PETITIONER: PRAKASH COTTON MILLS PVT. LTD. Vs. RESPONDENT: COMMISSIONER OF INCOME TAX (CENTRAL) BOMBAY DATE OF JUDGMENT06/04/1993 BENCH: VENKATACHALA N. (J) BENCH: 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. HEADNOTE: 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] JUDGMENT:
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 thereunder, 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.
993