Prakash
Cotton Mills Pvt. Ltd. Vs. Commissioner of Income Tax (Central) Bombay [1993] INSC 191 (6 April 1993)
Venkatachala
N. (J) Venkatachala N. (J) Jeevan Reddy, B.P. (J)
CITATION:
1993 AIR 2174 1993 SCR (2) 983 1993 SCC (3) 452 JT 1993 (2) 619 1993 SCALE
(2)425
ACT:
Income
Tax Act, 1961--A.Y. 1966-67--Allowance under section 37(1) of interest paid by assessee
for delayed payment of Sales Tax under Bombay Sales Tax Act and damages paid
for delayed payment of contribution under Employees State Insurance Act, 1947
Allowance under section 37 (2) of entertainment expenditure.
HEAD NOTE:
The
appellant paid Rs.19635 in the accounting year for A.Y. 1966-67, on account of
interest, under Bombay Sales Tax Act, 1951, for delay in payment of sales tax,
and for damages for delayed payment of contribution under Employees State
Insurance Act, 1947. The assessee-appellant in the return of income, claimed
the amount as allowance under section 37(1) of I.T. Act. The appellant, also
claimed the entire entertainment expenses, amounting to Rs.3865 as allowance
under section 37(2) of the I.T. Act The Income-tax Officer treated the payment
of Rs.19635 as penal interest and disallowed it as allowance under section
37(1) of I.T. Act.
Out of
the entertainment, expenses, amounting to Rs.3865 incurred by the Directors of
the assessee company, for entertainment at the Diners club and C.C.1, the
I.T.O. regarded Rs.1365 only as permissible deduction under section 37(2) of
I.T. Act, taking the view that the remaining sum of Rs.2500 was attributable to
personal expenses of the Directors of the assessee company and therefore
impermissible deduction under section 37(2) of the I.T. Act.
The Assessee
appellant did not succeed in appeals before the A.A.C. and in the Income Tax
Tribunal. Applications under section 256 (1) of the I.T. Act before the
Tribunal and under section 256 (2) in Bombay High Court were rejected.
The assessee
filed appeal by special leave in Supreme Court.
This
Court allowed the appeal partly and,
HELD:
'Mat the authority concerned has to allow deduction under section 37(1) of the
I.T. Act, wherever the concerned impost is purely 983 984 compensatory in
nature. Wherever such impost is found to be of a composite nature, that is
partly compensatory and partly penal, the authorities are obligated to
bifurcate the two components of the impost and given deduction to the
component, which is compensatory in nature and refuse the deduction for the
component which is penal in nature.
Therefore,
whenever any statutory impost paid by assessee by way of damages or penalty or
interest is claimed, the assessing authority is required to examine the scheme
of the provisions of the relevant statute providing for payment of such impost,
notwithstanding the nomenclature of the impost as given by the statute to find,
whether it is compensatory or penal in nature. Ibis Court agreed with the view
taken in earlier decisions by this Court and by the Andhra Pradesh High Court,
which settle the law as to when any amount paid as interest damages or penalty
could be regarded as compensatory (reparatory) as would entitle the assessee to
claim allowance under section 37 (1) of I.T. Act This Court concluded that the
question whether the impost is in essence compensatory or is by way of penalty,
has to be decided having regard to the relevant provisions of the law under
which it is imposed, the reasons given in the order imposing and quantifying
the damages or penalty. The imposition though called a penalty may be composite
in nature comprising penalty as well as compensation for delayed payment. The
nomenclature of the levy as interest, damages or penalty is not conclusive.
[991-B,
990-H, 991-A] Mahalakshmi Sugar Mills Co. v. Commissioner of Income Tax Delhi, [1980] 123 I.T.R. 429 S.C.;
Commissioner of Income Tax v. Hyderabad Allwyn Metal Works Ltd., (1988) 172 ITR
113 (H.CA.P.) and Organo Chemical Industries v. Union of India, A.I.R. 1979 S.C. 1803.
