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Whether interest paid under section 14B of the Employees' Provident Funds and Family Pension Act, 1952 is an admissible deduction in computing the income of the assessee. Detailed Analysis: The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, where the Income-tax Appellate Tribunal referred the question of law regarding the admissibility of interest paid by the assessee under section 14B of the Employees' Provident Funds and Family Pension Act, 1952 as a deduction in computing income. The controversy arose from defaults in payment of provident fund contributions during the assessment year 1977-78. The Regional Provident Fund Commissioner levied damages of Rs. 28,489, which the assessee claimed as a deduction. The Income-tax Officer rejected the claim, considering it a penalty. The Commissioner (Appeals) bifurcated the amount into interest and penalty, allowing deduction for interest but disallowing penalty. However, the Tribunal considered even interest as a penalty, leading to the current reference. The main issue in contention was whether damages under section 14B of the Act are compensatory or penal. The court referred to the Supreme Court's decision in Organo Chemical Industries v. Union of India, which held that damages under section 14B comprise both compensatory and penal elements. The purpose was not only to penalize defaulting employers but also to provide reparation to employees for the loss suffered. Subsequently, in Prakash Cotton Mills P. Ltd. v. CIT, the Supreme Court reiterated that if an impost is of a composite nature, authorities must bifurcate the compensatory and penal components for deduction. The court emphasized that where an impost is partly compensatory and partly penal, deduction should be allowed for the compensatory part. Based on the Supreme Court's rulings, the court found that the Tribunal erred in reversing the Commissioner (Appeals) order. It upheld the bifurcation of damages into interest and penalty, allowing deduction for the compensatory interest component. Consequently, the court answered the referred question in favor of the assessee, emphasizing the obligation to differentiate between compensatory and penal elements in such imposts. No costs were awarded in the judgment.
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