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2010 (11) TMI 95 - HC - Income TaxWhether the interest paid on the late payment of the provident fund can partake the character or nature of the provident fund - Whether the provisions of Section 43B of the Act are applicable on the interest paid by the assessee on the late payment of provident fund - . Plea of the assessee was that the interest amount is not in the nature of PF and therefore Section 43B of the Act would not apply - Though this plea was rejected by the AO the CIT (A) accepted this plea and allowed the appeal of the assessee - The CIT (A) relied upon the judgment of the Calcutta High Court in the case of Commissioner of Income-tax Vs. Padmavati Raje Cotton Mills Ltd. 1999 -TMI - 15973 - CALCUTTA High Court holding that the interest on late payment was outside the scope of Section 43B of the Act and therefore the rigour of that provision was not attracted - In the case of Mahalakshmi Sugar Mills Co. Vs. Commissioner of Income Tax Delhi 1980 -TMI - 5833 - SUPREME Court it was held that interest payable on arrears of cess is compensatory in nature - Having regard to the fact that it partakes the character of the provident dues itself Section 43B of the Act would be attracted and unless this interest is actually paid the assessee would not be entitled to claim deduction in respect thereof - orders passed by the Tribunal are set aside and the disallowance made by the AO affirmed
Issues Involved:
1. Whether the interest paid on the late payment of the provident fund can partake the character or nature of the provident fund. 2. Whether the provisions of Section 43B of the Income Tax Act are applicable to the interest paid by the assessee on the late payment of the provident fund. Issue-wise Detailed Analysis: 1. Character or Nature of Interest on Late Payment of Provident Fund: The primary issue is whether the interest paid on the late payment of provident fund (PF) dues can assume the character of the PF itself. The respondent-assessee argued that the interest amount is not in the nature of PF and thus should not be subjected to Section 43B of the Income Tax Act. However, the Court noted that the interest payable on delayed payment of PF dues is a statutory liability under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (PF Act). The Court referenced the Supreme Court's judgment in Mahalakshmi Sugar Mills Co. v. Commissioner of Income Tax, which held that interest on arrears of cess is part and parcel of the cess liability. Applying this principle, the Court concluded that interest on delayed PF payments is an accretion to the PF dues and thus partakes the character of the PF itself. Consequently, this interest would attract the provisions of Section 43B of the Income Tax Act. 2. Applicability of Section 43B of the Income Tax Act: Section 43B of the Income Tax Act mandates that certain expenditures, including PF dues, are deductible only on actual payment. The Court emphasized that Section 43B is an exception to the general rule of mercantile accounting, where liabilities are deductible when they become due. The Court observed that the interest on delayed PF payments, being part of the PF dues, falls within the ambit of Section 43B. Therefore, unless the interest is actually paid, the assessee is not entitled to claim a deduction for it. The Court also dismissed the argument that the interest is punitive and thus not deductible, clarifying that the interest under Section 7Q of the PF Act is compensatory and not penal. Conclusion: The Court answered both questions of law in the affirmative, in favor of the Revenue and against the assessee. It held that the interest on the late payment of PF dues partakes the character of the PF itself and is thus subject to the provisions of Section 43B of the Income Tax Act. Consequently, the appeals were allowed, the orders of the Tribunal were set aside, and the disallowance made by the Assessing Officer was affirmed.
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