This
Court, remitted the matter of the Tribunal concerned, so far as it related to
deduction under section 37(1) of I.T. Act, regarding impost of interest for
delayed payment of sales tax and impost of damages for delayed contribution
under Employees State Insurance Act, as the I.T.O. and the appellate authority
had refused the allowance without any examination of the schemes of the
provisions of the Bombay Sales Tax Act and the Provident Fund Act. [991-D] This
Court further held that the question as to what portion of expenses, claimed,
is deductible entertainment expenditure, has to be 985 decided by the fact
finding authorities, while assessing the relevant materials placed before them.
No question of law arises, particularly when the fact finding authorities had
recorded concurrent findings on consideration of relevant material. Hence the
question was decided against the assessee appellant [992-B]
CIVIL
APPELLATE JURISDICTION : Civil Appeal No. 1279 (NT)/1977.
From
the Judgment and Order dated 17.6.1976 of the Bombay High Court in I.T.
Application No.63 of 1976.
Mrs.
A.K Verma, Mrs. S.V. Pathak (For J.B. Dadachanji & Co.) for the Appellant.
P.S. Poti
Ms. A Subhashini (NP) and R. Satish for the Respondent.
The
Judgment of the Court was delivered by VENKATACHALA, J. Two questions are
raised for our decision in this appeal. First, whether the appellant was
entitled to claim as allowance under Section 37(1) of the Income-tax Act, 1961
(the I.T. Act) the interest paid by it for delayed payment of sales tax under
the Bombay Sales Tax Act, 1951 (the BST Act) and the damages paid by it for
delayed payment of contribution under Employees' State Insurance Act, 1947 (the
ESI Act.) Second, whether the appellant was entitled to claim as allowance
under Section 37(2) of the I.T. Act the entire expenses incurred by it as
entertainment expenses.
The
appellant is a company carrying on the business in the manufacture of textile
goods. It is the assessee. In the income-tax return of the assessee for the
Assessment Year 1966-67 (the previous accounting year being from 1st July, 1964
to 30th June, 1965), the interest and, the damages of Rs. 19,635 paid by if for
delayed payment of sales tax under the BST Act and for delayed payment of
contribution under the ESI Act, was claimed as revenue expenditure, allowable
under Section 37(1) of the I.T. Act. So also the sum of Rs3,865 paid by it for
entertainment expenses was claimed as revenue expenditure, allowable under
Section 37(2) of the I.T. Act. The I.T.O., 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 exclusive expenditure incurred on its Directors.
Appeals preferred before 986 the A.A.C. and the Income-tax Appellate Tribunal
(Tribunal) questioning the disallowance of claims of the appellant by the
I.T.O., did not succeed. Application made by the assessee under Section 256(1)
of the I.T. Act before the Tribunal to raise the questions covering the said
matters and get them referred for decision by the High Court, also did not meet
with success. Again, the application made thereafter by the assessee under
Section 256(2) of the I.T.
Act
before the Bombay High Court to obtain a reference on the questions relating to
the said matters for its decision, was rejected. Hence, the assessee has filed
this appeal by special leave, questioning the aforesaid orders made by the
authorities and the High Court. Reference sought to be obtained from the
Tribunal for decision by the High Court, was on the following questions:-
1.
Whether the sum of Rs.19,635 debited in the interest account paid by way of
interest for delayed payment of sales tax and Employees' State Insurance
contribution could be said to have not been incurred, wholly and exclusively
for the purpose of business?
2. Whether
an the facts and in the circumstances of the case, the sum of Rs.19,635 claimed
by the assessee was an .allowable expenditure under the Income-tax Act, 1961?
3.
Whether on the facts and in the circumstances, the Tribunal was justified in
holding that the disallowance' of Rs.2,500 out of expenditure incurred by the assessee
at Diners Club and C.C.I. could be disallowed even though the said expenditure
was less than the expenditure allowable under Section 37(2) of the I.T. Act?
4.
Whether there was any evidence or material before the Tribunal to hold that the
expenditure to the extent of Rs.2,500 at Diners Club and C.C.I. was not laid
wholly and exclusively for the purposes of business of the assessee-company'.?
