ORDER
O.P. Jain, Judicial Member
1. This appeal is directed against the order of the Commissioner of Income-tax (Appeals) dated 27th March, 1986 pertaining to the assessment year 1977-78.
2. The assessee had to pay a sum of Rs. 1,61,689.20 by way of damages under Section 14B of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred to as’the Act’)- A further sum of Rs. 8,976.33 was paid by way of penalty on account of the late payment of ESIC dues for the years 1971-72 to 1974-75. The assessee had claimed deduction for these amounts, which was denied by the ITO.
3. In the appeal before the CIT(A), it was contended for the assessee that although labelled as damages and penalties for the delayed payment of theP.F. dues and ESIC dues, the payments cannot be treated as penalty for infraction of statutory provisions. It was contended that the levy in fact represents interests charged by the Government for delayed payment and is, therefore, an admissible deduction under Section 37(1) of the Income-tax Act, 1961. In support of this contention reliance was placed on a Special Bench decision of the Tribunal in the case of Second ITO v. Bisleri (I) (P.) Ltd. [1985] 12 ITD 116 (Bom.). The contention of the assessee found favour with the learned CIT(A). As such the same was accepted and the deduction claimed was allowed. Dissatisfied by that order, the revenue is in appeal before the Tribunal.
4. The learned Departmental Representative has submitted that the damages imposed under the Act are in the nature of penalty and as such, the CIT(A) has erred in allowing the deduction. In support of his submissions, he has placed reliance on the undermentioned decisions :
1. CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113/36 Taxman 88 (AP).
2. CIT v. Kamlapat Motilal [1988] 172 ITR 438/39 Taxman 95 (All.).
5. The learned Departmental Representative has also argued that the case of Bisleri (I) (P.) Ltd. (supra) no more holds good in view of the decision of the Bombay High Court in Jairamdas Bhagchand v. CIT [1988] 171 ITR 545. He has pointed out that in the case of Bisleri (I) (P.) Ltd. (supra) the issue involved was whether the sales-tax penalty constituted an admissible deduction in the computation of the assessee’s total income. It was held by the Special Bench of the Tribunal that penalty under Section 36(3) of the Bombay Sales-tax Act, is an allowable deduction. It has been pointed out by the learned Departmental Representative that in the above cited case of Jairamdas Bhagchand (supra) the Bombay High Court has held that the penalty payable under Section 36(3) of the Bombay Sales-tax Act, is not an allowable deduction. It was thus urged that the reliance placed on Bisleri (I) (P.) Ltd.’s case (supra) is misplaced and the order of the CIT(Appeals) merits reversal.
6. As against the above submission advanced for the revenue, the learned counsel for the assessee has supported the order of the CIT(A). He has argued that the expression used in Section 14B of the Act is ‘damages’ and not ‘penalty’. He has further argued that the damages are levied with a view to compensate the employees for the late payment of the dues and such levy cannot be equated with penalty. It was contended that the principle laid down by the Tribunal in the case of Bislery (I) (P.) Ltd. (supra) is correct and still holds good. He has pointed out that in the instant case we are not concerned with the penalty imposed under the provisions of the Bombay Sales Tax Act. He has pointed out that in the aforesaid case the Tribunal, besides dealing with the issue of sales-tax penalty, had also considered the nature of the payment of damages under Section 14B of the Act and ESIC contributions, etc. and it was held that such payments are in the nature of interest and are allowable. He has further submitted that the assessee could not pay Provident Fund and ESIC dues in time on account of financial stringency. In that connection, he has invited our attention to the order passed by the Regional Providend Fund Commissioner imposing damages under Section 14B of the Act, a copy of which is available at pages 8 to 10 of the assessee’s compilation. In this order, the Regional Provident Fund Commissioner, while imposing the damages has taken into account the fact that the assessee company has been suffering from huge losses and has closed with effect from December 1975 and for that reason the damages were imposed at the rate of 20% instead of 100%, as originally proposed. It was also argued that the assessee that the decisions cited by the learned Departmental Representative are distinguishable and cannot be applied to the facts of the present case.
7. We have considered the rival submissions as also the evidence brought on record and the decisions cited before us.
8. The true nature of the expression ‘damages’ used in Section 14B of the Act had come up for consideration before the Hon’ble Supreme Court in Organo Chemical Industries v. Union of India AIR 1979 SC 1803. After considering the scheme of the Act and conflicting view of the various High Courts on the point, the Supreme Court has held that the expression ‘damages’ occurring in Section 14B is, in substance, the penalty imposed on the employer for the breach of the statutory obligation. It was observed that the predominant object is to penalise, so that an employer may be thwarted or deterred from making any further default. In this connection, it would be of advantage to quote paragraph 46 of the order, which reads as under:
The traditional view of damages as meaning actual loss, does not take into account the social content of a provision like Section 14B contained in a socio-economic measure like the Act in question. The word ‘damages’ has different shades of meaning. It must take its colour and content from its context and it cannot be read in isolation, nor can Section 14B be read out of context. The very object of the Legislation would be frustrated if the word ‘damages’ appearing in Section 14B of the Act was not construed to mean penal damages. The imposition of damages under Section 14B serves a two-fold purpose. It results in damnification and also serves as a deterrent. The predominant object is to penalise, so that an employer may be thwarted or deterred from making any further defaults.
