in detail. The said decision also noticed the decision of the Supreme Court in AIR 1979 SC 1803 (supra). In the said decision of the Andhra Pradesh High Court, it was held that only that portion of the amount paid as damages is compensatory in nature and the other portion can be regarded as penal in nature. In that view of the matter, we are unable to agree with the view of the Karnataka High Court that the entire amount paid under s. 14B of the Act would be compensatory in nature and is allowable as business expenditure. We prefer to follow the decision of the Andhra Pradesh High Court in (1988) 72 CTR (AP) 2 : (1988) 172 ITR 113 (AP) which noticed the decision of the Supreme Court in AIR 1979 SC 1803 (supra) and held that only that portion of the amount paid as damages under s. 14B of the Act which represents compensation paid is allowable as business expenditure, and the other portion which is of penal in nature cannot be allowed. In this view of the matter, we are unable to agree with the Tribunal that the entire amount is allowable as business expenditure. Therefore, we direct the Tribunal to determine after giving opportunity to the assessee, the portion of the amount paid under s. 14B of the Act as compensatory in nature and allow the same. The other portion which is of penal in nature is not allowable as expenditure.

We are also not in agreement with the view of the Tribunal that the liability has arisen in the course of carrying on business. The liability has arisen because of the default committed in the payment of dues within the time stipulated under the Act. Therefore, it cannot be said that the liability has arisen in the course of carrying on of business.

In this view of the matter, we answer the question referred to us in the negative and in favour of the Department, with the direction to the Tribunal to allow the expenditure which is compensatory in nature, and disallow the expenditure which is penal in nature. No costs.

[Citation : 233 ITR 757]

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