1982 (7) TMI 126 - AT - Income Tax

Summary

Issues:
- Deduction of liquidated damages paid to Provident Fund Commissioner as business expenditure.

Analysis:
The appeal in this case pertains to the assessment year 1977-78, concerning the deduction of liquidated damages paid by the assessee to the Provident Fund Commissioner. The Regional Provident Fund Commissioner imposed damages amounting to Rs. 28,489 on the assessee for default in payment of contributions to the provident fund. The Income Tax Officer disallowed this amount as a penalty for late payment, but the Commissioner (Appeals) allowed a deduction of Rs. 21,990 as interest portion and disallowed Rs. 6,499 as a penalty. The Department challenged the allowance of Rs. 21,990 in appeal. The key contention was whether the interest amount could be considered a penalty or a deductible business expenditure. The Department argued that the damages imposed under the Provident Fund Act were akin to a penalty for violating the statute and, therefore, not allowable as a deduction. This argument was supported by a Full Bench ruling of the Allahabad High Court. On the other hand, the assessee contended that interest was payable only on account of late payment and should be allowed as a deduction.

The Full Bench ruling of the Allahabad High Court in the case of Saraya Sugar Mills supported the Department's contention that damages under the Provident Fund Act were in the nature of a penalty and not deductible. The ruling held that damages and penalties were intrinsically of the same nature and interest paid to the Provident Fund Commissioner was not an admissible deduction. The assessee referred to a Supreme Court ruling in a similar case under the Sugarcane Cess Act, where interest was allowed as a deduction. However, the Tribunal distinguished the case, stating that the interest payable under the Provident Fund Act was not automatic but imposed by a specific order under section 14B. The Tribunal, in line with the Allahabad High Court ruling, held that the interest amount was not deductible as a business expenditure. As no contrary ruling was presented, the Tribunal decided in favor of the Department and disallowed the deduction of Rs. 21,990 as interest.

In conclusion, the Tribunal allowed the Department's appeal and held that the interest amount of Rs. 21,990 paid to the Provident Fund Commissioner was not an admissible deduction as a business expenditure.