TMI Blog1993 (4) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 37(2) of the Income-tax Act, the entire expenses incurred by it as entertainment expenses. The appellant is a company carrying on business in the manufacture of textile goods. It is an assessee. In the income-tax return of the assessee for the assessment year 1966-67 (the previous accounting year being from July 1, 1964, to June 30, 1965 ), the interest and the damages of Rs. 19,635 paid by it for delayed payment of sales tax under the Bombay Sales Tax Act and for delayed payment of contribution under the Employees' State Insurance Act, was claimed as revenue expenditure allowable under section 37(1) of the Income-tax Act. So also the sum of Rs. 3,865 paid by it for entertainment expenses was claimed as revenue expenditure, allowable under section 37(2) of the Income-tax Act. The Income-tax Officer, in his assessment order made on that return, treated the said item of expenditure of Rs. 19,635 as penal interest and disallowed it. As to the item of expenditure of Rs. 3,865, he disallowed Rs. 2,500 treating it as exclusively expenditure incurred on its directors. Appeals preferred before the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal ( " the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1966-67 and the fact that they could be considered by us on the facts found in the order of the Tribunal, we consider it most appropriate to deal with the questions ourselves and answer them. Such a course is resorted to by us not merely because of the said peculiar facts and circumstances of this case, but also because of our inclination to remit the first question with our answer thereon for a final decision by the Tribunal. First question: That section 37(1) of the Income-tax Act corresponds to section 10(2)(xv) of the predecessor Indian Income-tax Act of 1922 is undisputed. In Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, this court had to decide the question whether the interest paid by the appellant-assessee therein under section 3(3) of the U. P. Sugarcane Cess Act, 1956, for delayed payment of cess payable thereunder was an allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act of 1922. For deciding that question, this court examined the provisions of the Sugarcane Cess Act, 1956, which provided for taking of several kinds of action against person who defaulted in payment of the cess imposed under that Act. Section 4 was found to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmit 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 para. 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 under section 14B is to provide reparation for the amount of loss suffered by the employees. The Division Bench, having regard to the said view of the expression" damages " occurring in section 14B of the Provident Funds Act, found that such damages paid by the concerned assessee-respondent could not have been treated by the Tribunal as purely comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated for payment by the Act. The Commissioner has also the power to remit the whole or any part of the interest calculated in the manner mentioned in it which can be only on relevant grounds. Sub-section (5) of section 36, which is extracted above, indicates that after the levy of this amount under sub-section (3), immunity is granted from prosecution on the same facts. These indicate that the imposition, though called a penalty, is a composite one comprising both a penalty and a compensation for delayed payment. The Tribunal, therefore, was not right in treating the entire payment as merely interest for delayed payment. As already indicated while discussing question No. (1), the nomenclature of the levy as interest, damages or penalty may not be conclusive." The decision of this court in Mahalakshmi Sugar Mills Co. [1980] 123 ITR 429 and the decision of the Division Bench of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 with the views of which we are in complete agreement, are, in our opinion, decisions which settle the law on the question as to when an amount paid by an assessee as interest or damages or penalty could be regarded as comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction under section 37(2) of the Income-tax Act, while he regarded the remaining sum of Rs. 2,500 as impermissible deduction under section 37(2) of the Income-tax Act taking the view that the same was attributable to personal expenses of the directors of the assessee-company. The Appellate Assistant Commissioner, in dealing with the said claim for deduction in the appeal of the assessee filed before him, held that the entire expenses claimed as deductible expenditure under section 37(2) of the Income-tax Act could not be regarded as having been laid out or expended wholly and exclusively for the purpose of the business of the assessee. He, therefore, refused to interfere with the order of the Income-tax Officer made in that regard. The Tribunal, which considered the matter in the appeal of the assessee before it, affirmed the view of the Appellate Assistant Commissioner in the matter. As to what portion of the miscellaneous expenses claimed is a deductible entertainment expenses of the assessee being a matter to be decided by the fact-finding authorities while assessing the relevant materials placed before them, no question of law could arise in that regard, particularly, when t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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