1997 (5) TMI 36 - HC - Income Tax

Summary

Issues:
1. Allowability of damages due to default in payment of provident fund contribution as a deduction under Income-tax Act, 1961.

Analysis:
The case involves a question referred by the Income-tax Appellate Tribunal regarding the allowability of a sum of Rs. 19,081 levied as damages due to default in payment of provident fund contribution under section 28(i) and/or section 37(1) of the Income-tax Act, 1961. The Appellate Tribunal disallowed the deduction claimed by the assessee, considering the amount as penalty or fine rather than an allowable expenditure. The Tribunal relied on the decision in CIT v. Swadeshi Cotton Mills Co. Ltd. [1980] 121 ITR 747, affirming the disallowance. The Supreme Court's interpretation in Organo Chemical Industries v. Union of India [1979] 55 FJR 283 AIR 1979 SC 1803, 1816, highlighted that damages under section 14B of the Act serve both penalizing defaulting employers and providing reparation to employees. The Supreme Court in Prakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR 684 emphasized the need for a clear finding on the compensatory and penal nature of the damages.

The High Court noted that the Appellate Tribunal failed to provide a clear apportionment of the amount claimed by the assessee towards compensation and penalty. Following the precedent set by the Supreme Court, the High Court remanded the matter to the Appellate Tribunal to determine the portion of the claim amount attributable to compensation and penalty. The deduction would only be allowed for the amount apportioned towards compensation, aligning with the principles established in Organo Chemical Industries [1979] 55 FJR 283. The High Court directed the Appellate Tribunal to make a clear finding after hearing both parties before allowing the deduction, ensuring compliance with the legal requirements and precedents.