1985 (5) TMI 44 - HC - Income Tax

Summary

Issues:
Deduction of interest under the Bengal Public Demands Recovery Act, 1913 while computing total income under the Income Tax Act, 1961.

Detailed Analysis:
The case involved a reference under section 256(1) of the Income Tax Act, 1961, concerning the deduction claimed by the assessee for interest paid under the Bengal Public Demands Recovery Act, 1913. The assessee, a company, had failed to make contributions under the Employees' Provident Funds and Family Pension Fund Act, 1952, leading to a certificate proceeding for the recovery of arrears. The assessee claimed a deduction of the interest paid under the Bengal Public Demands Recovery Act while computing its total income. The Income Tax Officer disallowed the claim, but the Appellate Assistant Commissioner accepted it. However, the Tribunal, relying on a decision of the Gujarat High Court, held that the deduction was not allowable.

During the hearing, the contention was raised that the Tribunal erred in equating the interest payable under the Bengal Public Demands Recovery Act with damages payable under the Employees' Provident Funds Act. The Gujarat High Court decision relied upon by the Tribunal was related to damages for delay in provident fund contributions, which was considered a penalty for breaching statutory obligations. In contrast, the interest paid under the Bengal Public Demands Recovery Act was not for any infraction of law but due to a delay in payment of the certificated debt.

The interest under the Public Demands Recovery Act was highlighted as being akin to interest upon judgment, payable in execution proceedings. The interest was not a penalty or damages for breaching statutory obligations but a recoverable amount in the nature of interest upon judgment. The Supreme Court's decision in a similar context regarding the Sugarcane Cess Act, 1956, emphasized that interest paid for delay was compensation and not a penalty for infringing the law.

A previous decision by the same court also supported the deductibility of interest paid for late payment of royalty to the government under the Public Demands Recovery Act. Based on these considerations, the court concluded that the interest payable under the Bengal Public Demands Recovery Act should not be equated with damages payable under the Employees' Provident Funds Act. Consequently, the court ruled in favor of the assessee, allowing the deduction of interest under the Public Demands Recovery Act while computing total income under the Income Tax Act, 1961.