1990 (12) TMI 117 - AT - Income Tax

Summary

Issues:
Interpretation of damages under section 14B of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 as penalty or interest for late payment. Applicability of deduction under section 37(1) of the Income-tax Act, 1961. Relevance of previous decisions in determining deductibility of damages and penalties. Impact of Supreme Court ruling on the nature of damages under section 14B. Consideration of proportion of damages as penal and compensatory.

Analysis:
The appeal before the Appellate Tribunal concerned the deductibility of damages and penalties paid by the assessee under section 14B of the Employees Provident Fund and Miscellaneous Provisions Act, 1952, and late payment of ESIC dues for the assessment year 1977-78. The assessee claimed deduction for these amounts, contending that they should be treated as interest charged by the Government for delayed payment and hence deductible under section 37(1) of the Income-tax Act, 1961.

In support of the assessee's contention, reference was made to a Special Bench decision of the Tribunal in the case of Second ITO v. Bisleri (I) (P.) Ltd. where it was held that penalty under certain provisions is an allowable deduction. The CIT(A) accepted the assessee's argument, allowing the deduction claimed. However, the revenue, dissatisfied with this decision, appealed before the Tribunal.

The revenue argued that the damages imposed under the Act should be considered as penalties and not deductible. They cited previous decisions to support their stance, including CIT v. Hyderabad Allwyn Metal Works Ltd. and CIT v. Kamlapat Motilal. Additionally, they highlighted the decision of the Bombay High Court in Jairamdas Bhagchand v. CIT, which held that penalties under certain provisions are not allowable deductions.

The Tribunal considered the arguments from both sides and examined the nature of damages under section 14B. Referring to the Supreme Court ruling in Organo Chemical Industries v. Union of India, it was established that damages under section 14B are essentially penalties imposed on the employer for breaching statutory obligations. The Supreme Court emphasized that the purpose of such penalties is to penalize defaulting employers and provide compensation for employees.

Given the Supreme Court's interpretation, the Tribunal concluded that the damages paid should be treated as a combination of penal and compensatory elements. They determined that 60% of the amount paid under section 14B should be considered as a penalty, while the remaining 40% as compensatory. Consequently, the deduction was allowed only to the extent of 40% of the damages levied, with the balance not being considered deductible.

In the final decision, the Tribunal partly allowed the appeal, modifying the order of the CIT(A) to allow deduction for 40% of the damages paid under section 14B while reversing the decision regarding the penalty for delayed ESIC dues.