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Issues Involved:
1. Whether interest paid u/s 14B of the Employees' Provident Funds Act, 1952, is an allowable deduction under the Income-tax Act, 1961. 2. Whether interest paid on account of delayed payment of sales tax is an allowable deduction under the Income-tax Act, 1961. Issue 1: Allowability of Interest Paid u/s 14B of the Employees' Provident Funds Act, 1952 The court reframed the question to consider "damages" instead of "interest" paid u/s 14B of the Employees' Provident Funds Act, 1952. The Income-tax Officer disallowed the deduction claimed by the assessee for damages paid due to delayed remittance of employees' contributions to the Provident Fund. The Tribunal allowed the deduction, treating the levy as compensatory, akin to interest for delayed payment, referencing the Supreme Court decision in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429. However, the Supreme Court in Organo Chemical Industries v. Union of India, AIR 1979 SC 1803, clarified that damages u/s 14B serve both penal and compensatory purposes. The court held that the amount payable u/s 14B cannot be wholly compensatory and must be assessed to determine the penal and compensatory proportions. Consequently, only the compensatory portion is an allowable deduction under the Income-tax Act. The Tribunal was directed to determine the appropriate portion after hearing the parties. Issue 2: Allowability of Interest Paid on Delayed Payment of Sales Tax The assessee claimed deduction for interest paid on delayed payment of sales tax u/s 36(3) of the Bombay Sales Tax Act, 1959. The Income-tax Officer and the first appellate authority disallowed the claim, considering it penal. The Tribunal, however, treated the payment as compensatory. The court examined the provisions of the Bombay Sales Tax Act, 1959, and concluded that the levy u/s 36(3) is composite, comprising both penalty and compensation for delayed payment. The nomenclature of the levy as interest, damages, or penalty is not conclusive. The authority under the Income-tax Act must apportion the appropriate portions towards penalty and compensatory payment. The compensatory portion is an allowable deduction under the Income-tax Act. The Tribunal was directed to determine the appropriate portion after hearing the parties.
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