TMI Blog1985 (1) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... iews taken by different Benches of the Tribunal on the subject. Reference was made to the President for constituting a Special Bench for resolving the dispute so far as the Tribunal is concerned. The proposal was accepted and, hence, the appeal has come up for hearing before the Special Bench. There are two interveners, namely, Champion Engg. Works (P). Ltd, and Nitin Traders. The issue involved in the case of Nitin Traders is, whether the penalty paid by the assessee under section 36(3) is allowable as deduction. In the case of Champion Engg. Works (P.) Ltd., the issue relates to the question of deduction as regards damages and interest paid to the Provident Fund Commissioner under the Employees' Provident Fund Act, 1952 (' the Provident Fund Act '), and interest paid under the Employees' State Insurance Act, 1948 (' the Insurance Act '). 3. So far as the penalty under section 36(2)(c) is concerned, Shri G.S. Jetly, the learned standing counsel for the department, stated that it is of the same nature as a penalty imposed under section 271(1)(c) of the Income-tax Act, 1961. Reference, in this context, has been made to the case of Premier Automobiles Ltd. [1981] 48 STC 552, the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sugar Mills Co. v. CIT [1980] 123 ITR 429. Interest paid under the Insurance Act and the Provident Fund Act, according to Shri Jetly, stands on the same footing as penalty under section 36(3) of the Bombay Sales Tax Act. He has invited our attention to sections 405, 406 and 409 of the Indian Penal Code, 1860, to show that non-payment of contribution under the Provident Fund Act and/or Insurance Act is an offence. It is stated that for disallowance of damages as deduction, direct authority is found in the following decisions : 1. Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) (FB), the relevant observations being at page 392 : This decision has been overruled by a decision of the Full Bench of the Allahabad High Court in the case of Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 only with regard to the question of deduction for interest paid under section 3(3) of the Cess Act ; 2. CIT v. L.H. Sugar Factories Oil Mills (P.) Ltd. [1980] 123 ITR 596 (All.) ; and 3. Haji Aziz Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC), where it was held that the penalty paid of infraction of law is not allowable as a deduction is, of course, strongly relied upon. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. Loke Nath Co. [1984] 147 ITR 624. According to Shri Trivedi, penalty is nothing but an additional tax, as held by the Supreme Court in the case of C.A. Abraham v. ITO [1961] 41 ITR 425 at page 430. Further, in view of another decision of the Supreme Court in the case of CIT v. Piara Singh [1980] 124 ITR 40, holding that even illegal expenses of an illegal business are allowable as deductions, it is contended that the penalties paid represent allowable deductions. Great emphasis is laid on the fact that there are no separate provisions for charging of interest under the Sales Tax Act and that though named as penalty, what is charged under section 36(3) is only interest. In this connection, Shri Trivedi has made a reference to section 63 and rules 29 and 71, respectively. Our attention, in particular, is invited to the comments at page 2710 of the learned commentators, Chaturvedi and Pithisaria, in third edn. of their treatise on Income-tax, where it is stated to have been held that the mere fact that the ITO has discretion to charge or not to charge interest under section 139(8) of the Income-tax Act, it does not mean that what is charged is not interest. Lastly, he has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of N.A. Mohd. Abdul Rahim v. Dy. Commercial Officer [1965] 16 STC 290 that looking at the amount of penalty for non-payment of sales tax, it could be said that the amount paid is for damages for the period for which the State is kept out of the money to which it is entitled to. Indirect support is drawn from a decision of the Madras High Court in the case of Addl. CIT v. Murugan Timber Depot [1978] 113 ITR 99, where it was held that no penalty can be imposed under section 271 where no tax is payable by the assessee. The Calcutta High Court, in its decision in the case of Apeejay (P.) Ltd v. CIT [1978] 114 ITR 544, is stated to have explained and applied the decision of the Supreme Court in the case of CIT v. S.C. Kothari [1971] 82 ITR 794 and yet allowed the deduction. Lastly, Shri Patil has taken us through two orders dated 7-9-1977 and 22-3-1984 of the Maharashtra Sales Tax Tribunal in cases of Sekseria Cotton Mills and Rajan Glass Industries, respectively (copies of the orders on record), to show that the Sales Tax Tribunal, which is like this Tribunal, a second appellate authority under the Bombay Sales Tax Act, considers penalty imposed under section 36(3) as something l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , interest and damages are paid in the cases before us, we consider it desirable to first refer to the decision of the Supreme Court in the case of Haji Aziz Abdul Shakoor Bros. In the said case, the assessee had imported dates at a time when their import was prohibited. The goods were confiscated under section 167(8) of the Sea Customs Act, 1878. Option was given to the assessee to take delivery of the goods by paying a sum by way of penalty in lieu of confiscation of the goods. The assessee paid the penalty and took delivery of the goods. The Supreme Court held that the penalty was paid on account of infringement or infraction of law and since infraction of law is not an incident of business, the penalty cannot be allowed as a deduction. The same question came up before the Bombay High Court in the case of Pannalal Narottamdas Co. In this case, the assessee had purchased import documents in good faith. When the goods were actually imported, it was found that the goods imported were different from their description in the documents. Here again, the goods were confiscated under section 167(8) of the Sea Customs Act and an option was given to the assessee to pay a particular amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was