1988 (3) TMI 50 - HC - Income Tax

Summary

Issues Involved:
The judgment involves three main issues:
1. Deductibility of damages for late payment of provident fund deductions under section 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.
2. Deductibility of interest under section 5(3) of the Sugarcane Cess Act.
3. Deductibility of interest on purchase tax under the U.P. Sugarcane Purchase Tax Act, 1961.

Issue 1: Deductibility of Damages for Late Payment of Provident Fund Deductions
The court considered whether damages paid under section 14B of the Act, 1952, were in the nature of penalty or an allowable deduction incidental to the business. The Supreme Court's interpretation in Organo Chemical Industries v. Union of India clarified that damages under section 14B are penal in character, serving as both a deterrent and compensation for loss suffered by employees. The court rejected arguments that damages were not synonymous with penalty and that they could be segregated based on their ultimate destination. Relying on the Supreme Court's ruling, the court held that damages were penal in nature and not deductible as business expenditure, deciding in favor of the Revenue.

Issue 2: Deductibility of Interest under the Sugarcane Cess Act
Regarding the payment of interest under section 5(3) of the Sugarcane Cess Act, the court referred to the Supreme Court's decision in Mahalakshmi Sugar Mills Co. v. CIT, which allowed interest on arrears of cess as a revenue expenditure. Consequently, the court upheld the Appellate Tribunal's view that such interest was deductible in computing the assessee's total income.

Issue 3: Deductibility of Interest on Purchase Tax
The question of whether the payment of interest on purchase tax was deductible in computing the assessee's total income had been addressed by a Full Bench of the court in Triveni Engineering Works Ltd. v. CIT. The Full Bench ruled that interest on delayed payment of sugarcane purchase tax under the U.P. Sugarcane Purchase Tax Act, 1961, was an allowable deduction. Therefore, the court upheld the Appellate Tribunal's decision on this matter, deciding in favor of the assessee.

In conclusion, the court partially allowed the Revenue's reference, ruling in favor of the Revenue on the deductibility of damages for late payment of provident fund deductions but in favor of the assessee on the deductibility of interest under the Sugarcane Cess Act and interest on purchase tax. No costs were awarded, and the Appellate Tribunal was directed to dispose of the case in line with the court's judgment.