9. The following observations in paragraph 47 of the order are also material and are being reproduced hereunder:
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 Section 14B is not merely ‘to provide compensation for the employees’. We are clearly of the opinion that the imposition of damages under Section 14B serves both the purposes. It is meant to penalise defaulting employer as also to provide repartion for the amount of loss suffered by the employees.
10. In view of the above pronouncement of the Supreme Court, the arguments advanced on behalf of the assessee that the damages paid for late payment of the Provident Fund and ESIC dues are in the nature of interest and not penalty, cannot be accepted. It would be appropriate to mention here that this decision of the Supreme Court had not been brought to the notice of the Tribunal, inasmuch as, the same does not find any mention in the decision rendered in the case of Bislery (I) (P.) Ltd. (supra). The law declared by the Supreme Court is the law of the land and has to be followed irrespective of any decision of any authority to the contrary. In this view of the matter, we feel that the assessee fails to derive any support from the aforesaid decision of the Tribunal.
11. It may be argued that the Supreme Court in Organo Chemical Industries’ case (supra) has not interpreted the word ‘damages’ under the Income-tax Act but only under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and, therefore, that interpretation has nothing to do with the assessments under the Income-tax Act. We are unable to agree with this proposition, k may be stated that similar contention has been rejected by the High Court of Allahabad in the case of Kamlapat Motilal (supra).
12. Since strong reliance has been placed for the assessee on the case of Bislery (I) (P.) Ltd, (supra), we consider it appropriate to deal with the same in some detail. In that case the dispute related to the penalty imposed and paid under Section 36(2)(c) of the Bombay Sales-tax Act, 1959 and the penalty imposed and paid under Section 36(3) of the said Act. At the time of hearing, the Bench was confronted with conflicting views taken by different Benches of the Tribunal on the subject. Hence, reference was made to the President of the Tribunal for constituting a Special Bench. That proposal was accepted. Before the Special Bench, there were two intervenors, viz., Champion Engineering Works (P.) Ltd. and Nitin Traders. The issue involved in the case of Nitin Traders was whether the penalty paid by the assessee under Section 36(3) of the Bombay Sales-tax Act is an allowable deduction. In the case of Champion Engg. Works (P.) Ltd., the issue related to the question of deduction as regards damages and interest paid under the Employees’ Providend Fund Act, 1952 and interest paid under the Employees State Insurance Act, 1948. After considering the facts of the case and the decisions cited the Tribunal held that the interest paid in the case of Champion Engineering Works P. Ltd. for non-payment of Provident Fund Contribution and the contributions under the Insurance Act are allowable as deductions. It was also held that the penalty under Section 36(3) of the Bombay Sales-tax and damages under Section 14B of the Provident Fund Act are also allowable as deductions, because (i) the levies in both the cases are in the nature of interest and (ii) the assessees are not found to be at fault in not making the payment in time. The observations to this effect are to be found in para 16 of the order. These observations go to indicate that the findings of the Tribunal were based on appreciation of the facts of those cases. As regards the imposition of penalty the observations are to be found in para 17 of the order which is as under:
In short, our decision is that interest charged for non-payment of sales-tax, sugar cess, provident fund contribution, ESI contribution, etc., is not and cannot be equated with penalty for infraction of law. Such an interest is, therefore, always allowable as deduction. As regards penalty imposed and paid for non-payment of such levies, the manner in which the imposition of penalty is treated by the authorities under the statutes, under which the penalty is imposed, constitutes a relevant factor for considering whether the penalty so imposed is penalty or mere interest/damage/compensation for delay in making payment of legitimate dues. However, the acid lest in all these cases will be whether the penalty/damage has been suffered by the assessee in spite of its acting in good faith and in its capacity as a trader, i.e., whether the assessee has been helpless in not making the payment of the levies within the time fixed by the statute or whether the delay in payment is as a result of the assessee’s own fault. Thus, the allowability of penalty/damages as deduction will depend upon the facts and circumstances obtaining in each case.
13. In view of the aforesaid observations, we feel that the Tribunal did not lay down a general proposition that penalty imposed and paid for non-payment of such levies always constitute an admissible deduction. For this reason also, we feel that the assessee fails to draw any support from that decision of the Tribunal.
14. The Supreme Court as already indicated earlier, has held that the damages levied under Section 14Bof the Act comprises both an element of penal levy as well as compensatory allowance. This being so, it would be appropriate to determine as to what proportion should be treated as penal and what proportion as compensatory. While determining the proportion we have to bear in mind that the Supreme Court has held that the expression’damages’ occurring in Section 14B is in substance a penalty. Keeping in view what has been held by the Supreme Court and the special facts of the present case as per para 6 above, we think it reasonable to treat 60% of the amount paid under Section 14B of the Act as penalty and the remaining 40% as compensatory in nature and we hold accordingly.
15. In view of the above discussions, the order of the CIT(A) is modified and deduction is allowed to the extent of 40% of the damages levied at Rs. 1,61,689.20 paisc. For the balance payment made under Section 14B of the Act and the penalty levied for the delayed payment of ESIC dues we hold that the deduction is not admissible and the order of the CIT(A) to that extent is reversed and that of the ITO is restored.
16. In the result, the appeal stands partly allowed.