held that it was interest and not penalty and a number of reasons were given therefor, such as (i) there was a separate provision for imposing penalty under sub-section (5) of the same section, (ii) it was automatic, and (iii) no opportunity need be given and no specific order need be passed, etc. It was held in the circumstances that the interest payable on the arrears of cess under section 3(3) is, in reality, part and parcel of the liability to pay cess. The question is, whether it can be inferred from this decision of the Supreme Court that it has been laid down as law that the penalty imposed for non-compliance with the statutory provisions, in whatsoever form or manner, cannot be allowed as deduction ; particularly if such an imposition is not automatic, the statute contains separate provisions for charging of interest and there is discretion in the authority empowered to impose penalty not to do so on sufficient cause for default/lapse being shown. If converse of a proposition laid down by the Supreme Court is also to be taken as a proposition of law, the department, we must say, has to succeed. However, we find when confronted with a somewhat similar situation in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of India Ltd. [1983] 142 ITR 413 (Bom.). The decision of the Delhi High Court in the case of Loke Nath Co. is, to our mind, a solitary case, where the penalty of Rs. 4 lakhs was paid by the assessee as deposit fee for regularising construction of a building constructed in violation of the plan sanctioned originally. 13. In view of the legal position understood by us, as above, we have no difficulty in holding that the interest paid in the case of Champion Engg. Works (P.) Ltd., for non-payment of the provident fund contribution and the contributions under the Insurance Act are allowable as deductions. The issue regarding the deduction of the interest paid for non-payment of the contribution is squarely covered by the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. It will stand on the same footing as the contribution itself. There being no dispute that the provident fund contribution as well as the contribution under the Insurance Act are allowable as deductions in the hands of the assessee, we have no difficulty in holding that the interest thereon as well is to be allowed as a deduction. Therefore, we refer to the other provisions, under which pena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time the dealer continues to make default in the payment of tax : Provided that, the Commissioner or any appellate or revisional authority, may remit the whole or any part of the penalty payable in respect of any period." EMPLOYEES PROVIDENT FUND AND MISCELLANEOUS PROVISIONS ACT, 1982 : " 14B. Power to recover damages.---Where an employer makes default in the payment of any contribution to the Fund, the Family Pension Fund or the Insurance Fund or in the transfer of accumulations required to be transferred by him under sub-section (2) of section 15 or sub-section (5) of section 17 or in the payment of any charges payable under any other provision of this Act or of any Scheme or Insurance Scheme or under any of the conditions specified under section 17, the Central Provident Fund Commissioner or such other officer as may be authorised by the Central Government, by notification in the Official Gazette, in this behalf may recover from the employer such damages, not exceeding the amount of arrears, as it may think fit to impose : Provided that before levying and recovering such damage, the employer shall be given a reasonable opportunity of being heard." Penalty imposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, it is only reasonable that an opportunity should be given before charging interest under these sections. To our mind, these distinguishing features do not detract us from the fact that what is leviable is penalty for non-payment of tax within the time allowed by the statute. These distinguishing features pertain to procedure and are not material. For the sake of propriety, we are not referring to all the orders of the Tribunal relied upon on behalf of the assessee for the purpose. However, the Madras Bench ' D ' in the case of Anglo French Textiles Ltd. has discussed the question at length. It has been held that the penalty paid for non-payment of sales tax and damages paid for non-payment of provident fund contributions in time are allowable deductions. Moreover, the Madhya Pradesh High Court in its recent decision in the case of Simplex Structural Works has held that if the amount of penalty is such an expenditure which the assessee would have been required to incur, even if he had not broken the law, such an expenditure cannot, in the true sense, be termed as penalty for an infraction of the law. The assessee, in that case, had obtained the benefit of a concessional rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to observe that we were taken through a number of High Courts and Supreme Court decisions, where it was held that the penalty imposed under section 36(3) of the Bombay Sales Tax Act and the damages paid under the Provident Fund Act are for offences or acting in violation of statutory provisions. Attention was invited to a decision of the Andhra Pradesh High Court in the case of Maddi Venkataratnam Co. (P.) Ltd. and the decision of the Madhya Pradesh High Court in the case of CIT v. Malwa Vanaspati Chemical Co. Ltd. [1982] 135 ITR 221, where the penalties imposed in those cases were held to be not allowable as deductions. On carefully going through these decisions, however, we find that the assessees, in all these cases, were found as a fact to have conducted in a manner which was prohibited by law. There was no finding that the penalty was suffered in spite of the assessee acting in good faith and in the capacity of a trader. Accordingly, we are inclined to hold that these decisions are distinguishable. 16. Having regard to the above discussion, we hold that the interest paid, whether under the Provident Fund Act or under the Insurance Act, for non-payment of contribution u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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