Questions 1 & 2 are covered by First Question indicated at the outset. So
also, questions 3 & 4 are covered by Second Question indicated at the
outset. Indeed, after hearing counsel for the parties we were inclined to think
that the said questions ought to be remitted to the High Court for 987 its
opinion under Section 256 of the I.T. Act. In the normal course, we would have
done so and left the questions to be answered by the High Court. But, regard
being given to the fact that the questions relate to a 25 year old case of the
Assessment 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 question's ourselves and answer them. Such 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:
Section
37(1) of the I.T. Act corresponds to Section 10(2)(XV) of Predecessor Indian
Income-Tax Act of 1922 (the I.T. Act of 1922), is undisputed.
In Mahalakshmi
Sugar Mills Co. v. Commissioner of Income- tax, Delhi, (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 I.T. Act of 1922. For deciding that question, this Court
examined the provisions of Sugarcane Cess Act, 1956 which provided for taking
of several kinds of action against a person who defaulted in payment of the cess
imposed under that Act. Section 4 was found to make the defaulter liable to
imprisonment or fine or both. Section 3(5) was found to make the defaulter
liable for payment of penalty, an amount which far exceeded the amount of cess.
Then, Section 3(3) was found to make the defaulter liable for payment of
interest at 6 per cent per annum from the date of default till the date of
payment. On an analytical examination of the said provisions, this Court took
the view that interest paid under Section 3(3) by the defaulter for delayed
payment of the cess could not be described as a penalty imposed upon him for
infringement of the law but ought to be regarded as an amount of compensation
paid by him to the Government for delayed payment of the cess levied against
him under the Act. In that view of the matter, this Court held that the
interest paid by the appellant assessee on delayed payment of cess was an
allowable expenditure under Section 10(2)(XV) of the I.T. Act of 1922.
988 In
Commissioner of Income. Tax v. Hyderabad Allwyn Metal Works Limited, (1988) 172
ITR 113, a Division Bench of the Andhra Pradesh High Court had to decide two
questions; (i) whether the damages paid by the respondent-asseswe under Section
14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952,
was an allowable deduction under Section 37(1) of I.T. Act and (ii) whether the
interest paid under the BST Act, for delayed payment of sales tax there under,
was an allowable deduction under Section 37(1) of the I.T. Act. For deciding
question (i), the Division Bench, referred to the view of A.P. Sen, J. of this
Court found in a passage of his concurring judgment in Organo Chemical
Industries v. Union of India AIR 1979 SC 1803, on the expression 'damages'
occurring in Section 14B of Central Act of 1952, which read thus:- "The
expression 'damages' occurring in section 14B is, in substance, a penalty imposed
on the employer for the breach of the statutory obligation. The object of
imposition of penalty under s. 14B is not merely 'to provide compensation for
the employees'. We are clearly of the opinion that the imposition of damages
under s.14B serves both the purposes.
It is
meant to penalise defaulting employers as also to provide reparation for the
amount of loss suffered by the employees. It is not only a warning to employers
in general not to commit 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 989 by the employees." The Division Bench, having regard to the
said view of the expression damages occurring in section 14B of Provident Fund Act,
found that such damages paid by the concerned assessee-respondent could not
have been treated by the Tribunal as purely compensatory. While recording such
finding, the real distinction that exists between an impost which is
compensatory and an impost which is a penalty, is pointed out, thus:- "The
question whether any such impost is in essence compensatory or is by way of
penalty will have to be decided having regard to the relevant provisions of the
law under which it is imposed and the circumstances under which it has been
imposed. The mere nomenclature as interest, penalty or damages in the Act may
not conclusive for the purpose of allowing it as a deduction under the
Income-tax Act.
Similarly,
the circumstance that a fixed rate of interest has to be paid also may not be
conclusive. Section 14B of the Act provides for levy of damages for delayed
payment as a percentage of the amount due up to a prescribed maximum. Such a
determination is to be done by the appropriate authority after giving an
opportunity to the employer. Thus, the levy will be by a speaking order of the
authority fixing quantum of damages. As hel d by the Supreme Court, the said
amount comprises both an element of penal levy as well as compensatory payment.
