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Issues Involved: Interpretation of deduction under section 37 of the Income-tax Act, 1961 for interest payment claimed by the assessee due to late remittance of funds under the Employees' Provident Funds Act.
Summary: The High Court of Karnataka addressed the issue of whether the interest payment made by the assessee due to late remittance of funds under the Employees' Provident Funds Act could be claimed as a deduction under section 37 of the Income-tax Act, 1961. The Revenue contended that the payment was a penalty and not deductible, penalizing the assessee for delayed payment. However, the Appellate Tribunal disagreed with this view, leading to the reference to the High Court. The Court noted that the payment in question was indeed interest under section 7-Q of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, meant to compensate for delayed payments. It distinguished between interest payments and penalties, stating that the former serves to compensate the receiver for the delay, while the latter acts as a deterrent against frequent delays. Citing the Supreme Court's decision in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, which allowed deduction for compensatory payments, the Court found no difference in principle between that case and the present one. Referring to the decision in CIT v. Mandya National Paper Mills Ltd. [1984] 150 ITR 26, where penalty under the Karnataka Sales Tax Act was considered as interest for delayed payment and allowed as a deduction under section 37, the Court strengthened its stance in favor of the assessee. Ultimately, the Court held that the interest payment in question was compensatory in nature and deductible under section 37, answering the referred questions in favor of the assessee and against the Revenue.
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