It will be for the authority under the Income-tax Act to decide with reference
to the provisions of the Employees' Provident Funds Act and the reasons given
in the order imposing and quantifying the damages to determine what proportion
should be treated as penal and what proportion as compensatory. The entire sum
can neither be considered as mere penalty nor as mere interest." Then,
dealing with question (ii) relating to interest paid by the concerned
respondent assessee under the BST Act which the Tribunal had treated as an
allowable deduction under Section 37(1) of the I.T. Act, the Division Bench
considered the relevant provisions of the BST Act bearing 990 on the question
and held, thus:- 'From a reading of the aforesaid provision and in the
background of the various sections mentioned above, it cannot be said that the
levy under section 36(3), though called a penalty, is merely compensatory or in
the shape of interest for delayed payment or penal in character. The Act does
not provide for automatic payment of interest due to delay in payment. The levy
under sub-section (3) of section 36 is to be made after giving notice to the
dealer and after recording reasons for it where the tax has not been paid
within the time contemplated 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
Company (supra) and the decision of the Division Bench of the Andhra Pradesh
High Court in Hyderabad AIN" Metal Works Ltd. (supra) 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 regarded as compensatory (reparatory) in character as
would entitle 'such assessee to claim it as an allowable expenditure under
Section 37(1) of the I.T. Act. Therefore, whenever any statutory impost paid by
an assessee by way of damages or penalty or interest, is claimed as an
allowable expenditure under section 37(1) of the I.T. Act, the assessing
authority is required to examine the Scheme of the provisions of the relevant
statute providing for payment of 991 such impost notwithstanding the
nomenclature of the impost as given by the statute, to find whether it is
compensatory or penal, in nature. The authority has to allow deduction under
Section 37(1) of the I.T. Act, whereever such examination reveals the concerned
impost to be purely compensatory in nature. Whereever such impost is found to
be of a composite nature, that is, partly of compensatory nature and partly of
penal nature, the authorities are obligated to bifurcate the two components of
the impost and give deduction to that component which is compensatory in nature
and refuse to give deduction to that component which is penal in nature.
The
facts of the case under our consideration disclose that the I.T.O. and the
Appellate authorities have refused to allow the claims made by the assessee
under Section 37(1) of the I.T. Act, without any examination of the Scheme of
the provisions of the BST Act, to find whet her impost of the interest paid by
the assessee for delayed payment of sales tax was compensatory in nature as
would entitle it for deduction under Section 37(1) of the I.T. Act. The same is
the position as regards the impost of damages paid by the assessee under the
Provident Fund Act for delayed payment of contribution thereunder. Hence, we
consider it necessary to remit the question to the concerned Tribunal for
deciding the assessee's claims for deduction of interest and damages under
Section 37(1) of the I.T. Act. First Question is answered accordingly.
Second
Question:
Miscellaneous
expenses claimed by the assessee as deductible expenditure allowable under
Section 37(2) of the I.T. Act related to a sum of Rs.3,865 incurred by the
Directors of the assessee-company for entertainment at the Diners Club and
C.C.I., The I.T.O. regarded a sum of Rs.1,365 out of the said sum of Rs.3,865
as permissible deduction under Section 37(2) of the I.T. Act, while he regarded
the remaining sum of Rs.2,500 as impermissible deduction under Section 37(2) of
the I.T. Act taking the view that the same was attributable to personal
expenses of the Directors of the assessee-company. The A.A.C. in dealing with
the said claim for deduction in the appeal of the assessee filed before him,
held the entire expenses claimed as deductible expenditure under Section 37(2)
of the I.T. 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, 992 refused to interfere with the order of the I.T.O. made in that
regard. The Tribunal which considered the matter in the appeal of the assessee
before it, affirmed the view of the A.A.C. 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 the fact finding authorities have
recorded their concurrent finding on consideration of the relevant material.
Hence, the question under consideration is devoid of merit and is answered
against the assessee.
In the
result, we allow that appeal partly and remit the case relating to appellant-assessee's
claim for deduction under Section 37(1) of the Income-tax Act, 1961 to Income-
tax Appellate Tribunal, Bombay for being, decided in the light of our answer to
the First Question and decide the appeal of the assessee, accordingly. No
costs.
I.S.G.
Appeal allowed partly.
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